CHINA BILLS FINANCE CORPORATION
Fitch Ratings has affirmed
The Outlook is Stable.
Key Rating Drivers
Ratings Reflect Standalone Strength: CBF's Long-Term IDR is driven by its Viability Rating (VR), which is in line with its implied VR. The affirmation reflects Fitch's expectation that CBF will maintain a moderate risk profile and adequate loss-absorption buffers relative to its ratings. This is despite near-term pressure on profitability and capitalisation due to rising interest rates, as its fixed-income investments and funding costs are highly sensitive to market interest rates.
Stable Rating Outlook: We expect reinvestment of fixed-income securities and repricing of commercial paper (CP) guarantees to gradually catch up with rising funding costs amid higher interest rates. The rating and Outlook are also supported by
Baseline Short-Term, High National Rating: CBF's Short-Term IDR of 'F3' is at the baseline option that maps to its Long-Term IDR, as its funding and liquidity score of 'bbb-' does not meet the minimum 'bbb+' score specified in our criteria for a higher rating. CBF's 'A+(twn)' National Rating is at the high end of the national rating scale, reflecting low default risk relative to issuers in
Stable Operating Environment: The operating environment score of 'a' with a stable outlook considers
Significant Franchise: CBF has maintained a well-established franchise in CP guarantees. It is
Less Variable Underwriting Standards: We regard CBF's underwriting standards as more conservative than those of other rated BFCs, based on its consistent focus on established, leading groups in diversified industries. The company has robust valuation standards and maintains conservative loan-to-value ratios for its secured CP guarantees, which were 59% of its total CP guarantees at end-1H22.
The loan-to-value ratios on secured CP guarantees have been stable at less than 60%. CBF, similar to other rated BFCs, faces high concentration risk, as property-related exposures accounted for 28% of its CP guarantees and 62% of its secured guarantees have real estate as collateral.
Sound Asset Quality: Our assessment of the BFCs' asset quality considers the off-balance-sheet exposures inherent to their business models. CBF's asset quality score 'bbb+' is lower than the implied 'aa' category score because of its higher single-borrower concentration than domestic banks. We expect the asset quality of CBF's CP guarantees and fixed-income investments to remain healthy due to
Stabilising Profitability: We expect CBF's profitability to stabilise in 2023 after a decline in 2022 as CP guarantee yields pick up once they are repriced (average duration of about 40 days). we anticipate a narrowing in trading and valuation losses in 2023 as the increase in market interest rates is likely to moderate after the sharp gains in 2022.
Pressure on the spread income of bond investments is likely to linger due to delays in reinvestment amid the uncertainty over market interest rates. CBF's annualised operating profit/risk-weighted asset (OP/RWA) ratio declined to 0.9% in 1H22 from 1.2% in 2021 due to lower spread income and realised trading losses from its fixed-income investments as rates rose.
Pressure on Capital:
Stable Funding, Liquidity: CBF's repo counterparty base of corporates, individuals and financial institutions is more diversified than that of peers, supported by its stronger franchise. This mitigates liquidity risks arising from its high reliance on repos for funding. Its investment in high-credit-quality fixed-income securities also facilitates repo refinancing. The central bank provides a contingency repo funding facility via the
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on the VR-driven IDRs would arise if CBF's risk appetite grows, including aggressive growth in higher-risk CP guarantees or a significant rise in market risk, for example, by investing in lower-rated fixed-income investments. This could trigger a rating downgrade if it results in sustained deterioration to profitability or capitalisation. This could be the case if OP/RWAs were to fall below 0.75% from a four-year-average of 1% at end-1H22, or if its FCC ratio were to drop towards 11% with no credible plan to return to current levels.
CBF's Short-Term IDRs would be downgraded if its VR is downgraded to 'bb+' or below.
A downgrade of CBF's National Ratings would arise from a weakening in its standalone credit profile relative to the rated universe of issuers in
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside potential is limited due to CBF's concentrated business model, modest franchise, high market-risk exposure, and sole reliance on wholesale funding compared with similarly rated banks in
CBF's Short-Term IDR could be upgraded if its VR is upgraded to 'bbb+' or above, or its funding and liquidity score is revised to 'bbb+' or above.
Changes in Fitch's perception of CBF's standalone credit profile relative to the rated universe of issuers in
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
CBF's Government Support Rating (GSR) of 'b+' reflects its low systemic importance, resulting in our expectation of a limited probability of extraordinary government support in the event of stress.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch may take negative action on the GSR if we believe there is a lower propensity from the government to provide extraordinary support, for example, if there is meaningful deterioration in its systemic importance.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The GSR could be upgraded if Fitch assesses a higher propensity from the
VR ADJUSTMENTS
The business profile score of 'bbb-' has been assigned above the 'bb' category implied score on the following adjustment reason: market position (positive).
The asset-quality score of 'bbb+' has been assigned below the 'aa' category implied score on the following adjustment reason: concentration (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Criteria Variation
The analysis of an entity's funding and liquidity includes an assessment based on the core metric of loans/customer deposits under Fitch's Bank Rating Criteria. However, BFCs in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
(C) 2022 Electronic News Publishing, source
