Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) and Shareholder Support Ratings (SSRs) of
The Outlook is Stable.
CGS is a
CGI is a wholly owned subsidiary of CGS and serves as the sole offshore integrated platform of the group's international business.
Key Rating Drivers
Support-Driven Ratings: CGS's ratings are underpinned by our view that extraordinary support would be forthcoming from its actual controller, Central Huijin, in case of need. The support-driven ratings also reflect CGS's strategic role in supporting the government's financial reform and overseas expansion objectives. Furthermore, major shareholder's legal obligation to provide capital support is stated in CGS's articles of association and is required by the
Support is bolstered by Central Huijin's controlling ownership and strong board oversight of CGS and the reputational implications for the shareholder if CGS were to default. We expect Central Huijin to remain as CGS's largest shareholder, given its role in assisting
Stable SROE: The sector risk operating environment (SROE) score remains at 'bbb-'/stable.
The OE score is above the implied 'bb' category score, as we believe
Strong Policy Alignment: CGS, as one of
Above-Sector Return: CGS's profitability has been stronger than the sector level, underpinned by its scale benefits. Profitability, measured by operating income/average equity, reached 9.9% in 1Q23, up from 7.9% in 2022, due to fair value gains from the company's proprietary trading positions, as capital market sentiment and the economy improved after Covid-19 pandemic-related restrictions were lifted. We expect profitability to be susceptible to unexpected market movements and adverse changes in market sentiment in light of CGS's reliance on more volatile business activities.
Sound Capital Position: CGS has maintained sound leverage relative to its business risk and earnings volatility, with an adequate capital buffer against asset impairments arising from severe market shocks. Its net adjusted leverage stood at 4.9x at end-1Q23.
Wholesale Funded: CGS relies on wholesale funding, especially repos for short-term funding, in line with the operations of sector peers. However, the risk is lowered by its sufficient liquidity coverage buffers and adequate underlying collateral against repo transactions, which have suitable credit quality. Its funding and liquidity profile also reflects the contingency funding plan in place and the potential for ordinary support from its parent, Central Huijin.
Subsidiary Rating: The ratings on CGI is aligned with that of CGS, reflecting our assessment of an extremely high propensity of support from CGS. CGI is CGS's sole overseas subsidiary, carrying out all of its offshore business, which is one of CGS's five key business segments and is aligned with Central Huijin's strategy to internationalise
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Any change to
A downgrade would also be triggered by a significant weakening in CGS's role in facilitating the development and stability of
CGI could be downgraded if CGS shows signs of a reduced propensity and ability to support the subsidiary.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
CGS's rating could be upgraded if Fitch believes it has become more systemically important to the Chinese government - although this possibility seems remote against the importance of large state-owned banks - or if the entity undertakes more significant policy roles.
A rating upgrade on CGI will follow similar rating action on CGS's rating.
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 '
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance 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 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
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