Fitch Ratings has affirmed Industrial and Commercial Bank of China Limited's (ICBC) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A', Short-Term IDR at 'F1+' and Viability Rating (VR) at 'bbb'.

The Outlook is Stable.

Key Rating Drivers

Government Support-Driven IDR: The Long-Term IDR is driven by our assessment of the very high likelihood of government support, indicated by its Government Support Rating (GSR) of 'a', which is one notch below China's sovereign rating (A+/Stable). The state's 73% stake in ICBC, the bank's long history of receiving support and its systemic importance drive our assessment. The IDR's Stable Outlook mirrors the Stable Outlook on the sovereign rating. ICBC's Short-Term IDR is at the higher of the two options for its Long-Term IDR, reflecting our expectations that sovereign support is more certain in the near term.

D-SIB Designation: ICBC was designated a global systemically important bank in 2013 and a domestic systemically important bank (D-SIB) in October 2021 by the Chinese authorities, which supports our GSR assessment. It sits in Bucket 4, similar to China Construction Bank Corporation (A/Stable), Bank of China Limited (A/Stable) and Agricultural Bank of China Limited (A/Stable). ICBC has a strong domestic market position with loan and deposit market shares of around 10% and 11%, respectively, at end-1H22.

Stable OE Despite Weaker Growth: The stable outlook on China's bank operating environment (OE) score of 'bbb-' reflects our view that regulatory reforms, which may be delayed or implemented more slowly due to near-term economic pressure, will prevent a sustained rise in system leverage. Continued property weakness, pandemic disruptions and rising global uncertainties are weighing on the country's near-term economic growth prospects. Fitch forecasts China's GDP growth at 2.8% in 2022 before picking up to 4.5% in 2023.

The Chinese authorities' policy response has been light and targeted compared with previous downturns and we do not expect a material reversal in regulatory reforms already implemented. We have assigned the OE score above the 'bb' category implied score, as we believe China's robust external finances and a record of stable economic performance, reflected in the Chinese sovereign rating, will boost financial-market and economic stability. ICBC's assigned VR of 'bbb' is in line with the implied rating and does not drive its IDRs.

Leading Franchise: ICBC's large local franchise is underpinned by a dominant retail position as well as a vast network and connections with large state-owned enterprises, which support its business profile. However, its business profile score of 'bbb+' is lower than the 'a' implied category score, with an adjustment to account for issues over management and governance, which are not uncommon in China, given frequent management rotation and regulatory intervention.

Stable Asset Quality: We do not expect any major weakening in the bank's reported asset quality metrics, as any further deterioration in property lending should be mitigated by ICBC's small direct exposure to property developers, at around 3% of loans at end-1H22, and minimal exposure to affected mortgages with delivery issues, at 0.01% of its outstanding residential mortgages at end-1H22.

ICBC reported a stable non-performing loan ratio of 1.4% at end-3Q22, which is similar to its reported impaired-loan ratios. The bank's loan-loss allowance coverage was 207% at end-1H22 (the latest reported), similar to the state bank average.

Above-Peer Profitability: We expect ICBC's profitability to remain better than that of most state banks because of its leading market positions and strong deposit franchise. ICBC's reported operating profit/risk-weighted asset ratio of 2.0% in 2021 remained above the 1.8% state bank peer average.

Capitalisation Benefits from Profitability Resilience: We expect ICBC to maintain a stable common equity Tier 1 (CET1) ratio over the next two years, above the state bank peer average, benefitting from its steady and resilient profitability. Its CET1 ratio of 13.7% at end-3Q22 was higher than the state bank average of 12.2%. We expect ICBC, like other state banks, to also benefit from ordinary capital support from the government.

Stable Deposit Franchise: We expect a modest increase in ICBC's loan/deposit ratio (LDR) due to continued loan growth to support China's economic recovery in the medium term, but the ratio is likely to remain lower than the state bank average due to its large deposit franchise. Its Fitch-calculated LDR was around 76% at end-3Q22 (78% at end-2021).

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

IDRS and GSR

The bank's Long-Term IDR and GSR will come under pressure if Fitch perceives that the central government's propensity or ability to provide timely extraordinary support to the bank has diminished. Lower propensity may be through an enhanced resolution framework and diminished ability, potentially highlighted by a sovereign rating downgrade. However, we do not expect either scenario to occur in the near term.

ICBC's Short-Term IDR will be downgraded if the sovereign's Short-Term IDR is downgraded and/or if ICBC's Long-Term IDR is downgraded.

VR

A weaker OE or more extensive use of directed policy lending, resulting in a further meaningful build-up in credit risk without a corresponding increase in loss-absorption buffers, could be negative for ICBC's VR. A sustained deterioration in the bank's financial metrics could lead to a VR downgrade, including a combination of the following reported core metrics:

The four-year average of reported impaired loans/gross loans worsening to around 3% (four-year average in 2018-2021: 1.5%) for a sustained period, although Fitch's assessment of asset quality will also consider other indicators, such as special-mention loans, loan-loss provisioning, and whether (and to what extent) we believe reported metrics deviate from actual underlying asset quality;

The four-year average of operating profit/risk-weighted assets falling to and is sustained below 1.5% (four-year average in 2018-2021: 2.1%); and

CET1 ratio falling below 12.0% (13.7% at end-3Q22) without a credible plan to increase it back to the current level.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

IDRS and GSR

An upgrade of the sovereign ratings could lead to positive rating action on ICBC's GSR and its support-driven IDRs if that were to indicate greater ability to support the bank with no change in support propensity. There is no upside for ICBC's Short-Term IDR as it is already at the highest level on the scale.

VR

Further upward revision in the OE assessment is a prerequisite for a VR upgrade. In addition, we do not expect upgrade potential unless the improvement in the OE is in conjunction with a sustained reduction in the bank's risk profile and a substantial and sustained improvement in its financial metrics. We believe this combination is unlikely in the near term.

VR ADJUSTMENTS

The OE score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reasons: sovereign rating (positive).

The business profile score of 'bbb+' has been assigned below the 'a' category implied score due to the following adjustment reason: management and governance (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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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.

Public Ratings with Credit Linkage to other ratings

ICBC's IDRs are directly linked to China's sovereign ratings.

ESG Considerations

ICBC has an ESG Relevance Score of '4' for Financial Transparency risk. There are structural issues around financial transparency and disclosure that are not captured in headline performance metrics in China and affect our OE assessment. This negatively affects the bank's credit profile and is relevant to the rating in conjunction with other factors.

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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