Bond Ratings - China
Elena Okorochenko
General Manager – Managing Director
Financial Services, Structured Finance,
Sovereign/IPF
April 7, 2015
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requires the prior written approval of Standard & Poor’s. Copyright © 2015
by Standard & Poor’s Financial Services LLC. All rights reserved.
Agenda
1.
About Standard & Poor’s
2.
Rating Methodology And Rating Process
3.
Key observations on cross-border and domestic bond markets in China
4.
2015 credit outlook for Corporate, Bank and Local Government sectors in China
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2.
About Standard & Poor’s
Standard & Poor’s Global Reach
• In business for 150+ years
• Provides global reach and local
knowledge with an office
network spanning
23 countries
• 1,400+ research analysts
• More than 1.1 million
ratings outstanding
• $11.3+ trillion outstanding debt
rated as of the end of March
20141)
• Provides perspective on a
company’s creditworthiness
Note: 1) Including outstanding Bank Loan Ratings
Sources: Standard & Poor’s CreditPro®.
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4.
Analytic Coverage Highlights Source1)
Corporate Ratings
Financial Institutions Ratings
Insurance Ratings
47,400
60,300
7,600
Government Securities Ratings
Structured Finance Ratings
930,500
97,500
2)
Note:
1) Coverage highlights source: 2013 Nationally Recognized Statistical Rating Organization (NRSRO) Application..
2) The SEC definition of the Exchange Act ABS (asset-backed securities) is substantially similar to the definition of the term “structured finance products.”
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5.
Rating Process and Methodology
Overview of Ratings Process
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7.
Global Default Risk By Ratings Categories: 20 Year Period
Global Corporate Average Cumulative Default Rates By Rating
60%
50%
40%
30%
20%
10%
0%
0
1
2
3
4
5
AAA
6
AA
7
8 9 10 11 12 13 14 15 16 17 18 19 20
Time Horizon in Years
A
BBB
BB
Sources: Standard & Poor’s Global Fixed Income Research and Standard & Poor’s CreditPro®. Data from 1981-2013.
8
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8.
B
CCC/C
S&P Corporate Criteria Framework
Combining Business and Financial
Risk Profile to determine the anchor
of the rating. Additional rating factors
can modify the anchor. These are:
1)
2)
3)
4)
5)
6)
Diversification/portfolio effect
Capital structure
Financial policy
Liquidity
Management and governance
Comparable rating analysis
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9.
Bank Ratings Framework
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10.
Standard & Poor’s Ratings of Local and Regional Governments
Individual Credit Profile
International
Framework
Economy
Budgetary
performance
and flexibility
Debit burden
and contingent
liabilities
Liquidity
Financial
management
Matrix outcome^
Overriding factors
• Sovereign Ratings
• Very weak liquidity or
management
• Debt/financial performance below
benchmark
• Extraordinary government support
Local and regional government rating
^See table 1 for further details—LRGs and regional governments
.
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11.
Key Observations on Bond Markets in China
Cross-border Bond Issuance
Future drivers:
- Strong supply of quasi-bank credit
- Rising RMB volatility and narrowing
funding gap
- Still strong pipeline from Banks and
Non-bank FIs (leasing co-s, AMCs)
- Strong interest from LRG-related
issuers
- Cross-border ABS
Key risks:
- Increasing leverage of corporate issuers
on the backdrop of economic slowdown
- Governance and legal issues (Kaisa)
- Currency mismatch risks
- Interest risks for NBFIs
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13.
China Domestic Markets
Key observations:
- Continued strong growth of bond
markets, but size relative to GDP is
still small;
- Gov-t bonds, gov-t banks dominate;
- Moving towards market-based
pricing of risk; defaults? Role of
domestic ratings?
- Securitization is growing (2015
expected to double 2014 volumes)
- Move to replace a portion of LGFV
debt with muni bonds will support
the bond market and improve LRG
discipline
Size of local currency bond market in % of GDP
Source: Asianbondsonline.adb.org
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14.
S&P Ratings in China as of Apr-1, 2015
Number of ratings
Rating distribution
25
9
Sov and LG
Insurance
FIs
Corporate
19
20
33
15
134
10
Corporate
Banks and NBFI
5
Insurance
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15.
D
CCC
B-
B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
0
Sov and LG
2015 Credit Outlook for Corporates: Increased Downside Risk
Sector Impact Of Downside Scenario
• Weaker demand due to
slower economic growth
and persistent
overcapacity offset lower
raw material prices
• Investment demand
declined and property
sector continued
adjustments
• Capex for some sectors
will remain high to support
growth
• Most vulnerable sectors:
Mining, E&C, Transport
Telecom
Oil and gas
Technology services
Infrastructure
Consumer
Pharmaceuticals
Capital goods
Real estate
Utilities
Auto
Engineering and
construction
Low
Low
Low
Low
Low
Low
Medium
High
Low
Low
Potential rating
downside
------One notch
One notch
---
Medium
One to two notches
Technology hardware
Low
--
Low
Medium
High
High
High
High
--Two notches
One notch
One notch
One to two notches
Industry
6% GDP growth scenario
Railway/Metro
Retail
Mining
Building materials
Metals
Transport
Source: Standard & Poor’s 2014.
16
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16.
2015 Credit Outlook for Banks: Generally Stable
• Chinese banks’ credit losses are
likely to worsen
• Interest margins will fall with
acceleration of financial reform and
easing monetary policy
• Major banks may further consolidate
their balance sheets through NPL
disposals, asset securitization and
capital issuance
• Overall Outlook remains stable,
underpinned by the sector’s
adequate credit profile and the
significant downside risks built into
the ratings
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17.
Business Profile And Financial Profiles Of The Top 50 Banks
Business position
Financial
profile
Below average
Average
Above average
(32) Huishang Bank
(38) Bank of Guangzhou
(9) Shanghai Pudong Development Bank
(19) Bank of Beijing
(30) Bank of Nanjing
(35) HSBC Bank (China)
(49) Standard Chartered Bank (China)
(1)
andCommercial
CommercialBank
Bank
(1) Industrial
Industrial and
Ofof
China
(2) China Construction Bank
China
(2) China
ChinaConstruction
Construction Bank
(2)
Bank
(8) China Merchants
(3) Bank of China
(4) Agricultural Bank of China
(6) Bank of Communications
(8) China Merchants Bank
Average
(29) Chengdu Rural
Commercial Bank
(33) Guangzhou Rural
Commercial Bank
(36) Bank of Hangzhou
(37) Harbin Bank
(39) Bank of Chengdu
(43) Kunlun Bank
(47) Bank of Chongqing
(10) Industrial Bank
(11) China CITIC Bank
(12) China Minsheng Banking Corp.
(14) China Everbright Bank
(17) Hua Xia Bank
(20) Bank of Shanghai
(24) Chongqing Rural Commercial Bank
(26) Bank of Ningbo
(30) Shanghai Rural Commercial Bank
(45) Bank of East Asia (China)
(4) Agricultural Bank of China
(5) China Development Bank
(6) Bank of Communications
(31) Bank of Tianjin
(39) Bank of Dalian
(40) Bank of Jilin
(42) Xiamen International Bank
(46) Tianjin Rural Commercial
Bank
(44) Baoshang Bank
(13)
(15)
(16)
(18)
(21)
(22)
(23)
(25)
(27)
Legend
Red – Mega banks
Blue – National banks
Burgundy – Large regional banks
Green – Foreign bank subsidiaries
Gray – Policy banks
(S) – summary disclosure only
Below Average
Agricultural Development Bank of China (S)
Ping An Bank
The Export-Import Bank of China (S)
China GuangFa Bank
Evergrowing Bank
Bank of Jiangsu
China Bohai Bank
China Sheshang Bank
Beijing Rural Commerical Bank
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18.
Above average
2015 Credit Outlook for LRGs: Some upside with reforms
• Slower economic growth will reduce revenues; liquidity expected to weaken
• We estimate half of China’s 31 provinces to have investment-grade ratings
General budget revenues,
% y/y growth
• Public finance reforms help mitigate risks but the question is the speed of
implementation
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19.
Related Research
• Sector Review: For China’s Banks, the credit Downturn has yet to bottom out,
18-Mar-2015
• Scenario Tests suggest China’s small to midsize banks would struggle if
property prices plunge, 05-Mar-2015
• Credit Outlook: Market-Driven Initiatives are likely to support China’s
securitization market in 2015, 16-Feb-2015
• China Property Watch: Developers Face Uneven Recovery Amid Policy
Relaxation And High Inventory, 12-Feb-2015
• Credit FAQ: How Kaisa’s Troubles Could Affect China’s Property Developers,
28-Jan-2015
• Risk-Oriented Solvency System Signals A New Chapter in China’s Insurance
Industry, 9-Dec-2014
• China Credit Spotlight: Credit Profiles In The Corporate Sector Are Diverging
Amid Tougher Operating Conditions, 20-Nov-2014
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20.
Thank you!
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