ICBC Financial Leasing Co., Ltd.

Transcription

1 CREDIT OPINION ICBC Financial Leasing Co., Ltd. Update After Rating Action Update Summary Rating Rationale On 24 May 2017, we affirmed ICBC Financial Leasing Co., Ltd's (ICBC Leasing) long-term issuer rating of A1. At the same time, we revised the outlook to stable from negative, following similar rating action on the company's parent, Industrial and Commercial Bank of China Limited (ICBC, A1 stable). ICBC Leasing's A1 long-term issuer rating incorporates the company's ba3 standalone credit strength and an eight-notch uplift, based on our assumption of support from its parent, ICBC. Contacts Sean Hung AVP-Analyst Yifan Chen Associate Analyst Nicholas Zhu, Ph.D VP-Senior Analyst Minyan Liu Associate Managing Director The A1 rating is based on ICBC Leasing's strategic importance to, and linkages with, ICBC. ICBC has full ownership of the company. Since establishing the leasing subsidiary, ICBC has provided considerable support in the form of business referrals, risk management systems, information platforms, several rounds of capital injections and funding access. We believe that the amount of extraordinary parental support ICBC Leasing would receive under a situation of stress has increased in the context of the company's management control, business development, operations and regulatory framework over the past few years. The ba3 standalone credit strength takes into account the leading franchise that ICBC Leasing has quickly built in the rapidly growing leasing industry in China. The company also has good asset quality and has entered into diverse business lines. Moreover, the company's steady business and asset growth in the past two years has offset its risk management and capital pressure. While ICBC Leasing maintains its solid performance and is gradually diversifying its funding sources, the company's standalone credit strength is constrained by three key considerations: First, ICBC Financial Leasing depends heavily on short-term bank funding, thus creating a significant maturity and interest rate mismatch between the company's assets and liabilities. Given ICBC Leasing's status as a core subsidiary of ICBC, the associated refinancing risk is mitigated by ICBC s commitment to provide liquidity support. Nonetheless, the company's balance sheet structure does have intrinsic weaknesses that have been reflected in our assessment of its standalone credit profile. Second, the company is exposed to asset concentration, particularly in the city transportation segment. While the underlying borrowers associated with this concentration are mostly linked to local governments and the underlying assets are strategically important, the company's profitability and capital could be materially affected by single-name defaults.

2 Third, ICBC Leasing continues to support the funding agreements of the company's managed offshore leasing platform via keepwell agreements and guarantees, which increase the company s contingent liabilities and financial obligations. Exhibit 1 ICBC Leasing's Total Assets and Asset Growth RMB million Source: Company data Credit Strengths ICBC Leasing is a leading franchise affiliated to ICBC Performance of the company's onshore business is stable Asset risk is mitigated by integrated risk management Credit Challenges Short-term borrowings and wholesale funding pose risks Rapid growth of overseas business may challenge risk controls Rating Outlook The outlook is stable and is in line with the stable outlook on the ratings of ICBC. Factors that Could Lead to an Upgrade The ratings of ICBC Leasing are aligned with the company's parent bank. The company's issuer ratings are unlikely to rise unless there is an upgrade of its parent's ratings. We would consider raising ICBC Leasing's standalone credit strength if the company (1) maintains good asset quality; (2) reduces the tenor mismatch between its assets and liabilities; (3) improves its profitability; and (4) strengthens its capital ratio relative to its managed assets. Factors that Could Lead to a Downgrade The ratings of ICBC Leasing are aligned with the ratings of the company's parent. Any rating action on the parent would likely result in rating action on the company. The ratings of ICBC Leasing could also be downgraded if we observe (1) weakening liquidity and capital support from the company's parent; (2) a declining business relationship and management control of the parent; or (3) a significant reduction of ICBC shareholding to below 50.1%. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 The company's standalone credit strength could be lowered in case of (1) deteriorating asset quality and rising credit costs; (2) weakening liquidity and funding profiles; and (3) insufficient capital. Detailed Rating Considerations A leading franchise affiliated with ICBC ICBC Leasing is the largest leasing company in China by assets, with total assets of RMB177 billion as of the end of June Established in 2007, ICBC Leasing started off with equipment leasing and subsequently expanded into other business segments, such as aircraft, shipping, ocean engineering, railway transportation, water and gas supplies. Equipment leasing remains the company's largest business by assets and revenue contribution. To develop its business, the company has leveraged its relationship with its parent, ICBC, which has a vast network and strong franchise in China. The company is incorporated in Tianjin, which (amid its efforts to position itself as an important economic hub), has been offering favorable policies to leasing companies. Moderate growth rate to reduce pressure on the company's capital adequacy ICBC Leasing has a moderate capital position. The company's leverage has remained stable, as its parent has repeatedly injected capital to support growth and meet regulatory guidelines. ICBC Leasing started with a RMB2 billion capital position in 2008 and the company's paid-in capital increased to RMB11 billion as of the end of 2016, after a series of capital infusions by its parent. The company is currently not required to pay dividends to its parent. ICBC Leasing's total asset growth slowed to around 6% in 2015 from 42% in This moderate asset growth is in line with the overall economic slowdown in China. The slowdown also reflects significant exposure of the company s onshore business to clients with public or semi-public functions (such as transportation, urban development, water and gas supplies, which are mainly financial leasing businesses). As of the end of 2016, the company s total assets decreased 10% to RMB165.5 billion from the end of As a result of ICBC Leasing s slowed asset growth and stable profitability, the company's capital adequacy can be supported by its internal capital generation. According to our calculation, the company s ratio of tangible common equity to tangible managed assets increased to 13.7% as of the end of 2016 from 11.05% as of the end of 2015 and 10.38% as of the end of This increase was in line with its peers. Asset risk mitigated by integrated risk management ICBC Leasing's overall risk management framework is aligned with that of its parent. The company adheres to its parent's rules for internal credit ratings, credit management and provisioning, as well as to capital requirements and provisioning rules set by the China Banking Regulatory Commission (CBRC). All credits are managed through a centralized monitoring system by the company's parent. ICBC Leasing has no exposure to high-risk sectors such as highway and solar energy. The company also conducts a monthly credit information exchange with its parent. We believe ICBC Leasing inherited its parent's risk culture and philosophy as the majority of the company's senior management and board members have extensive experience working with ICBC. As a private company, ICBC Leasing does not have any independent directors. ICBC Leasing has also improved the company's risk management practices by focusing on preserving lease asset values, while closely monitoring the credit profiles of its customers and optimizing transaction structures for maximizing risk-adjusted returns. Intrinsic volatility in ICBC Leasing's assets and cash flow could be high, because the company's exposures are susceptible to volatility in economic growth. The company's targeted sectors for growth, such as aircraft, shipping and construction equipment, are closely correlated with the macro economy. This risk is partially offset by the company's business exposure to the more stable public services and the utility sectors, such as metro transportation, water and gas supplies, and power plants. 3

4 The company's client profile, which primarily includes medium-sized enterprises and large corporates, helps it mitigate credit risk. It also focuses on medium and large aircraft from the narrow-bodied series, with better liquidity and stronger market demand. The company s nonperforming asset ratio was around 0.81% as of the end of 2016, slightly increased from 0.7% as of the end of Diversified business lines but lumpy public projects lead to concentration risk ICBC Leasing enjoys a geographically diversified portfolio. The company's aircraft, shipping and ocean engineering businesses are mainly located in coastal areas and economically advanced cities in China. The company's equipment leasing clients, such as miners and power generators, are concentrated in central and inner China. ICBC Leasing has spread into several business lines, with pillar projects in large cities as the company's main exposures. For instance, it has been providing funds to large-ticket assets, such as train cars, telecommunication equipment and signal systems for metro transportation projects in provincial capitals and economically advanced cities. A significant portion of the company's exposures is to clients with public or semi-public functions, such as transportation, urban development, water and gas supplies. While the underlying borrowers associated with these concentrations are mostly linked to local governments and the underlying assets are strategically important (such as subway equipment), the company's profitability and capital could be materially affected by single-name defaults. Short-term borrowing and wholesale funding pose risks Similar to the company's peers, ICBC Leasing depends heavily on short-term borrowings from banks, including inter-bank placements and bank loans. Although eligible leasing companies have been allowed to issue debt since 2009, limited debt has been issued to date, given cost considerations and the lengthy process. The company has explored additional funding sources, including factoring and issuing wealth management products. However, these are not significant financing sources for Chinese leasing companies. Intrinsic weakness in ICBC Leasing's liquidity, derived from the company's reliance on short-term borrowings, has led to asset liability mismatches. Rolling over short-term debt to support long-term assets is inherently risky and likely to cause an interest rate mismatch. ICBC Leasing's weak liquidity is partially mitigated by (1) the company's affiliation with ICBC, which provides flexible funding and facilitates strong relationships with financial institutions (credit limit from ICBC accounted for around 40% of ICBC Leasing's total liabilities as of the end of 2016); (2) its diversified and well-established bank loan providers, including both large and small banks; (3) close monitoring of the company's liquidity position and cash flow projections on a daily basis. Rapid growth of overseas business to challenge risk controls Financial leasing companies in China are not allowed to have overseas subsidiaries. In order to conduct offshore business, ICBC Leasing has set up ICBC International Leasing Co. Ltd (ICBCIL, unrated), which was established in Ireland and is indirectly 100% owned by ICBC as the company's overseas business platform. Although there is no shareholding relationship between ICBC Leasing and ICBCIL, ICBC Leasing has management control over ICBCIL and its subsidiaries via a service agreement signed in In the past, ICBC Leasing has also demonstrated strong willingness to support some of ICBCIL's and its subsidiaries' financial obligations by providing guarantees for syndicated loan facilities and keepwell agreements for bonds. For example, in March and November 2015, ICBC Financial Leasing provided a keepwell agreement for notes issued by ICBCIL Finance Co., Limited, which is a subsidiary of ICBCIL. As the business of ICBCIL is developing rapidly, we expect ICBC Leasing might face challenges with regard to the company's risk controls for its overseas business. In particular, we expect contingent liabilities and financial obligations with regard to ICBICIL may increase. Strong parental support ICBC Leasing is wholly owned by ICBC and is an integral part of its parent's strategy to provide customers with a full range of financial services. Our support assumption considers ICBC Leasing's strong liquidity and capital support from ICBC, under the new regulation on financial leasing companies that was issued by the CBRC in March To comply with the new regulation, ICBC Leasing amended its articles of association in December The new articles include an explicit clause that requires ICBC (1) to provide the necessary support for ICBC Leasing's business development; (2) to provide liquidity 4

5 support in case the company experiences payment difficulty; and (3) to promptly replenish the company's capital levels in case of operational losses leading to capital loss or erosion. Furthermore, over the past few years ICBC has demonstrated its strong willingness to provide additional support to ICBC Leasing's growth and capital needs. In January 2014, ICBC injected RMB3 billion to bring ICBC Leasing's registered capital to RMB11 billion, which helped the company reduce its leverage and enhanced its capital adequacy ratio. In addition, ICBC and ICBC Leasing have increased their business cooperation and client referral activities. All of ICBC Leasing's clients in equipment leasing, who accounted for around 60% of the company's onshore leasing business as of the end of 2016, were ICBC s clients. Ratings Exhibit 2 Category ICBC FINANCIAL LEASING CO., LTD. Outlook Issuer Rating ST Issuer Rating Moody's Rating Stable A1 P-1 PARENT: INDUSTRIAL & COMMERCIAL BANK OF CHINA LTD Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Subordinate Pref. Stock Non-cumulative Stable A1/P-1 baa2 baa2 A1(cr)/P-1(cr) Baa3 (hyb) Ba2 (hyb) Source: Moody's Investors Service 5

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