Rating Action Commentary
Fitch Affirms Shanghai Pudong Development Bank's Long-Term IDR at 'BBB'; Outlook Stable
Fri 10 Jun, 2022 - 6:05 AM ET
Fitch Ratings - Hong Kong/Shanghai - 10 Jun 2022: Fitch Ratings has affirmed Shanghai Pudong Development Bank Co., Ltd.'s (SPDB) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook and Short-Term IDR at 'F2'. Fitch has also affirmed its Viability Rating (VR) at 'bb-' and the rating of its USD5 billion medium-term note (MTN) programme at 'BBB'.
Fitch is withdrawing SPDB's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of our updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned SPDB a Government Support Rating (GSR) of 'bbb'.
Key Rating Drivers
Government Support-Driven IDR: SPDB's Long-Term IDR is driven by our assessment of the high likelihood of government support in the event of stress. This is based on a combination of factors, including its size, domestic significance and strategic local-government ownership.
Strategic Local-Government Ownership: The Shanghai State-owned Assets Supervision and Administration Commission (SASAC) is SPDB's largest shareholder, with a stake of nearly 30%, which contributes to our GSR assessment. Shanghai SASAC injected capital into SPDB in 2017 through Shanghai International Group, SPDB's immediate parent.
D-SIB Designation: SPDB's designation by Chinese authorities as a domestic systemically important bank (D-SIB) in October 2021 also supports our GSR assessment. We do not expect the implementation of a recovery and resolution plan framework in China to significantly diminish support prospects.
Short-Term IDR: The Short-Term IDR has been assigned at the higher of the two options of its Long-Term IDR, reflecting our view that government support is more certain in the near term.
VR Does Not Drive IDRs: SPDB's 'bb-' VR is in line with the implied rating. However, we have assigned several financial factor scores below those implied by its core metrics, reflecting the bank's off-balance-sheet exposures and activities. At the same time, we have assigned the operating environment (OE) score of 'bbb-' above the 'bb' category implied score, as we believe China's robust external finances and strong macroeconomic performance, reflected in the 'A+'/Stable sovereign rating, boost financial market and macroeconomic stability.
OE Outlook Revised to Stable: We have revised the outlook on China's bank OE score of 'bbb-' to stable from positive, reflecting our view that a confluence of economic developments has increased the risk of a slowdown in structural reforms. Lingering weakness in China's property market, renewed Covid-19-related lockdowns, accelerating global inflation and rising interest rates are weighing on the country's near-term economic growth prospects, leading to the easing of some policies. However, we do not expect a material reversal in regulatory reforms already implemented.
Local Franchise with Regional Focus: SPDB's close relationship with the Shanghai government supports its corporate banking franchise and customer base. However, its business profile score of 'bb+' is below the 'a' implied category score to reflect management and governance limitations. These are not uncommon in China given frequent management rotation and regulatory intervention. Its reliance on interest income and exposure to shadow activities will also make its business model more susceptible to market volatility and regulatory changes.
Modest Asset Quality Weakening: We expect the impact from property stress on SPDB's asset quality to be limited due to its manageable exposure to property development loans and active non-performing loan resolution. However, its asset quality score of 'bb-' has been assigned below the 'bbb' category implied score to reflect its larger non-loan exposures relative to state banks.
Solid Capitalisation: SPDB has a stronger capital position than most other mid-tier banks and we believe it is well-positioned to meet the minimum common equity Tier 1 (CET1) ratio requirement of 8%.
Relatively High LDR: SPDB's funding and liquidity score takes into consideration its high loan-to-deposit ratio (LDR) as well as greater exposure to shadow activities compared with large state banks. The assigned score of 'b+' is lower than the 'bbb' category implied score in light of the bank's reliance on non-deposit funding and limited retail deposit franchise.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRS, GOVERNMENT SUPPORT RATING
The Long-Term IDR and GSR will come under pressure if Fitch perceives a deterioration in the central government's propensity or ability to provide timely extraordinary support to the bank. This could include a sovereign rating downgrade, which could reflect diminished ability to provide support. Lower propensity to provide support may also be reflected through an enhanced resolution framework, though we do not expect either scenario to occur in the near term.
A weakening in SPDB's relationship with the Shanghai government, such as significant changes to its ownership structure or regional significance, may negatively affect our assessment of the state's propensity to support the bank.
SPDB's Short-Term IDR will be downgraded if its Long-Term IDR is downgraded.
VIABILITY RATING
A VR downgrade is possible if SPDB reverts to rapid growth, especially in entrusted investments or wealth-management products (WMPs), that puts further pressure on its capitalisation relative to its risk appetite. 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 impaired loans/gross loans (2018-2021 four-year average: 1.8% on reported basis) weakening to and remaining at around 6.0%, although Fitch's assessment of asset quality would also consider other indicators, such as 'special-mention' loans, loan-loss provisioning and whether (and to what extent) we believe reported metrics understate any deterioration in asset quality; and
- The four-year average of operating profit/risk-weighted asset (RWA) ratio weakening to and remaining at around 1.0%.
- The CET1 ratio falling below 8.0% without a credible path to return to existing levels.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRS, GOVERNMENT SUPPORT RATING
An upgrade of the sovereign ratings could lead to positive rating action on the bank's GSR and support-driven IDRs, if it indicated a greater ability to support SPDB with no less propensity to provide support.
SPDB's Short-Term IDR would be upgraded if its Long-Term IDR is upgraded.
VIABILITY RATING
A sustained reduction in the bank's risk appetite, including a reduction in shadow activities or improved transparency towards these activities, slowing growth and a sustained improvement in capital buffers would be positive for the VR. This would include its CET1 ratio rising and staying above 10% and its four-year average of operating profit/RWA ratio rising to and remaining at around 1.5%.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The MTN programme is rated in line with SPDB's Long-Term IDR, as it represents its direct, unconditional, unsecured and unsubordinated obligations.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The senior debt rating would be downgraded if SPDB's Long-Term IDR is downgraded.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of SPDB's Long-Term IDR would lead to positive rating action on its senior debt rating.
VR ADJUSTMENTS
The OE score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reason: sovereign rating (positive).
The business profile score of 'bb+' has been assigned below the 'a' category implied score due to the following adjustment reason: management and governance (negative) and business model (negative).
The asset quality score of 'bb-' has been assigned below the 'bbb' category implied score due to the following adjustment reason: non-loan exposure (negative).
The funding and liquidity score of 'b+' has been assigned below the 'bbb' category implied score due to the following adjustment reason: non-deposit funding (negative) and deposit structure (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
SPDB's IDRs are directly linked to China's sovereign ratings.
ESG Considerations
SPDB has an ESG Relevance Score of '4' for Financial Transparency as there are still structural issues around financial transparency and disclosure. These are not captured in headline performance metrics in China and affect assessment on the OE as well as the financial profile. SPDB, like other mid-tier banks, remained more exposed to this risk relative to the state banks due to its larger exposure to WMPs and entrusted investments stemming from the use of off-balance-sheet transactions. This has a negative impact on the credit profile, and is relevant to the ratings 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.
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Shanghai Pudong Development Bank Co., Ltd. | EU Endorsed, UK Endorsed |