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Agricultural Bank of China

Moody’s downgrades Agricultural Bank’s credit rating one notch

Moody’s Investors Service lowered Agricultural Bank of China’s credit rating to A2, but reaffirmed the A1 ratings for ICBC, CCB and BoC

PUBLISHED : Thursday, 25 May, 2017, 9:00pm
UPDATED : Thursday, 25 May, 2017, 10:42pm

In a sign that it is lagging behind its major rivals, Agricultural Bank of China was downgraded one notch by Moody’s Investors Service on Thursday, while the ratings agency left its ratings on China’s three other large state owned banks unchanged.

“Agricultural Bank of China is less well capitalised than its rivals, it has a higher problem loan ratio, and it is slightly less profitable,” said Moody’s vice president and senior credit officer Sonny Hsu.

Moody’s assigned ABC a credit rating of A2, down from its prior credit rating of A1.

In the first quarter of this year, ABC posted profit attributable to shareholders of 55.7 billion yuan (US$8.11 billion).

In contrast, ICBC reported profit of 75.7 billion yuan, while China Construction Bank reported profit of 70 billion yuan.

“ABC has been less successful than its competitors in boosting fee income in areas like credit cards and wealth management,” said Huatai Financial chief financial analyst Chen Shujin.

For a number of years Chinese banks’ income from lending has been under pressure from low rates.

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In terms of asset quality, ABC’s non performing loan ratio was 2.33 per cent at the end of March, compared to an average across the sector of 1.74 per cent.

ABC operates China’s second-largest branch network behind Postal Savings Bank of China, and the historically weaker performance of loans in rural areas has contributed to its higher NPL ratio.

“ABC has made progress in reducing the formation of new NPLs,” said Chen.

In the past ABC’s large branch network was a benefit to the bank, as it meant it could attract more deposits than its rivals. As such, it had a lower cost of funds, and could make a greater profit on lending.

Chen said that the relationship between a bank’s branch network and its cost of funds has become less important in recent years.

“China Construction Bank and China Merchants Bank have done better than ABC when it comes to using the internet to attract deposits,” she said.

Deposits seen as key factor as Chinese banks’ results diverge

ABC is also behind its peers when it comes to solvency.

As of the end of March, ABC’s common equity tier one capital ratio, an important measure of a bank’s solvency, stood at 10.5 per cent, in contrast to CCB’s 12.98 per cent, and Bank of China’s 11.6 per cent.

Moody’s decision to downgrade ABC’s rating was not a result of recent changes in the bank’s situation, but rathe a consequence of the agency’s decision on Wednesday to downgrade China’s overall credit rating, citing the country’s worsening debt outlook.

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On a stand alone basis, Moody’s had already considered ABC to be less well positioned than its peers, but because the agency had factored in a “very high level of government support” it had given the bank an A1 long term deposit rating, the same as the other members of China’s big four banks -- ICBC, Bank of China, and China Construction Bank.

After the downgrade of China’s sovereign rating, calculations under the agency’s framework meant that support from the Chinese government was sufficient to maintain the other three banks’ long term deposit ratings at A1. Meanwhile, ABC’s weaker initial position required a downgrade to A2, Moody’s said.

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