Fitch Affirms China-Based CICC at 'BBB+' with Stable Outlook
(The following statement was released by the rating agency) TAIPEI/HONG KONG, April 12 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of China International Capital Corporation Limited (CICC) and China International Capital Corporation (Hong Kong) Limited (CICCHK) at 'BBB+' with a Stable Outlook and the entities' Short-Term IDRs at 'F2'. At the same time, the agency has affirmed the ratings of the notes issued by CICC Hong Kong Finance 2016 MTN Limited at 'BBB+'. CICC is one of China's larger investment banks, with leading positions in several equity and bond league tables. CICC's major shareholders include Central Huijin Investment Ltd. and related parties (58.7%), GIC Private Limited (6.9%), TPG Asia V Delaware, L.P. (4.3%), KKR Institutions Investments L.P. (4.2%) and China National Investment and Guaranty Corporation (3.2%). CICCHK is the sole offshore investment banking arm of CICC. It is wholly owned by CICC. CICC Hong Kong Finance is a wholly owned offshore special purpose vehicle established by CICCHK to launch the USD2 billion medium-term note (MTN) programme. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS IDRS on CICC and CICCHK CICC's ratings reflect Fitch's belief that extraordinary support from Central Huijin would be forthcoming, if needed. This is based on CICC's strategic role in supporting China's goal of establishing an internationally influential investment bank and its strong linkage with Central Huijin, a wholly owned subsidiary of China Investment Corporation (CIC). CIC is a sovereign wealth fund and the vehicle that holds controlling investment stakes in China's four largest banks on behalf of the government. In assigning the rating to CICC, Fitch has taken the Chinese sovereign (A+/Stable) as the ultimate source of extraordinary support to CICC and notched the rating three levels down. This recognises the investment bank's linkages to the Chinese sovereign but lower systemic importance against China's largest state-owned banks. Central Huijin is CICC's largest shareholder with a 58.7% stake. We estimate that CICC accounts for less than 1% of Central Huijin's total assets, but has a unique role in shepherding economic liberalisation, enhancing investment banking expertise and facilitating restructuring of state-owned enterprises. The company has leading market positions in underwriting, fixed-income business and advisory in large complex corporate restructurings, especially those involving cross-border placements. Central Huijin's strong propensity to support CICC is highlighted by its election to receive all new CICC shares from CICC's March 2017 acquisition of China Investment Securities Company Limited (CISC), which increased Central Huijin's CICC shareholding from 28.6%. The CISC acquisition enlarged CICC's balance sheet and strengthened its market position to China's 12th largest securities company, from the 22nd largest previously. The ratings on CICCHK are aligned with those of CICC, reflecting our assessment of an extremely high probability of support from CICC and its core shareholder, Central Huijin. CICCHK is CICC's sole offshore investment banking arm and thus assumes the important role of carrying out all cross-border investment banking businesses for CICC. This is integral to CICC's strategic focus in expanding its international franchise. In addition, it is wholly owned by CICC, highly integrated into the latter's operations and is a core subsidiary. CICCHK represented 29.1% of CICC's total assets as of end-2016 and accounted for 22.7% of CICC's total 2016 revenue. The Stable Outlook reflects our expectation that the extraordinary support expected to be offered to these entities by their parents will stay intact over the long term. Fitch considers CICC's standalone credit profile as among the best of Chinese securities firms, driven by its established risk management culture, restrained risk appetite and sound asset quality. Nonetheless, the rapid evolution of China's financial market weighs on its credit profile, as do the unpredictable regulatory interventions, both of which could result in sudden plunges in market liquidity and higher volatility. CICC had a sound and stable earnings performance, with a ROE of 10.7% in 2016, despite inclement market condition. CICC's strengths in investment banking and asset management, and the resultant revenue diversity, have helped contain the negative influence from the increasingly competitive brokerage market and the decline in market volume. CICC's revenue fell only modestly by 6% in 2016, while the industry suffered a sharp 43% contraction. SENIOR DEBT - CICC Hong Kong Finance The ratings on CICC Hong Kong Finance's MTN programme and the USD500 million senior notes issued under the programme reflect our assessment of an extremely high probability of support from CICCHK to CICC Hong Kong Finance. The notes are unconditionally and irrevocably guaranteed by CICCHK. The guaranteed notes constitute direct, unsubordinated, unconditional, and unsecured obligations of CICC Hong Kong Finance and rank pari passu with all of its other existing and future unsubordinated and unsecured obligations. RATING SENSITIVITIES IDRS on CICC and CICCHK A rating downgrade could result from a weakening in linkages between CICC and Central Huijin. This could include a significant dilution of Central Huijin's stake in CICC or if CICC's strategic importance to the Chinese government declines, which may be reflected in CIC reducing strategic involvement. CICC's ratings could be upgraded if Fitch believes it has become more systemically important to the Chinese government - although this possibility seems remote for CICC against the large state-owned banks - or if CICC undertakes a more visible strategic policy role. CICCHK's ratings would change in line with CICC's ratings and could be downgraded if CICC shows signs of a reduced willingness and ability to support the subsidiary. SENIOR DEBT - CICC Hong Kong Finance The MTN programme's ratings are directly correlated with notable changes in the willingness or ability of CICC to support the guarantor or issuer. The rating of the guaranteed senior notes will change in line with any movement in CICCHK's ratings. The rating actions are as follows: China International Capital Corporation Limited Long-term IDR affirmed at 'BBB+'; Outlook Stable Short-term IDR affirmed at 'F2' China International Capital Corporation (Hong Kong) Limited Long-term IDR affirmed at 'BBB+'; Outlook Stable Short-term IDR affirmed at 'F2' CICC Hong Kong Finance 2016 MTN Limited Senior unsecured USD2 billion MTN programme affirmed at 'BBB+' USD500 million 2.75% senior unsecured notes due 2019 affirmed at 'BBB+' Contact: Primary Analyst Jonathan Lee Senior Director +886 2 8175 7601 Fitch Australia Pty Ltd, Taiwan Branch Suite 1306, 13F, 205, Tun Hwa North Road, Taipei, Taiwan Secondary Analyst Leo Wah, CFA Director +852 2263 9951 Committee Chairperson Tim Roche Senior Director + 61 2 8256 0310 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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