On May 12, Fitch confirmed the long-term issuer default rating (IDR) of CITIC Bank (International) Limited (China CITIC Bank International Limited, referred to as "CITIC Bank International") as "BBB+". Look forward to "stability".

Fitch also confirmed that Citic Bank International has a short-term issuer default rating of "F2", a support rating of "2", a survivability rating (VR) of "bbb+" and a senior unsecured medium-term note plan rating of "BBB+".

Fitch has adjusted the "a" business environment assessment outlook of banks in Hong Kong, China from "negative" to "stable". The revision reflects Fitch's expectation that the downside risks from the outbreak have diminished and that a gradual economic recovery will help Hong Kong, China's GDP growth return to 4.5 per cent in 2021 (shrinking by about 6 per cent in 2020). The risk of potential capital outflows has also been reduced; in fact, deposits in most banks in Hong Kong are growing steadily as a result of active capital market activity, which also supports bank fee income.

Hong Kong, China has a deep-rooted position as an international financial and wealth management centre, and the operating environment assessment and viability ratings of most Hong Kong banks, including Citic Bank International, will benefit from adequate liquidity and capital buffers. However, low interest rates remain a challenge, although earnings pressure is likely to ease as expected credit losses (ECL) ease.

Key rating drivers

Issuer default rating and survivability rating

Citic Bank International's issuer default rating is driven by its survivability rating, reflecting the bank's good franchise in Hong Kong, China. The bank can work with its parent company, China CITIC Bank Corporation Limited, to look for growth opportunities inside and outside Hong Kong, China, without affecting its risk appetite.

Citic Bank International has a higher rating than Citic Bank, which owns 75 per cent of its subsidiaries, reflecting Fitch's expectation that Citic Bank International will maintain sufficient flexibility in its business strategy, management and risk preferences. at the same time, make selective use of Citic Bank's resources. The survivability rating also takes into account differences in the operating and regulatory environment between Hong Kong and the mainland.

Citic Bank International had an impairment loan ratio of 1.6 per cent by the end of 2020, higher than the industry average of 0.9 per cent because the bank had a large number of group exposure impairment last year. The bank faces a high risk of loan concentration as it focuses on cross-border syndicated lending and mainland operations to boost growth. By the end of 2020, the company's total exposure to mainland China had fallen slightly to 51 per cent from 55 per cent at the end of 2019, but it was still 28 per cent above the industry average and was likely to increase further.

Like its peers, Citic Bank International's profitability has been negatively affected by low interest rates. However, the decline is more pronounced than that of their peers because of separate impairment reserves for exposure to large groups. As a result, Citic Bank International's operating profit / risk-weighted asset ratio fell to 0.4 per cent by the end of 2020.

Fitch expects Citic Bank's profitability to improve in 2021 and 2022, but is still under pressure from low interest rates, in part because of abundant liquidity in the system. As a result, Fitch adjusted its profitability and profitability rating from "bbb" and "negative" to "bbb-" and "stable".

However, Fitch believes that if the bank works with the parent company to further take advantage of its local franchise and cross-border business growth prospects, such as in the Greater Bay area, the bank's viability rating can be maintained at current levels. In 2020, the bank's customer loans and deposits grew by 16.2 per cent and 11.9 per cent respectively, much higher than most of its local counterparts.

The bank's core tier one capital adequacy ratio (CET 1) fell from 14.3 per cent at the end of 2019 to 12.3 per cent at the end of 2020, due to strong loan growth and low profitability, but the bank's leverage has been maintained at a similar level with highly rated banks in Hong Kong, China (a similar assessment of the operating environment). Fitch expects no significant capital loss from Citic Bank International, as the bank's asset quality and profitability should benefit from a stable operating environment in Hong Kong, China. Citic Bank International will be more prone to accelerated loan growth.

Support rating

Citic Bank International's "2" support rating reflects Citic Bank's ability and willingness to provide institutional support to it.

Fitch believes that CITIC Bank International is a core subsidiary of CITIC Bank and an important platform for implementing CITIC Bank's overseas expansion strategy. therefore, Citic Bank's international institutional support-driven issuer default rating is equivalent to Citic Bank's issuer default rating. Fitch believes that a default by Citic Bank International will seriously damage Citic Bank's reputation. Citic Bank International's possibility of timely support from its mainland parent bank (and eventually the Chinese government) limits the downside risk of its issuer's default rating.

Default rating of short-term issuers

According to Fitch's bank rating standard, Citic Bank International's "F2" short-term issuer default rating is the benchmark rating because the bank's financing and liquidity factors are classified as "a -".

Rating sensitivity

Factors that may alone or jointly lead to positive rating actions / upgrades by Fitch include:

Default rating and survivability rating of long-term issuers

Citic Bank International's default rating and viability rating are unlikely to be upgraded unless it can effectively strengthen its franchise and effectively manage its asset quality and concentration risk. This will increase the prospect of Citic Bank International improving its financial position, with the viability rating likely to come from the fact that its impairment loan ratio remains below 2.0 per cent, operating profit / risk-weighted assets continue to improve to more than 2 per cent, while the CET 1 ratio rises to more than 14 per cent.

Support rating

If the parent company's issuer default rating is upgraded by two or more sub-levels, that is, China's sovereign rating is upgraded, or the country's more explicit willingness to support Citic Bank International, indicating an increased tendency to support Citic Bank International, Citic Bank International's support rating may be upgraded.

Default rating of short-term issuers

If the bank's financing and liquidity factor score is changed from "a -" to "a", its short-term issuer default rating may be upgraded, but in the absence of a more effective improvement in financial position (effective use of franchises), the increase may not happen.

Factors that may alone or jointly cause Fitch to take negative rating action / downgrade include:

Default rating and survivability rating of long-term issuers

If Citic Bank International's business is structurally weaker and risk appetite increases (including the parent bank's recommendation), the bank's financial position continues to deteriorate and undermines its company's health. Fitch may downgrade the bank's issuer default rating and viability rating. This may be reflected in the decline in the feasibility of Citic Bank's overall international business model, or it may be due to the deterioration of the following financial indicators in the economic environment:

-the impairment loan ratio increases and continues to exceed 3.5% (the four-year average up to 2020 is 1.2%)

-the ratio of operating profit to risk-weighted assets remains below 0.75% (the four-year average up to 2020 is 1.1%); or

-the CET 1 ratio has fallen below 12%, and there is no feasible plan to restore it to its current level.

Support rating

Huiyu may downgrade Citic Bank International's support rating if it believes that the Chinese government's willingness to provide timely support to CITIC Bank International through CITIC Bank has diminished.

Default rating of short-term issuers

Citic Bank International's short-term issuer default rating is unlikely to be downgraded unless its long-term issuer default rating is below "BBB", or its viability rating is below "bbb", its capital and liquidity rating is below "bbb+", and its institutional support-driven issuer default rating is also downgraded.