Research: Rating Action: Moody’s affirms China Construction Bank (Europe)’s A2 deposit and issuer ratings, stable outlook

Paris, February 16, 2023 — Moody’s Investors Service (“Moody’s”) today affirmed the A2 long-term deposit and issuer ratings of China Construction Bank (Europe) S.A. (CCB Europe), with a stable outlook, and downgraded the Baseline Credit Assessment (BCA) to ba3 from ba2. Moody’s concurrently upgraded the Adjusted BCA to baa1 from baa2. The agency also affirmed the bank’s short term deposit and issuer ratings of P-1, its long-term and short-term Counterparty Risk (CR) Assessment of A1(cr)/Prime-1(cr) and its long-term and short-term Counterparty Risk Ratings (CRRs) of A1 and Prime-1, respectively.

Moreover, Moody’s affirmed the A1 backed senior unsecured notes, with a stable outlook, which are guaranteed by CCB Europe’s China-based parent, China Construction Bank Corporation (CCB; A1 stable, baa1) through its Luxembourg branch. The rating agency also withdrew the backed senior unsecured EMTN programme of (P)A1. Please refer to the Moody’s Investors Service Policy for Withdrawal of Credit Ratings, available on its website, https://ratings.moodys.com.

RATINGS RATIONALE

BCA DOWNGRADE REFLECTS FRANCHISE AND PROFITABILITY CHALLENGES

The downgrade of CCB Europe’s BCA to ba3 from ba2 reflects persistent franchise and profitability challenges, in turn highlighting governance deficiencies in terms of the bank’s ability to developing a long-term and sustainable business strategy and achieving its financial goals. Except for 2018, CCB Europe has been loss making since its inception in 2013, reflecting a narrow range of banking products, a conservative growth strategy as well as ongoing investments in developing the bank’s European network. CCB Europe serves its parent strategic objective in expanding the group’s footprint in corporate banking across Europe. With its focus on participating in syndicated loans, the bank’s cross-selling opportunities remain limited, consequently leading to subdued revenue and profitability outlook in Moody’s opinion.

While assets are currently of good quality, the bank will likely incur higher credit costs over time as the portfolio seasons. Further, CCB Europe’s loan book will continue to lack granularity and exhibit elevated sector concentrations. Moody’s expects the bank’s sound capitalization (Common Equity Tier 1 ratio of 20.1% at year-end 2021) to decline over the rating outlook horizon, in line with the projected growth of the loan book, but to remain sufficiently strong to absorb potential loan losses.

ADJUSTED BCA UPGRADE REFLECTS STRONG INTEGRATION WITHIN ITS PARENT EUROPEAN OPERATIONS, COMBINED WITH STRATEGIC IMPORTANCE  

Despite the downgrade of CCB Europe’s BCA, its Adjusted BCA was upgraded to baa1 from baa2, reflecting Moody’s revised assumptions for affiliate support from its parent CCB. Because of its strategic importance in the development of an European franchise, its strong integration within the Chinese group’s European operations, as well as the parent’s close involvement in all its subsidiary’s strategic decisions, the rating agency has revised the support assumptions to affiliate-backed from very high, resulting in five notches of uplift from the BCA, from three previously. This assessment also reflects CCB’s ongoing support to its European subsidiary through capital, committed credit facilities and guarantees.

At the same time, Moody’s changed its previous moderate government support assumptions for CCB Europe to low, because financial support from the government of China (A1 stable) in case of need would likely be provided through CCB, and is therefore now already captured by the affiliate-backed support assumptions from the parent. Consequently, the government support assumption at the instrument level no longer provides a rating uplift.

AFFIRMATION OF RATINGS AND ASSESSMENTS FOLLOWING UNCHANGED ADVANCED LGF ANALYSIS

The affirmation of CCB Europe’s A2 deposit and issuer ratings reflects the outcome of the Advanced LGF analysis, which indicates a very low expected loss-given-failure for both CCB Europe’s deposits and senior unsecured debt. This assessment takes into account the large amount of deposits and the approximately outstanding €1.1 billion senior unsecured debt under an issuing program which benefits from its parent’s guarantee. This results in a two-notch uplift from CCB Europe’s Adjusted BCA for both deposits and senior unsecured debt.

Finally, Moody’s affirmation of CCB Europe’s A1 senior unsecured debt ratings reflects the unconditional and irrevocable on-demand guarantee provided by CCB.

The withdrawal of the (P)A1 backed senior unsecured EMTN programme rating reflects the fact that, according to measures enacted in March 2022 by the China Banking and Insurance Regulatory Commission, such a parental guarantee can no longer apply to future debt issuances from any of its subsidiaries, including CCB Europe, unless approved by the regulator or counter-guaranteed by subsidiaries’ pledges of government bonds or certificates of deposits.  

ESG considerations

The assigned ratings also incorporate a revised assessment as per Moody’s Investor Service’s General Principles for Assessing Environmental, Social and Governance (ESG) Risks Methodology. Reflecting Moody’s views of the aforementioned governance deficiencies of CCB Europe in developing a sustainable business and financial strategy, the bank’s governance issuer profile score was lowered to G-4 from G-3. At the same time, CCB Europe’s ESG credit impact score improved to neutral-to-low (CIS-2) from moderately negative (CIS-3), reflecting the mitigating rating impact of the revised affiliate support assumptions over the bank’s ESG risk profile.  

OUTLOOK

The outlook on CCB Europe’s long-term deposit and issuer ratings is stable, in line with the stable outlook on its parent’s long-term deposit ratings.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Unless CCB itself were upgraded, an upgrade of CCB Europe’s BCA would not lead to an upgrade of the deposit and issuer ratings.

CCB Europe’s BCA could be upgraded if the bank were to set a medium to long-term plan that would entail a diversification of its assets and product range, leading to sustainable   profitability, and, by the same token, reduce governance-related risks.

The long-term deposit and issuer ratings could be upgraded should there be a material issuance of subordinated liabilities, leading to increased rating uplift as a result of Moody’s Advanced LGF analysis.

A downgrade of CCB Europe’s Adjusted BCA would likely result in a downgrade of all its ratings. CCB Europe’s Adjusted BCA could be downgraded (i) if the support probability from CCB were to be reduced, if for example its European expansion became less strategically important, or (ii) if CCB’s BCA was downgraded.

Factors that may lead to a downgrade of CCB Europe’s standalone BCA include (i) inability to break even over the medium term; and (ii) increasing asset risk.

Although unlikely at present, the long-term deposit and issuer ratings could be downgraded should there be a significant decrease in the bank’s existing stock of bail-in-able liabilities, leading to fewer notches of rating uplift under Moody’s Advanced LGF analysis.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Roland Auquier
Vice President – Senior Analyst
Financial Institutions Group
Moody’s France SAS
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Olivier Panis
Senior Vice President
Financial Institutions Group
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Client Service: 44 20 7772 5454

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