CMB keeps positive S&P ratings

China Merchants Bank kept its Standard & Poor’s 'BBB-' long-term and 'A-3' short-term counterparty credit ratings on CreditWatch.

"The ratings remain on CreditWatch primarily to reflect Standard & Poor's view that CMB's proposed rights issue, if it materializes, would likely significantly strengthen the bank's relatively weak capital position," said Standard & Poor's credit analyst Ryan Tsang. "The CreditWatch also reflects the bank's continued track record of good financial metrics despite severe operational challenges in 2009. In addition, we note the steady improvement in CMB's business and geographic diversification, underpinned by the bank's smooth integration with the acquired Wing Lung Bank in Hong Kong."

CMB recently revised the targeted proceeds from the issue to  US$2.63 billion - US$3.2 billion. If the bank raises US$2.63 billion, its ratio of adjusted total equity to adjusted assets would rise about 100 basis points to 4.69 percent, largely comparable to that of its rated domestic peers.

The ratings were initially placed on CreditWatch with positive implications on 14 August 2009, following the bank's announcement of a planned rights issue with expected proceeds of between US$2.19 billion and US$2.63 billion.

CMB has much greater operational flexibility than its state-owned domestic peers, making it less susceptible to government influence, in S&P’s opinion. It also noted that the bank has less exposure than these peers to questionable project loans despite its strong loan growth of 31.8 percent in the first three quarters of 2009.
CMB's profitability is sound but moderated significantly in the first nine months of 2009, after an exceptional 2008. Its annualized return on average assets stood at 0.97 percent for the period, compared with 1.46 percent in 2008. The weakened performance is mainly attributable to the bank's sharply narrowed net interest margin following an official interest rate cut in 2008, particularly for residential mortgages. In addition, its operating expenses rose following the acquisition of Wing Lung Bank in late 2008.

S&P expects CMB to maintain satisfactory profitability because its net interest margin appears to have bottomed out since the third quarter of 2009.