THE SHANGHAI COMMERCIAL & SAVINGS BANK, LTD.
Fitch Ratings has affirmed
The Outlook on Long-Term IDR is Stable. Fitch has also affirmed the Viability Rating (VR) at 'a-'.
Key Rating Drivers
Intrinsic Strength Drives Ratings: SCB's Long-Term IDR is driven by its VR. The VR balances the bank's sound risk profile and solid financial buffers against its moderate business scale and profitability relative to that of its higher-rated local peers. The Stable Outlook reflects our expectation the bank's intrinsic credit profile would be stable over the next two years. The Short-Term IDR of 'F2' is the baseline rating, according to Fitch's Bank Rating Criteria, since the bank's funding and liquidity factor score is 'a-'.
Stable Operating Environment: Our assessment of
Stable Business Model: The business profile score of 'bbb+' is supported by SCB's niche but stable banking relationships with corporations, SMEs and high-net-worth individual customers predominantly based in
Sound Risk Profile: SCB's risk profile score of 'a-' is supported by its lending focus on secured loans (72% of total loans at end-2022) and sound liquidity management with a high level of fixed-income securities in its balance sheet. The bank reduced its fixed-income portfolio to about 24% of total assets by end-2022, from 35% at end-2021, to minimise the investment revaluation impact amid the rapid increase in interest rates during the year.
Rising Asset-Quality Pressure: We have revised the outlook on the asset-quality score to negative from stable, reflecting rising pressure from the real-estate sector. The impaired-loan ratio increased to 0.9% in 2022 from 0.2% in 2020, driven by deterioration in property-related exposure in mainland
Steady Profitability: SCB is likely to maintain steady profitability in the near term despite increased pressure on credit costs. Profitability should be supported by loan repricing to higher interest rates and the recovery of fee income amid
Strong Regulatory Capital Buffers: The common equity Tier 1 (CET1) ratio improved by 1.4pp to 19.6% in 2022, driven by the reduction in risk-weighted assets from the divestment of fixed-income securities and lower dividend payouts. That said, our assessment of SCB's capitalisation and leverage is constrained at 'a', lower than the implied 'aa' category score, due to its high loan concentration.
Modest Loan-to-Deposit Ratio: SCB's funding and liquidity profile strength is supported by its modest loan-to-customer deposit ratio (55% at end-2022) and large liquid-asset portfolio. However, the score of 'a-' is below the 'aa' category implied score due to its more price-sensitive deposit structure relative to that of larger local peers.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The bank's VR could be downgraded if there is a significant shift in its business model towards higher risk markets, or vulnerable sectors, which weakens its risk profile and leads to structural deterioration in the financial profile.
The VR could also be downgraded if a deterioration in operating conditions leads to a combination of the following financial metrics deterioration for a sustained period:
impaired loans/gross loans exceeding 2% (four-year average to 2022: 0.5%)
operating profit/risk-weighted assets remaining below 1.5% (four-year average to 2022: 2.0%)
the CET1 ratio falls below 14% (2022: 19.6%) without a credible plan to restore it.
A downgrade of the VR would lead to similar action on the Long-Term IDR.
The Short-Term IDR would be downgraded if the VR is downgraded and the funding and liquidity score is lowered to below 'bbb+'.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
There is limited rating upside to SCB's VR without a more positive assessment of
An upgrade of the VR would lead to similar action on the Long-Term IDR.
The Short-Term IDR could be upgraded if we were to revise SCB's funding and liquidity score to 'a', from 'a-', but this is unlikely in the absence of a more meaningful franchise.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The ratings of the bank's Basel III-compliant subordinated notes are two notches below the VR to reflect the poor recovery prospects of the gone-concern loss-absorption instruments. The notes have no coupon payment flexibility relative to senior unsecured instruments because of their subordinated status, and have a partial or full write-off feature.
We do not factor in any shareholder support, as SCB's parent,
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
A change in the VR would prompt a similar change to the ratings of the subordinated notes.
The GSR is already at the lowest level on Fitch's scale and cannot be further lowered.
We do not foresee an upgrade of the GSR due to
VR ADJUSTMENTS
The OE score of 'a' has been assigned below the 'aa' category implied score on the following adjustment: size and structure of the economy (negative).
The capitalisation and leverage score of 'a' has been assigned below the 'aa' category implied score due to the following adjustment: risk profile and business model (negative).
The funding and liquidity score of 'a-' has been assigned below the 'aa' category implied score due to the following adjustment: deposit structure (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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