OREANDA-NEWS. Fitch Ratings has today affirmed China CITIC Bank International Limited's (CNCBI) Long-Term Issuer Default Rating (IDR) at 'BBB'. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.

The bank's Long-Term IDR is driven by its standalone strength denoted by its Viability Rating (VR). The affirmation and Stable Outlook reflect Fitch's view that the bank will maintain financial flexibility to mitigate its high China concentration risks amid a more challenging macroeconomic environment in both mainland China and Hong Kong. Its IDRs are also underpinned by the expectation for support from its parent, China CITIC Bank (CNCB; BBB/Stable).

KEY RATING DRIVERS

IDRS, VR AND SENIOR DEBT
CNCBI's IDRs and VR reflect its adequate financial profile with strong funding and liquidity and adequate capitalisation. However, the bank's high China concentration renders it vulnerable to asset-quality deterioration at a time when the Chinese economy is slowing down. Profitability is weakening, which in turn reduces the bank's internal capital generation.

CNCBI's largest concentration remains on China. Gross mainland China exposure (MCE) grew to 65.9% of total assets at end-1H15, from 61.7% at end-2014. The top 20 loans accounted for 18.9% of total loans and 141.6% of Fitch Core Capital (FCC), down from 21.3% and 161.0% at end-2014, respectively.

Asset quality remains solid with credit costs at a cyclical low. However, the agency expects impairments to creep up as loans season and growth softens, particularly in the China-related portfolio. Management's less prudent provision policy - indicated by the bank's declining reserve coverage ratio - increases the risk of under-provisioning once the credit cycle turns. NPL coverage has declined to 44% (from 76% at end-2014 and 117% at end-2013), which is significantly below those of peers (Fitch-rated Hong Kong banks median: 78.4%). The NPL ratio remains low at 0.49% at end-1H15; net credit cost for 1H15 is a negative 7bp thanks mainly to reserve release.

Fitch expects CNCBI's capital level to improve to be more in line with that of its peers. The agency also expects the bank to consume capital at a slower pace due to lower loan growth and maintain a comfortable capital buffer over the already stringent regulatory requirement. The improvement will stem from an expected HKD1.8bn capital injection announced by its parent CNCB and the expected disposal of its China subsidiary to Taiwan's CTBC Financial Holding. The agency estimates the bank's FCC ratio will increase by approximately 200bp to over 14% based on risk-weighted assets at end-1H15, compared with the average of 14.8% for Fitch-rated Hong Kong banks at end-1H15. On the same basis, Fitch Eligible Capital will be 14.8% as the agency assigns 50% credit to the bank's USD300m Basel III-compliant Additional Tier 1 instrument.

Fitch expects CNCBI's profit to come under further pressure as volume growth slows due to a more challenging economic environment in China and weak trade activity. In addition, converging on- and off-shore rates will normalise CNCBI's profit as non-recurring income from such treasury operations fades. The bank's weaker performance in 1H15 was mainly due to a significant 63% yoy drop in income from placing yuan deposits, mainly with Chinese banks onshore, as spreads have dropped.

Fitch continues to view CNCBI's funding and liquidity as a rating strength. Similar to other Hong Kong banks, CNCBI is predominantly deposit-funded with customer deposits account for 90% of its total funding. The loan-to-deposit ratio of 77.2% is in line with the system average. Additionally, CNCBI maintains a substantial liquidity portfolio, which provides buffer against potential refinancing risk.

CNCBI's senior unsecured securities are rated in line with its IDR as they represent direct, unconditional, unsubordinated and unsecured obligations of the bank.

SUPPORT RATING
CNCBI's Support Rating of '2' reflects a high probability of support from CNCB (BBB/Stable), and ultimately the Chinese government (A+/Stable) in light of the state ownership in CNCB. Fitch considers CNCBI a core subsidiary to CNCB given CNCBI's role in support the group's cross-border business expansion. Therefore, the agency equalises the IDRs of CNCBI and CNCB.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
CNCBI's lower Tier 2 subordinated debt is rated one notch below its IDR to reflect the notes' higher loss severity given their subordination to senior unsecured instruments. Fitch also rates CNCBI's subordinated debt with non-viability clauses and partial write-down features at the same level as lower Tier 2 instruments.

RATING SENSITIVITIES

IDRS, VR AND SENIOR DEBT
CNCBI's VR could come under pressure if its risk appetite were to change and result in credit growth and risk concentrations that are no longer commensurate with its capitalisation. Alternatively, the agency would downgrade the VR if there is significant deterioration of loan quality on China-related lending.

A downgrade of CNCBI's VR would not necessarily lead to a downgrade of its IDR, as institutional support from CNCB provides a floor for CNCBI's IDR at 'BBB'.

The ratings on CNCBI's senior debt are sensitive to changes in its IDR.

SUPPORT RATING
The SR is potentially sensitive to any change in assumptions around the propensity or ability of CNCB to provide timely support to the bank.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings on CNCBI's subordinated debt issues are notched from the bank's IDR and would be sensitive to any changes to that rating.

The rating actions are as follows:

China Citic Bank International Limited
Long-Term IDR affirmed at 'BBB'; Outlook Stable
Short-Term IDR affirmed at 'F3'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '2'
Senior unsecured securities affirmed at 'BBB'
Lower tier-2 subordinated debt without non-viability clauses affirmed at 'BBB-'
Subordinated notes with non-viability clauses affirmed at 'BBB-'.