ICBC International Holdings Ltd. Assigned #A-/A-2# Outlook Stable

Stocks and Financial Services Press Releases Monday October 30, 2017 17:31
HONG KONG--30 Oct--S&P Global Ratings

HONG KONG (S&P Global Ratings) Oct. 30, 2017--S&P Global Ratings assigned its 'A-' long-term and 'A-2' short-term issuer credit ratings to ICBC International Holdings Ltd., a Hong Kong-based investment and financial services platform. The outlook on the long-term rating is stable.

The rating on ICBC International reflects the company's highly strategic group status to its sole shareholder and parent, Industrial and Commercial Bank of China Ltd. (ICBC: A/Stable/A-1). We expect ICBC International to be an indirect beneficiary of support from the Chinese government, if needed.

Our assessment of ICBC International's status to the ICBC group considers the following:
  • ICBC International is a tier-one subsidiary within ICBC group. The company provides complementary broker-dealer products and financial advisory services for clients offshore, such as for advising customers' cross-border transactions. ICBC International plays a key role in the group's global development strategy, cooperates closely with other ICBC entities, and strengthens customer stickiness of ICBC group.
  • ICBC International is highly integrated with the parent in terms of management and operations. The subsidiary's board of directors and key managers are appointed by the parent, and its risk control processes are built on the pillars of the group's global standards. ICBC International adheres to the group's industry policies, and follows the parent's guided concentration limits on fixed-income and equity investments. Liquidity and risk management reports are submitted periodically for the parent bank's review. ICBC group has consistently referred customers, supported ICBC International's information technology systems, and is closely associated with the subsidiary in terms of brand name and reputation.
  • ICBC International is dependent on funding and capital support from the parent bank, which has supported the subsidiary with multiple capital injections, large amount of direct credit facilities, and by guaranteeing the subsidiary's medium-term notes issuance (through ICBC group's Hong Kong branch). ICBC International leverages on the parent's banking relationships with China's large state-owned enterprises and leading private firms.
  • Our assessment of the group status is constrained by ICBC International's very small size within ICBC group (0.3% of net assets at end-2016), the company's relatively volatile performance and sensitivity to market risks, and the differing nature of its broker-dealer and financial advisory business compared with the parent bank's credit underwriting practices. For debt underwriting, we note that other ICBC entities also have underwriting capabilities, which create some business overlap with ICBC International.

ICBC International focuses on serving large mainland Chinese and Hong Kong companies and selected overseas customers. It capitalizes on the parent bank's extensive distribution network and customer resources. The subsidiary has served the parent bank's strategy by providing complementary offshore broker-dealer products, investment services, and financing arrangements including bridge loans, financing mergers and acquisitions, and underwriting equity and bond issuances.

ICBC International's strategy is heavily focused on proprietary investments in loan-like assets, fixed-income, and equity financial products. ICBC International also leverages its knowledge of investees to create cross-selling opportunities with its other business segments, including corporate finance, sales and trading, and asset management. As a result, ICBC International's asset size more than doubled to Hong Kong dollar (HK$) 36.2 billion in 2016, and we anticipate this high growth will continue, given ICBC group's internationalization strategy and developments plans. We expect ICBC International's leverage to rise significantly from an estimated 4.8x at end-2016, while its investment book will remain sensitive to market risks.

As ICBC International pursues a high-growth strategy, we expect its revenue and net income contribution to the group to gradually increase from its current very low base. In addition, a more diversified revenue stream will lower reliance on proprietary investment-related income (73% of revenue in 2016).

ICBC International also plans to diversify its customer composition. In 2016, more than 85% of revenues were from mainland Chinese customers, but this will decline to a targeted 60%, with 20% coming from Hong Kong, Taiwan, and Macau clients, and the rest from European and North American customers.

The stable outlook on ICBC International mirrors the rating outlook on ICBC. The outlook also reflects our view that ICBC International will remain the group's principal offshore investment and financial services platform and maintain its highly strategic group status over the next one-to-two years.

We could downgrade ICBC International if we lower the rating on the parent bank, or if we no longer believe ICBC International to be a highly strategic subsidiary of ICBC. The latter could occur if the group significantly reduces its stake in ICBC International or the subsidiary deviates from the group's strategies.

We do not expect to upgrade ICBC International over the next one to two years. However, we could consider upgrading ICBC International if we revised its group status to core from highly strategic. This could happen if: (1) ICBC International delivers sustainable performance, and its capital and income contribution to the group increases significantly; and (2) integration between ICBC International and the parent bank strengthens.

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