CMB International Capital Corp. Ltd. Assigned #BBB+/A-2# Outlook Guaranteed Notes Rated #BBB+#

Stocks and Financial Services Press Releases Tuesday July 3, 2018 17:51
HONG KONG--3 Jul--S&P Global Ratings

HONG KONG (S&P Global Ratings) July 3, 2018--S&P Global Ratings today said it has assigned its 'BBB+' long-term and 'A-2' short-term issuer credit ratings to Hong Kong-based CMB International Capital Corp. Ltd. (CMBI). The outlook on the long-term rating is stable.

At the same time, we assigned our 'BBB+' long-term issue rating to debt that CMBI guarantees. Legend Fortune Ltd., a 100% owned special purpose vehicle of CMBI, issues the debt. The issue rating is subject to our review of the final issuance document.

Our rating on CMBI reflects our view that the company is a core subsidiary of China Merchants Bank Co. Ltd. (CMB: BBB+/Stable/A-2). We expect potential extraordinary government support to CMB to indirectly extend to CMBI. We therefore equalize our ratings on CMBI with those on CMB.

Our assessment of CMBI's status to the CMB group mainly reflects the following:
  • CMBI is the sole offshore platform for the group's capital market related financial services. Its major business lines include asset management, corporate finance, wealth management, structured finance, and equities trading and research. The company shares the majority of its clients with its parent in the fast-growing asset management and wealth management business. Growth in these segments is mainly driven by the management of funds for the group's corporate and high net worth clients with global asset allocations or alternative investment needs. The largest investor in managed private equity funds is the parent bank's wealth management products. We also understand that CMBI invests a small portion in the private equity funds itself with satisfactory performance to date. CMBI's strategic value is brought about by cross-license regulatory restrictions in China.
  • The CMB group's offshore equity trading function is consolidated at the CMBI level and serves CMBI and other group entities, namely CMB HK branch and Wing Lung Bank. We understand there is very minimal overlap of CMBI's strategic or business functions with any other offshore group entity.
  • CMBI and CMB have overlapping senior management. The subsidiary's chairman is also the group's president and CEO, and CMBI's CEO is the group's vice president. This factor supports closer strategic alignment, oversight, and monitoring of CMBI by the group, compared to peers. This is notwithstanding CMBI's small size. It accounted for 0.2% of group assets, 0.9% of group net assets, and 0.6% of group revenue and profit at end-2017.
  • Numerous rounds of capital injections from CMB to CMBI, and the subsidiary's access to intra-group contingent liquidity facilities. CMBI also shares the group's distribution channels and internal operation systems.

We expect CMBI to follow an asset-light business development approach, in line with that of the parent bank. Fee and commission income accounted for more than 60% of CMBI's revenue in the past three years. Group integration is therefore key to the company achieving adequate profitability.

While we believe intra-group integration is high, the new asset management rule in China could disrupt CMBI's private equity operations and cooperation with the group. The company has very limited exposure to property developer debt and its proprietary investment is limited, increasing the resilience of its financial performance to market volatility.

We expect CMBI to have stable revenue contributions from its business lines over the coming two years. As of end-2017, CMBI's asset management and wealth management businesses together account for 65% of the company's net operating revenue, followed by corporate finance (17%), structured finance (10%), and the rest is from equity trading and others businesses. CMBI has grown rapidly in the IPO, wealth management private banking, and fund management segments, while other business segments are still at the early development stage. We expect only a modest increase in CMBI's leverage (total assets minus client deposits, divided by equity) from 2.34x as of end-2017.

The stable outlook on CMBI mirrors the outlook on CMB. The outlook also reflects our view that CMBI will remain the group's principal financial service provider in offshore capital markets and maintain its core group status over the next two years.

We could downgrade CMBI if we lower the rating on the parent bank, or if we no longer believe CMBI as a core subsidiary of CMB. The latter could occur if: (1) the group significantly reduces its stake in CMBI; (2) the subsidiary deviates from the group's strategies; (3) the overlap of senior management reduces, resulting in less group control or oversight; (4) CMBI is no longer the sole offshore capital markets financial service provider, or other group subsidiaries develop overlapping key functions; or (5) the synergy and client overlap between CMBI and the parent weakens, possibly due adverse regulatory developments.

We may raise the rating if we upgrade CMB.

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