作者：于, 冬雪

HONG KONG, 4 July 2018. Pengyuan International has assigned a first-time global-scale long-term issuer credit rating (LTICR) of ‘A-’ to CMB International Capital Corporation Ltd (CMBI) with a Stable Outlook. The rating is based on a standalone credit profile (SACP) of ‘bbb-’ and our view of China Merchants Bank Co Ltd (CMB)’s extremely strong willingness to provide extraordinary support to CMBI in the event of financial distress.

The rating reflects CMBI’s strong market recognition, well-seasoned management, prudent business model, and resilient financial profile. In addition, the rating considers the extraordinary operational and financial support from the company’s parent, CMB. In our view, CMBI’s overall creditworthiness is closely linked with that of CMB, given the former’s status within the group.

These strengths are partially offset by the procyclicality of CMBI’s business, limited scale in a highly competitive market, and relatively short track record as it continues to ramp up its capabilities across major product lines. While we expect the company to maintain a robust capital level in 2018-2020, we believe management will have to navigate an increasingly challenging operating environment as capital market volatility remains elevated.

Key Rating Factors

Positive

Strong market recognition. CMBI has received wide market recognition in recent years, especially in its corporate finance business, where the firm ranked no. 1 in IPO underwriting in Hong Kong in 2017. We attribute such success to the CMB brand name, as well as revenue synergies with the bank parent. The majority of CMBI’s corporate and retail clients originate from the bank’s onshore and offshore branch network.

Well-seasoned management. The firm’s management and board of directors consist of experienced professionals either sourced from CMB internally or from reputable financial institutions externally. At the operational level, revenue per employee indicates that the firm is running at an efficiency level comparable to well-established peers’ in the same space.

Prudent business model. We view positively management’s strategy to adopt an asset-light business model, which reduces the amount of risk the company undertakes with its balance sheet. This strategy is followed consistently across the major product lines.

Resilient financial profile. As a result of its business model, CMBI’s ROA is well above industry norms, although ROE has been on par with peers’ due to its low leverage. Our analysis suggests that even if the capital market environment weakens markedly, the company will be able to maintain a balance sheet that is consistent with the current rating. A key credit positive is the variable nature of many of CMBI’s operating expense items, of which staff compensation represents a major portion.

Negative

Procyclicality. Despite its conservative financial profile, CMBI’s businesses are necessarily procyclical and would be subject to volatilities in the capital markets on both the asset and funding sides. These potential fluctuations are mitigated by high fee and commission income contributions to a certain extent.

Limited operating scale.

CMBI accounts for less than 1% of CMB’s revenues, net profits, assets, and shareholders’ equity. We anticipate that the company will gradually ramp up its scale in 2018-2020, but its size will likely remain a source of potential vulnerability in what we consider to be a highly competitive operating environment.

Relatively short track record.

While CMBI has been a part of the CMB group since 1998, it was not until 2015 that the company began to grow its book of business proactively. Revenues have surged in the last 2-3 years and the firm is still in the process of building up its capabilities in areas such as institutional sales and trading.

The Stable Outlook reflects our view that CMB’s capability and willingness to support CMBI are unlikely to change in the next 12-24 months. We believe that CMB’s willingness to support CMBI will remain extremely strong over this period.

We would consider downgrading CMBI’s rating if:

• CMB’s creditworthiness deteriorates significantly; or
• We determine that the company’s importance to CMB has declined noticeably. This may be reflected in a change in CMBI’s ownership or in signs that indicate that support may not be forthcoming during times of financial distress. Such signs may include a withdrawal of funding arrangements by CMB or an assertion by management that the international securities and asset management operations cease to be integral to the bank’s long-term growth ambitions.

We would consider upgrading the rating if:

• CMB’s creditworthiness improves significantly.

CMBI’s standalone SACP of ‘bbb-’ is based on our four-pillar analysis:

Industry Structural Stability: We consider the Hong Kong securities industry to have high structural stability, driven by competitive but growth-conducive market dynamics, sound macroeconomic fundaments, well-developed banking system and capital markets, and a relatively robust regulatory environment.

Enterprise Risk Management (ERM): We believe CMBI has adequate ERM capabilities, supported by an appropriate strategic and risk framework, conservative asset-liability and business risk management, and improving operational risk management. However, we believe potential vulnerabilities may lie in the firm’s consistency in implementing its ERM policies as staff recruitment has occurred at a significant pace in the last 12-18 months. These vulnerabilities may be exacerbated by continued expansion into new product categories.

Capital Formation: We regard CMBI’s capital generation capacity to be strong, reflecting high earnings quality, an increasingly optimal return on capital profile, and a sustainable dividend policy. We expect to see ROE trending from the low- to the mid-teens as capital utilization becomes increasingly optimal, while ROA is forecast to be marginally lower as asset intensity rises from a low base.

Capital Adequacy: The company has an asset-light balance sheet management philosophy and, even as it continues to grow its revenues at a robust rate, we expect its capital adequacy to remain strong on an absolute basis and relative to its peers’. In particular, we expect the company’s economic capital / tangible assets (less client accounts) ratio to stay above 20% through 2020 (i.e. leverage of < 5x).

On the asset side, we expect the company to maintain manageable exposures in its own account, with proprietary trading positions, participation in higher-risk asset management products, margin lending, and structured finance loans representing a modest percentage of capital. CMBI’s funding and liquidity are also considered to be strong, with interest coverage expected to exceed 5x in 2018-2020 as per our definitions.