Fitch Ratings has affirmed
The Outlook on the Long-Term IDR is Stable.
Key Rating Drivers
Support-Driven IDR: The bank's Long-Term IDR is driven by Fitch's assessment of a high likelihood of government support, as reflected in the GSR. This is based on a combination of factors, including relative size and domestic significance, as well as the local government's strategic ownership. The rating also considers the bank's niche interbank platform and important role in supporting local state-owned enterprises in
Support Prospects Unchanged: Our Stable Outlook on IND reflects our view that even in the event of a one-notch downgrade in
D-SIB Designation: IND was formally designated a domestic systemically important bank (D-SIB) by Chinese regulators in
The 'b+' VR has been assigned below the 'bb-' implied rating to reflect our view that IND's risk profile has a strong negative impact on the bank's overall credit profile, which drags down the assigned VR to the level of the risk profile score of 'b+'.
Stable OE Despite Slower Growth: Fitch forecasts
The operating environment (OE) score of 'bbb-'/stable is above the 'bb' category implied score, as we believe
Leading Interbank Platform; Regional Significance: IND has a leading interbank platform and plays a key role in supporting the
Shadow Activities Remain Large: The bank's entrusted investments were around 13% of assets at end-2023, above the mid-tier bank average of 7%. Its off-balance-sheet wealth-management products (WMPs) also remained large, at around 43% of deposits at end-2023. This continues to weigh on our assessment of its risk profile.
Continued NPL Resolution: We expect IND to maintain stable asset quality (impaired loan ratio: 1.1% at end-1Q24) in 2024-2025 on continued non-performing loan (NPL) resolution. It has a higher direct loan exposure to property developers (8% of total loans at end-2023) but its reported NPL ratio for development loans of 0.8% is below the mid-tier average (3.4% at end-2023). IND's asset-quality score of 'b+' is below the 'bbb' category implied score. This reflects its large non-loan exposures and higher loan growth appetite relative to peers, which could result in weaker and more volatile asset quality.
NIM Pressure Persists: The bank's operating profit/risk-weighted asset ratio declined to 1.2% in 2023 from 1.6% in 2022 amid continued net interest margin (NIM) pressure from a loan prime rate cut and mortgage repricing. Still, we expect the ratio to remain between 1.1% and 1.2% in the next one-two years as moderating impairment charges should support stable profitability, keeping it commensurate with the bank's 'bb-' earnings and profitability score.
Capitalisation Matches Mid-Tier Peers: IND's common equity Tier 1 (CET1) ratio was 9.5% at end-1Q24, on a par with the mid-tier bank average. We expect the bank to maintain largely stable capitalisation over 2024-2025 given steadier earnings generation.
Higher Interbank Funding Than Peers: IND has high reliance on interbank funding and its deposit franchise remained weaker than higher rated mid-tier peers. The funding and liquidity score of 'bb-' has been assigned below the 'bbb' category implied score, given the bank's reliance on non-deposit funding. Its large off-balance-sheet exposure may strain its on-balance-sheet funding. Still, we expect its Fitch-calculated loan/deposit ratio to stay stable at the 106% reported at end-2023.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
IDR and GSR
The Long-Term IDRs and GSR will be downgraded if the
A weakening in IND's relationship with the
VR
IND's VR could be downgraded if its risk appetite increases, for example if rapid credit growth leads to weaker capital buffers, or if the bank resumes aggressive growth in entrusted investments and/or WMPs, which erode its funding and liquidity profile. Disruption to interbank markets could also result in higher funding and liquidity strains for IND relative to peers. These factors could be reflected in a sustained deterioration in financial metrics, such as a combination of the following reported core metrics:
The four-year average of impaired loans/gross loans increasing to - and sustained at - around 8% (2020-2023: four-year average of 1.4% on a reported basis), although Fitch's assessment of asset quality will also take into consideration other indicators, such as 'special-mention' loans, loan-loss provisioning for both on- and off-balance-sheet assets, and whether (and to what extent) we believe reported metrics understate any deterioration in asset quality.
CET1 ratio falling to around 8.5% without a credible plan to raise it back towards the current level (9.5% at end-1Q24).
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
IDR and GSR
An upgrade of the sovereign ratings could lead to positive rating action on the bank's GSR and its support-driven Long-Term IDR if that indicates greater ability to support IND with no less propensity to support.
Indications that transferring the operations of IND's niche interbank platform to other participants in the event of stress would be difficult - which may indicate that IND is of higher systemic importance than we had previously perceived - could also lead to an upgrade of the bank's GSR and IDRs. A material improvement of its retail deposit franchise, such that it is similar to that of mid-tier peer
VR
A sustained reduction in the bank's risk appetite, such that its underlying asset quality proves to be resilient through a weaker environment, together with a stabilisation of the domestic economy, would be positive for its VR assessment. The VR may also be upgraded if there is a material decrease in the bank's reliance on interbank funding, or sustained improvement in its capital buffers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
IND's medium-term note (MTN) programme and senior debt instruments are rated in line with its Long-and Short-Term IDRs and IDRs (xgs), as they represent its unsecured and unsubordinated obligations.
IND's IDRs (xgs) are driven by its VR. The Long-Term IDR (xgs) has been affirmed at 'B+(xgs)' and the Short-Term IDR (xgs) has been affirmed at 'B(xgs)'.
IND's Short-Term IDR has been assigned at the higher of the two options available for its Long-Term IDR, reflecting our expectation that government support is more certain in the near term.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The long- and short-term ratings on the MTN programme and the long-term rating on the notes would be downgraded if IND's IDRs or IDRs (xgs) are downgraded.
The bank's Long-Term IDR (xgs) could be downgraded if the VR is downgraded. The Short-Term IDR (xgs) could be downgraded if the VR is downgraded below 'b-'.
IND's Short-Term IDR will be downgraded if its Long-Term IDR is downgraded.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The long- and short-term ratings on the MTN programme and the long-term rating on the notes would be upgraded if IND's IDRs or IDRs (xgs) are upgraded.
The bank's Long-Term IDR (xgs) could be upgraded if the VR is upgraded. The Short-Term IDR (xgs) could be upgraded if the VR is upgraded above 'bb+'.
IND's Short-Term IDR is likely to be upgraded if the Long-Term IDR is upgraded.
VR ADJUSTMENTS
The 'b+' VR has been assigned below the 'bb-' implied rating due to the following adjustment reason: risk profile (negative).
The OE score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reason: sovereign rating (positive).
The business profile score of 'bbb-' has been assigned below the 'a 'category implied score due to the following adjustment reason: management and governance (negative).
The asset quality score of 'b+' has been assigned below the 'bbb' category implied score due to the following adjustment reason: non-loan exposure (negative) and underwriting standards and growth (negative).
The funding and liquidity score of 'bb-' has been assigned below the 'bbb' category implied score due to the following adjustment reason: non-deposit funding (negative).
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
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.
Public Ratings with Credit Linkage to other ratings
IND's IDRs and GSR are linked to
ESG Considerations
IND has an ESG Relevance Score of '4' for Financial Transparency, as there are structural issues around financial transparency and disclosure. Those issues are not captured in headline performance metrics in
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
(C) 2024 Electronic News Publishing, source
