China  Special Report 

Chinese Banks – Annual Review and Outlook 
As Western banks continue to wrestle with the events of the past year, Chinese banks have emerged from the global crisis relatively unscathed, and now stand among the largest financial institutions in the world. The resilience of Chinese banks has attracted a growing amount of attention and inquiry from market participants. Could banks in China be stronger than they are being given credit for? With lending expected to rise by close to 30% of GDP by year‐end (2008: 16.7%) and loan spreads down 160bp from mid‐2008, many analysts have been worried about a deterioration in Chinese banks’ performance. However, earnings and asset quality have generally surprised on the upside in 2009. Consequently, most measures of capitalization, although clearly weaker than at end‐2008, have demonstrated less erosion than expected given the magnitude of growth. While recent performance has been better than anticipated, Fitch Ratings continues to believe that a high degree of caution is still warranted due to major ongoing weaknesses in loan classification and disclosure of off‐balance‐sheet exposures, Chinese banks’ lack of experience operating through a full economic cycle, and the lengthy process of instilling a new credit culture. Meanwhile, although this year’s fiscal and monetary stimulus appear to be succeeding in reviving the economy, the aggressive growth of credit in H109 has raised the spectre of a medium‐term bad loan crisis, although this by no means is a foregone conclusion. Other recent developments provide additional cause for concern; chief among these is the growing amount of unreported loan transactions, which are increasingly distorting credit growth figures at an institutional and systemic level and represent a growing pool of hidden credit risk. Reflecting Fitch’s long‐standing caution in China, many of these concerns are already built into the Individual Ratings of Chinese banks, which continue to hover at the lower end of the scale from ‘A’ (high) to ‘F’ (low, see Table 1). However,

Charlene Chu +8610 8567 9898 x 112 Chunling Wen +8610 8567 9898 x 105 

Related Research
· Bank Systemic Risk Report (November 2009) · Chinese Banks: Soaring Credit Amid Weak Corporate Climate a Concern (May 2009) · Asset Quality Under Pressure As Credit Cycle Turns (January 2009) · Chinese Banks: Signs of Strain Emerging, Despite Strong H108 (September 2008)

Table 1: Fitch’s Ratings of Chinese Banks (at End‐November 2009)
Bank China Merchants Bank (Merchants) China CITIC Bank (CITIC) Bank of Beijing (BoB) Bank of China (BOC) Bank of Communications (BCOM) Bank of Shanghai (BoSH) China Construction Bank (CCB) China Minsheng Banking Corporation (Minsheng) Industrial & Commercial Bank of China (ICBC) Industrial Bank Co.Ltd. (IND) Shanghai Pudong Development Bank (SPDB) China Everbright Bank (CEB) Guangdong Development Bank (GDB) Hua Xia Bank (HXB) Shenzhen Development Bank (SZDB) Agricultural Bank of China (ABC) Agricultural Development Bank of Chinaa (ADBC) China Development Banka (CDB) Export‐Import Bank of Chinaa (ExIm)


A A‐ BB‐ A A

A+ A+ A+

Individual C/D C/D D D D D D D D D D D/E D/E D/E D/E E n.a. n.a. n.a.

Support 2 2 3 1 1 3 1 3 1 3 3 2 3 3 3 1 1 1 1

Fitch does not assign Individual Ratings to policy banks, as they do not operate on a fully standalone basis Source: Fitch 

17 December 2009 

and real effective exchange rates for 86 countries under coverage.Banks Chart 1: CNY Loan Growth New loans/mo. but there is evidence that loan re‐packaging transactions picked up in H209 (see Chart 2. as the ratings are underpinned by strong expectations of state support in the event of stress. In contrast. and raises concerns about a future deterioration in loan quality. which are growing in popularity but are largely unreported. which may not have moderated as much as official figures suggest. particularly given that over three‐quarters of it was concentrated in just the first six months. LHS) CNY loans (yoy. which has surpassed all forecasts published at the start of the year. Credit growth of this magnitude inevitably places a strain on banks’ internal risk management.250 1. asset prices. and assigns a Macro‐ Prudential Indicator (MPI) score ranging from ‘1’ (low risk) to ‘3’ (high risk). Looking into next year. past episodes of banking system distress have often been preceded by periods of very rapid credit growth in excess of nominal GDP growth. no concrete data is available on outright loan sales). RHS) (CNYbn) 1. Fitch Chinese Banks – Annual Review and Outlook December 2009  2  . including managing brisk loan growth amid increasingly thin capitalization.  Credit Growth  Without question. In other countries. of Loan‐Related Wealth Management Products Issued Loan‐only products 1. the Outlooks for the Long‐Term IDRs of China’s major banks are Stable. Fitch suspects this activity was one factor behind the marked slowdown in aggregate loan growth figures in H209. for 2009. or 20%+ growth yoy. This report discusses recent trends in China’s banking system and highlights the key challenges heading into 2010. No comprehensive data is available on the nominal amount of this activity. and the growing amount of credit and liquidity risk in interbank and investment securities portfolios.600 1. PBOC Source: Wind. Fitch’s baseline estimate is net new loans of CNY8trn or more. Fitch’s sovereign team evaluates trends in credit growth. loan growth will be less brisk than in 2009 as the pressure for economic stimulus eases and balance sheet constraints from weakened capital and loan/deposit ratios become more binding. These transactions. with the total loans/GDP ratio rising to 127% from 106% at end‐2008 (see Chart 1). In its semi‐annual “Bank Systemic Risk Report” (see Related Research on front page). Although Chinese Chart 2: No. which free up space to extend new loans and lessen the pressure on capital and liquidity. or USD1. This is a tremendous amount of money to enter an emerging‐market economy in the span of one year.000 750 500 250 0 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Oct‐Nov 09 Products with loans as a core component Source: Bloomberg.200 800 400 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 20 10 (%) 40 30 downward revisions are possible for some institutions in 2010‐2011 if the growing divergence between credit risk and capitalization materially worsens. Fitch expects total combined CNY and foreign currency loan growth of 32%.5trn. A key factor to monitor will be the trend in outright sales of loans and/or re‐packaging of loans into wealth management products. rising hidden credit exposure. can lead to a noticeable reduction in a bank’s outstanding loans and result in understated credit growth figures at an institutional and systemic level. (3mma. but this could be revised upward in 2010 given this year’s acceleration in lending. China’s MPI has been ‘1’ since the launch of the report in July 2005. the dominant theme in 2009 has been the unprecedented level of credit growth.

3 +3.9 +5.996 282.2 +1.8 +1.3 31.9 27. it is worth spending some time to discuss these exposures.0 11. which made up 23% of new lending in H109 (this share fell to 10% by Q309 owing to numerous maturities).0 n.2 37.3 48.a.4 n.4 19.6 +3.9 +2.013 255.209 413.3 16.a 9. H109 increase (CNYm) 977. n.1 9. placing a larger portion of capital at risk than would appear on the surface (see the section Key Themes in 2010 on page 11). Fitch Chinese Banks – Annual Review and Outlook December 2009  3  .a.2 8.9 18. 36.069 53. which often trumps considerations of safety and soundness.a.628 245.a. Un‐annualised Source: Bank financial statements.a.a. A unique feature of the growth in H109 was the large share of short‐term loans.0 18.a.0 10.Banks Chart 3: New Loans Share End‐2008 to Q309 City commercial banks 8% Policy banks. while the final exposure to the corporate entity resides with the bank that issued the acceptance.900 731. A discounted bill in China is money advanced by a bank to a corporate borrower that submits a valid acceptance from another bank (or sometimes the same bank).a. By this measure. and China Merchants Bank posted the fastest growth in H109 of 48% and 42% un‐annualized (see Table 2). the most accurate measure of who took on the most non‐bank credit exposure in H109 is not gross loans.664 141.605 56. When the bank extends the money to the borrower. n. n. 206. while JSCBs’ 20% share of new loans is 6pp above their share of system assets.4 +2. In this context. This reflects these institutions’ closer relationships with state enterprises and the infrastructure‐heavy nature of a large portion of this year’s lending.1 n.4 11.9 15.a.0 24.6 +1.5 27. see “Chinese Banks: Soaring Credit Amid Weak Corporate Climate a Concern” under Related Research on front page).343 n. n.750 59.1 n.5 n.a. n.139 354.599 67.4 +1.a. 21. Fitch believes that banks could still be reputationally liable for some portion of losses.574 323.647 70.a. n.5 29.7 48. it is actually taking on exposure to the bank that issued the acceptance.8 16. 834.9 19.7 34.1 12.3 33.434 58.328 864. State‐owned banks’ contribution is broadly consistent with their overall market share. Fitch Taiwan India China Korea Although bills have been contracting rapidly in H209.2 15.a. More aggressive growth at JSCBs in part reflects the intense level of competition and ceaseless drive to gain or maintain market share between these institutions.1 19.8 9.740 364. ie interbank exposure.7 n. but gross loans less discounted bills plus acceptances.6 32. Chart 4: Asian Leverage Gross loans/tangible equityª HK (x) 13 11 9 7 5 2007 2008 H109 ª Average of top 10 banks Source: Bank financial statements. as they are the only instruments Chinese banks can use to compete on price (for additional information.113 n.154 148. in particular discounted bills.a.0 28.017. Who Lent the Most? Big 5 54% State‐owned and joint‐stock banks (JSCBs) have accounted for the majority of new credit this year.475 858.8 30. coops 16% JSCBs 20% Source: PBOC Rural banks 2% banks argue that they face little to no exposure to losses on these transactions.a 12.805 400.124 n.7 9.8 19.1 7.3 +4.216 40.5 +1.255 852. the popularity of these instruments rises whenever competition between banks intensifies. China Minsheng Banking Corp. extending 74% of all new loans from January to September 2009 (see Chart 3).0 20.1 11. as there seems to be some confusion as to who is carrying what type of credit risk from these instruments.414 277. Gross loans – discounted bills + acceptances Loans – bills + acceptances/ tangible equity Growth Change from (%)a (x) 2008 (x) 29.9 25.2 22.1 7. Loans/ tangible equity (x) 8. Table 2: Breakdown of H109 Credit Exposure Gross loans H109 increase (CNYm) 1.6 10.824 241.4 34.4 19.5 26. Bank BOC ICBC ABC CCB Merchants BCOM Minsheng CITIC SPDB CEB IND HXB SZDB BoB BoSH GDB a Growth (%)a 30. Historically.a.5 +1.1 +1.7 19.0 18.0 42.560 n.8 20.674 88.3 n.5 14.7 29.

some Chinese corporates are already starting to face an effective interest rate increase as these bills. and will continue to be a key factor placing downward pressure on Chinese banks’ Individual Ratings. Shanghai Pudong Development Bank. this amounts to CNY6. With close to a quarter of all outstanding discounted bills already having matured in Q309. both of which make them a safe haven for banks in this more difficult environment.0%  Other  7.1%  Corporate short­term  16. Add to this another CNY870bn in net new corporate fixed‐income issuance during the period.8%  Property development  5. Fortunately. and manufacturing (see Chart 6). four of the five most highly leveraged banks — Shenzhen Development Bank. which is greater than total net new corporate lending in 2007 and 2008 combined. China Minsheng Banking Corp.9x the base rate).9%  Chinese Banks – Annual Review and Outlook December 2009  4  . or is simply a product of cheap. the vast majority of which had been extended to infrastructure‐related projects or entities. every bank reporting H109 data showed a rise in leverage. Where Did the Money Go? Chart 5: Corporate Loans Up.5%  Corporate discounted  bills  10.  Chart 6: Sectoral Breakdown of Net New Loans.9%  Source: PBOC Other  Infrastructure  49. while the remaining 21% were retail loans (of which close to one‐third were small business retail loans). End‐2008 to End‐Q309 Other  2. are rolled over into regular loans at a minimum rate of 4. loose credit. the most highly leveraged Chinese banks under Fitch’s coverage had levels of non‐bank credit exposure to equity of 20x or more. Profits Down (% yoy) 45 15 ‐15 ‐45 Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug 06 07 07 07 07 08 08 08 08 09 09 09 Profit growth (LHS) Loan growth (RHS) (% yoy) 40 30 20 10 Source: Bloomberg One of the core factors underlying Fitch’s concerns about the medium‐term asset quality outlook for Chinese banks is their aggressive lending to what is a qualitatively weaker corporate sector (see Chart 5.3%  24. property development. note that all figures in this section apply to CNY loans only as no sectoral data is available on foreign‐currency loans).1%  Leasing & commercial  services  6. which were extended at rates in the neighbourhood of 2% on average.4% (six‐month loans priced at 0. followed by local government financing platforms (which fall under the category “leasing and commercial services”). leverage ratios are likely to remain high relative to the rest of the region. Just under 79% of the new loans extended by Chinese banks from end‐2008 to end‐Q309 went to corporate borrowers. well above historical averages in China and other Asian countries (see Chart 4). The borrowers involved in these activities tend to be among China’s larger enterprises and have closer ties to the central and/or local governments.5%  Small business retail  6. enterprises could begin to face difficulties later next year as monetary policy begins to tighten. By end‐June 2009. To the extent the latter is the case. In nominal terms.7%  Consumer  14.5%  Manufacturing  5. While this will lower these figures somewhat. and it is no wonder that the Chinese corporate sector has begun to revive.8trn (just under USD1trn) in net new corporate loans in January‐September 2009.Banks With growth of assets outstripping growth of equity almost across the board. The key question heading into next year is whether the February 2009 bottoming of corporate profitability reflects an improvement in core earnings power of Chinese enterprises. and China Merchants Bank — have raised or are in the process of raising additional equity in H209. Close to two‐thirds of the corporate loans extended from end‐2008 to Q309 were medium‐ to long‐term credits.

risk‐ adjusted capital ratios have fallen across the board for listed banks due to rising credit exposure and rapid growth of off‐balance‐sheet items. encouraging banks to monitor their credit card portfolios more closely and to reduce their reliance on third‐party marketers of cards.5 1.5 2. but it is important to keep in mind that the scale of such loans remains extremely small. liquid assets and channel them into lending (see Chart 7). China’s large state banks in particular have benefited from an influx of deposits associated with the ramp up of numerous central‐ and local‐government infrastructure projects. However. In aggregate. eg China Merchants Bank at 2. from end‐2008. Although data for the entire system shows deposit growth lagging loan growth since February 2009. although some institutions clearly have larger exposure than others. a few universal themes are worth highlighting: · Although loan growth has been very brisk across the sector. net income of most Chinese banks has held up extremely well in 2009. By Q309. Chinese banks have begun to demonstrate noticeable differences in a number of areas as institutions pursue different strategies to cope with the fall in net interest margin (NIM) and fund growth. Fitch Chinese Banks – Annual Review and Outlook December 2009  5  .5 0. retail lending began to accelerate in March 2009 in tandem with the stronger residential property market and the government’s push to increase credit to consumers and small enterprises (in China. the average Tier 1 and total capital adequacy ratios (CARs) for listed banks reporting data had fallen 73bp and 74bp. the performance of Chinese banks has tended to be broadly comparable due to very similar balance sheet and earnings structures. This has helped prop up key ratios such as RoAA and equity/assets. comprising less than 1% of total outstanding loans for the 16 Chinese commercial banks under Fitch’s coverage. respectively. Nevertheless. but also contributed to a very noticeable rise in some banks’ exposure to credit risk. Source: Bank financial statements. net new retail loans exceeded net new corporate loans by a margin of 1. Asset Growth (%) 30 25 20 15 2005 2006 2007 2008 H109 Loan growth Asset growth Performance  Historically.Banks After a quiet start of the year. In Q309. The average RoAA of China’s 12 Chart 8: Listed Banks' Earnings Breakdown Percent of average assets (%) 3. Problems with credit card lending have increasingly been in the headlines.5:1.0 1.  Chart 7: Loan vs.0 Net interest revenue Non‐interest income Operating costs Impairment charges Taxes RoAA 2007 2008 H109 Source: Bank financial statements. Although slower growth of assets has helped prop up equity/assets ratios.0 2. Chinese regulators also have been quite proactive on this issue. gross new loans at state banks amounted to 79% of their total deposit intake through Q309 (excludes Agricultural Bank of China). loans to very small businesses and farm households are recorded as retail loans).0 0. Fitch · · Earnings Despite a sizeable contraction in loan‐to‐deposit spreads.9% of total loans in H109. in reality nine of China’s 12 listed banks posted increases in the nominal amount of customer deposits that exceeded the rise in gross loans through end‐Q309. growth of total assets has tended to be more muted as Chinese banks reduce their balances of safer. in the wake of this year’s credit boom.

02 −0.02 −0.01 −0. the China Banking Regulatory Commission’s (CBRC) new 150% loan loss reserve coverage target appears to be having the unintended effect of lowering impairment charges for those institutions with coverage ratios already above the 150% level.03 −0.11 0. for some institutions.08 −0.54 SZDB Minsheng BOC ICBC CCB HXB IND BoSH CITIC BoB BCOM SPDB Merchants a Taxes 0.10 −0.03 −0. Notwithstanding the dramatically different credit environment in H209.02 −0.89 −0.37 −0.05 −1. the new 150% reserve coverage target has clearly provided some banks with significant leeway on this parameter.09 −0. one would expect credit impairment charges to be a major factor weighing on Chinese banks’ profitability.20 −0.99% (see Chart 8). Looking into 2010.26 Negative figures represent a decline in expenses.02 0.10 ‐0.64 0.04 −0.42 0.36 −0. Industrial Bank. whose loan loss provisioning declined from 16. RoAA is likely to remain in the neighbourhood of 1%‐1.01 −0. and fair value/other gains on securities (see Table 3).79 ‐0. in some cases. only one of China’s listed banks.17 0. and increased non‐interest income from acceptances.01 0 0.7% of pre‐provision profit in 2008 to 1% in H109.01 Non‐recurring items + other 0 0. higher operating expenses and credit costs.34 −0.39 −0. this rise in net interest revenue is being quickly offset by declining fee and commission income growth from slower expansion of off‐balance‐sheet items and. How RoAA held steady amid a drop in NIM is partly explained by the slower growth of total assets compared with loans. non‐ recurring items.13 −0.24 −0. However.03 −0. In addition.33 −0.19 0. while loan loss reserve coverage fell only 8pp to 219%.13 0.30 −0.27 −0.60 −0.) Table 3 shows that every listed bank posted a decline in impairment charges in H109.08 −0.41 −0.27 −0. In an environment in which corporate profits continue to contract.38 −0. Bank of Communications.76 0. However.Banks Table 3: Changes to Components of RoAA (End‐2008 to End‐H109) No.07% in H109. resulting in an average contribution to RoAA of +37bp.18 −0. thereby providing a positive contribution to RoAA Source: Bank financial statements.68 0. net income for each bank was also boosted by varying combinations of reduced credit and operating costs. while four institutions had ratios above 210%. while deposits take longer Chinese Banks – Annual Review and Outlook December 2009  6  .13 −0. higher‐yielding loans. advisory and consulting services.54 0.41 −0.03 ‐0. While improving asset quality contributed to this lowering of credit costs (see Asset Quality section below). Fitch listed banks rose 2bp to 1.04 0.02 0 0 ‐0.04 −0.03 −0.06 ‐0. Increases in administered interest rates are a possibility later in the year.10 −0. Although NIM began rebounding in Q309 as expiring discounted bills were shifted into regular.15 ‐0.13 0.08 Operating costs −0.06 −0.1% in 2010 as additional revenue is used to make up for lower operating costs and under‐ provisioning in 2009.05 −0.87 0 ‐0.08 −0.57 −0.02 0 0 0.07 0.43 −0.02 ‐0.10 −0.02 −0. NIM should benefit from tightened credit policy as loan growth slows to the low 20% range and the popularity of low‐yielding discounted bills fades.09 −0.36 −0. noted above.02 0.41 −0.02 ‐0.37 0.27 −0.18 −0.02 ‐0.15 −0.73 0.75 ‐0. Fitch expects year‐end net profitability will remain broadly in line with that reported at mid‐year.25 Expensesa Impairment charges −1.02 −0.92 −0.06 0. (At end‐Q309.73 0. eg. while net income as a share of total average business volume (the sum of on‐balance‐sheet assets plus total reported off‐ balance‐sheet items) remained unchanged at 0.06 Total change in RoAA 0.02 0 −0.24 −0.65 −0. of percentage points Revenue Net interest Investment Net fees+ other revenue gains + losses income −0.41 −0.04 −0. had a reserve coverage ratio more than 10bp below the 150% target.02 ‐0.06 −1.11 −0. which would be positive for banks’ NIM as interest rate changes typically have a faster impact on Chinese banks’ assets.01 −0.

Banks to re‐price.43 27.46 44.351 2. SM loans and charge‐offs. delinquent credits. SM loans to NPL status.064 3. it should be noted that Fitch’s sovereign team expects monetary tightening will first focus on draining liquidity through higher reserve requirements and/or central bank issuance. Chinese corporates could come under greater strain as monetary conditions tighten. etc.18 21. How does this add up at a time when the economy has faced its worst downturn in a decade and corporate profits have been under pressure? Table 4: Trends in NPLs and SM Loans of China’s 12 Listed Banks NPLs (CNYm) NPLs/gross loans (%) SM loans (CNYm) SM loans/gross loans (%) Gross charge‐offs (CNYm) Source: Bank financial statements. Chinese Banks – Annual Review and Outlook December 2009  7  . Fitch has been voicing concern about the asset quality outlook for banks in China.29 942.7%. Fitch does not currently anticipate impairment charges will rise much beyond historical averages in 2010. while half recorded a fall in the absolute amount of NPLs by end‐June 2009 (see Table 4).7trn in new corporate financing. as one could argue that many of the flaws in the global financial system might still be hidden today if banks in the US had been more lenient in classifying delinquent mortgages. followed secondarily by interest rate increases to prevent attracting further capital inflows. However. In addition to declines in nonperforming loan (NPL) and special‐mention (SM) loan ratios from the denominator effect of fast credit growth.458 4.885 Fitch has emphasized all along that asset quality deterioration is a medium‐term issue for banks in China because of the extended time it can take for loans to be recognized as impaired due to widespread rolling‐over of delinquent credits and the bullet‐oriented structure of most corporate lending.514 3. many companies that were strapped for cash in late 2008 may have been able to repay or become current on past‐due loans in 2009.872 2007 369.04 767.603 1. 11 of China’s 12 listed banks posted a drop in the nominal amount of SM loans. These amounts are quite small relative to the CNY7.53 688. the asset quality figures reported by most Chinese banks have actually been improving in 2009. Assessing the Newly Disclosed Migration Data One very interesting.976 2. At first glance. a key unknown that could significantly affect next year’s profitability is asset quality and associated loan loss impairment charges. For example. though this could change in the event of more aggressive tightening and/or greater corporate distress.447 2008 351. some of the ratios appear surprisingly high given how little movement there is each period in the balances of NPLs. ie the rate of migration of normal loans to SM or NPL status. listed banks reported an average migration rate of normal loans to SM or NPL status of 3.7trn from loans and fixed‐income issuance from January to September 2009. Fitch 2006 417. (see Table 5). As noted earlier.881 7. Nevertheless. But rather than worsening. but complex new piece of asset quality data that China’s listed banks began disclosing in 2009 is the downward rates of migration within the five‐tier loan classification. Another key reason for the improvement in the nominal amounts of SM loans and NPLs in 2009 is that some new loans were used to pay off old.50 744. The stock of NPLs and SM loans stood at CNY352bn and CNY767bn for China’s 12 listed banks at end‐2008. This is not to be overlooked. With Chinese corporates raising over CNY7.05 32.504 5. Of course. in 2008.132 H109 331. Asset Quality For more than a year. and one can see how channelling just a small fraction of new financing toward paying off old delinquent debts could have a noticeable impact on the balances of NPLs and SM loans.

in China the CBRC instructs banks to subtract from the denominator all loans within the same class that are repaid or migrate upwards or downwards during the period. and even taking into account this overstatement.90 20.67 0.04 15.89 6. which in turn results in understated denominators and inflated migration rates.99 11. after numerous conversations with Chinese banks on this issue. this implied somewhere in the neighbourhood of CNY500bn of combined new NPLs and SM loans in 2008.84 0.7% by the total amount of listed banks’ normal loans at end‐2007.50 4.47 62.96 1.39 19.23 3.30 10. or getting repaid or disposed of to offset this downward movement.23 6.22 1.61 28.625bn. Fitch has come to two important conclusions: · the migration ratios currently reported by many banks appear to be systematically overstated owing to deficiencies in the mathematical formulas underlying the ratios.30 9.89 17. the formula that the CBRC has suggested banks use to calculate migration rates requires that all loans within the same class that were repaid. This means that a large number of existing NPLs and SM loans must either be moving upward in the classification.06 2.30 2.95 SM loans to NPL status 2007 2008 13.70 4.07 22.40 9.60 1.80 7.72 Un‐annualised Source: Bank financial statements.52 1.28 5.65 1.00 1.64 6.10 8.25 4.41 26. according to the CBRC’s suggested formula. a migration ratio for normal loans to SM or NPL status of 5% in H109 would typically mean that 5% of normal loans on 1 January 2009 (or 31 December 2008) migrated to SM or NPL status by 30 June 2009.16 3. For example. and by extension overstated migration rates.71 0.19 8.96 16.92 1.61 3.60 1. the implied combined amount of new NPLs 1 Migration formulas typically consist of the nominal amount of loans that migrated during the period in the numerator.42 0.39 3.12 6.79 8. upgraded or downgraded during the period be subtracted from the denominator. or CNY13. However. Fitch’s estimate of CNY500bn of combined new NPLs and SM loans was derived by multiplying 3.20 1.07 0.99 10. However.06 14. · With regard to the first point.26 3.46 2.72 2. divided by the beginning balance of loans in that category during the period in the denominator (or ending balance of loans in that category during the prior period). in the example above.67 21.45 4.Banks According to Fitch’s calculations.66 0.78 0. Nevertheless.48 0.32 1. as 44% of all CNY loans outstanding at end‐ 2007 had maturities of one year or less).49 11.53 1.40 10.15 7.23 H109a 13. any normal loans that were repaid or downgraded during the period should first be subtracted from this amount. resulting in systematic understatement of the denominator. Fitch Reconciling Chinese banks’ elevated migration rates with relatively stable nominal amounts of NPLs and SM loans is extremely difficult in the absence of detailed data on loan portfolios and loan loss reserves.48 2.96 3.13 4.43 8. it would appear that a substantially greater amount of loans are migrating to SM and NPL status each period than changes in the balances of NPLs or SM loans would indicate.94 2.02 26. yet the combined reported amount of NPLs and SM loans adjusted for charge‐offs rose only CNY50bn for listed banks during this period.72 9.29 13.1 For instance. What happened to the other CNY450bn? Table 5: Five‐Tier Migration Rates Reported by Listed Banks (%) Bank BCOM CCB ICBC BOC IND Merchants HXB Minsheng SZDB SPDB CITIC BoB Average a Normal loans to SM or NPL status 2007 2008 H109a 1.62 3.59 1.01 12.90 1. If 50% of normal loans at end‐2007 were repaid or migrated during 2008 (this is not inconceivable. Chinese Banks – Annual Review and Outlook December 2009  8  .41 3.02 5.44 1.

54 ‐57 6. Precisely what accounts for this discrepancy is difficult to identify without more comprehensive data. the migration rates currently reported by Chinese banks cannot be relied upon to accurately gauge the flow of new problem loans.Banks and SM loans would be closer to CNY250bn. Capital Given the extent of on‐ and off‐balance‐sheet expansion in 2009. The CBRC reportedly is re‐evaluating its suggested formula for calculating migration rates.65 ‐6 4.57 9. Because of these numerous issues with the data. but remains above the CNY50bn in new NPLs and SM loans adjusted for charge‐offs.76 ‐138 3.16 ‐125 4. they continue to point to substantially greater movement of loans between categories than fluctuations in the balances of NPLs or SM loans reported each period would suggest.84 9.63 10.61 5.76 6.77 n. ‐110 +209 +101 +449 +14 +191 ‐225 +283 Q309 (%) 13.72 +59 4.a. ‐133 +254 +175 ‐48 ‐217 ‐22 ‐150 ‐57 Tangible equity/ tangible assets Q309 Change from (%) 2007 (bp) 7.60 Total CAR Change from 2007 (bp) ‐399 ‐49 ‐403 ‐47 ‐171 ‐118 ‐192 n.85 ‐140 3.42 ‐25 Bank BoBa ICBC CITIC CCB BOC BoSHa BCOM ABCb IND HXBa SPDB GDBb Merchants CEBb Minshenga SZDB a b Total and Tier 1 CAR data is from H109 Q309 data is unavailable and replaced with end‐2008 data Note: Underlined banks have raised or are in the process of raising equity in H209‐H110 Source: Bank financial statements. but Fitch believes that a number of factors are likely at play. and some banks employ their own formulas.52 9. Lastly. This brings us to the second point: even though the migration rates are overstated.60 11.38 ‐14 3.63 10. In response. it should be noted that although most banks use the CBRC’s formula.63 10.20 Tier 1 CAR Change from 2007 (bp) ‐399 ‐113 ‐330 ‐80 ‐130 ‐79 ‐219 n.16 11.51 8. although these efforts may be focused initially on Tier 2 instruments. and even China’s large state banks.50 6. This is considerably lower than Fitch’s initial estimate.09 +102 3.54 +129 4. including repayments of past NPLs and SM loans. have stated that they are considering additional capital raising. While certainly positive.29 ‐115 3. it is no surprise that the capital ratios of most Chinese banks have eroded noticeably this year (see Table 6).12 12.90 5. Looking at the figures from this perspective shows that a number of listed banks registered a noticeable rise in the rate of migration of normal loans to SM or NPL status in 2008 — which is consistent with the rise in impairment charges (see Chart 8) — followed by an improvement in H109 due to the reasons cited earlier (note that the H109 migration figures are not annualised).a. in many cases the amounts Table 6: Changes in Key Capitalization Ratios Q309 (%) 16.11 11.20 ‐79 7. or to evaluate one bank’s migration rates against another’s.04 7.86 9. Until there is more consistency in the formulas. upgrades of NPLs and SM loans to normal status or the transfer or sale of NPLs and SM loans to other financial institutions. it is not mandatory.48 8. Fitch Chinese Banks – Annual Review and Outlook December 2009  9  . and changes may be made in the future.98 5.26 ‐26 5. migration rates at one bank may not always be comparable with those at other banks. Consequently.48 9.54 9. a number of mid‐tier nationwide banks have raised or are in the process of raising additional equity.54 +3 3.36 10.08 8.24 12.a. the data can only reliably be used to assess trends within a single bank’s own data set.84 6.41 10.67 6. 4. which are generally better capitalized than smaller entities.22 ‐107 5.37 8.09 12.10 8.

Of these entities. which should lift these banks’ Tier 1 CARs to 8%‐9%. half of the 16 Chinese commercial banks under coverage had Tier 1 CARs below this 8% threshold. At end‐Q309. this means that banks need to have in the neighbourhood of a 7%‐8% Tier 1 CAR to reach the new effective minimum of a 10% total CAR. These distortions include inconsistencies in the way Chinese banks record exposures to off‐balance‐sheet acceptances and on‐balance‐sheet discounted bills when they serve as both the accepting and the discounting bank. in that context. Fitch has become increasingly focused on measures of leverage when assessing Chinese banks’ capitalization. which have been distributing on the order of 40%‐50% of net income in dividends each year. corporate securities holdings. greater equilibrium between the pace of growth and internal capital generation is needed. which currently is not the case (see Chart 4 on page 3). discounted bills and government‐related lending. That said. particularly for state‐owned banks. the average risk weighting for on‐balance‐sheet assets declined for most banks reporting data. In practice. and. and variations in risk weightings assigned to government‐related borrowers. due to what the agency perceives to be growing distortions in Chinese banks’ calculations of risk‐weighted assets from rapid growth of acceptances. loans for mergers and acquisitions). Over the past year. and can be achieved by a combination of more restrained balance sheet expansion. Chinese Banks – Annual Review and Outlook December 2009  10  . recent capital‐raising efforts are simply making up for lost ground in 2009. requiring that banks deduct from their own supplementary capital any holdings of other banks’ subordinated debt purchased after 1 July 2009. what benchmark levels Fitch requires for different rating categories. improved non‐interest sources of income and more sustainable dividend payout policies. which carry lower risk weightings as interbank exposures. and there are no specific targets for any given rating level. Chart 9 shows that despite a rise in the share of loans to total assets from end‐2008 to end‐H109. and requiring that state‐owned and joint‐stock banks have a minimum 7% Tier 1 CAR in order to issue Tier 2 instruments (5% for smaller institutions). as well as ongoing weaknesses in loan classification. albeit rising. and Fitch does not expect much qualitative improvement in overall capitalization levels compared with the past. Risk‐Adjusted Capital Ratios Alone Are Insufficient in Assessing Capitalization Over the past year. capitalization makes up only one component of the agency’s assessment of Chinese banks.2 2 Interbank exposures carry a 0% risk weighting if less than 4 months in maturity and a 20% risk weighting for anything beyond this. Given the minimal amount of residential mortgage lending in H109 (and still small. or (2) a greater share of corporate loans being comprised of discounted bills. Fitch has received numerous inquiries about how much capital Chinese banks need to raise. Given Fitch’s expectations for continued elevated credit growth. Corporate entities invested in by the central government qualify for a 50% risk weighting versus 100% for other corporate loans. Fitch would prefer to see Chinese banks maintaining levels of capital at the upper end of regional peers. this discrepancy must be attributable to a shift in the risk profile of corporate borrowers from either: (1) a greater share of borrowers falling under the category “government‐related”. In other words.Banks being raised are just sufficient to bring banks back to their original starting points in 2007‐2008 before the lending boom. six have raised or are in the process of raising additional core capital. imposing a minimum 10% total CAR for those banks wanting to open new branches or expand into new lines of business (eg. rather than on risk‐adjusted capital ratios. capital burn is likely to remain a central issue in 2010 and 2011. Over the longer term. given the rise in hidden credit exposure from the growing popularity of unreported loan sales. which are discussed under Rising Credit and Liquidity Risk in the Interbank and Investment Portfolios below). Of course. the CBRC has tightened capital requirements by restricting subordinated debt to no more than 25% of core capital.

which is the sale and re‐packaging of loans into wealth management products that are then sold on to investors.Banks Chart 9: Share of Loans Up. there are two other areas that Fitch believes warrant close monitoring in 2010: the proliferation of unreported loan transactions and concurrent rise in hidden credit exposure. Chinese Banks – Annual Review and Outlook December 2009  11  . Chart 10 shows a decline in the average risk weighting for off balance sheet items in H109 for those banks reporting data. In both instances.a. Fitch Similarly. BCOM BoB n. Unreported Loan Transactions and Rising Hidden Credit Exposure Over the past two years. which is the outright sale of loans to other financial institutions. no. In a special report in September 2008 (see Related Research on front page). Since that time. BoSH SZDB H109 Note: Comparable data for other banks is not available Source: Bank financial statements.a. which are often assessed net of pledged deposits when calculating risk‐weighted assets. Because of this recent volatility in risk weightings. of percentage points Change in ratio of loans/assets 15 10 5 0 ‐5 Merchants CITIC ICBC CCB BOC BoB SZDB Change in average risk weighting for on‐balance‐sheet assets Note: Comparable data for other banks is not available Source: Bank financial statements. In addition. banks with larger gaps in Chart 10 tend to have larger off‐balance‐sheet positions and higher balances of acceptances. and rising credit and liquidity risk in Chinese banks’ interbank and investment securities portfolios. Chart 10: Average Risk Weighting of Off‐Balance‐Sheet Items also Down Risk‐weighted amount of off‐balance‐sheet items as % of total disclosed off‐balance‐sheet items 2008 60% 45% 30% 15% 0% Merchants CITIC ICBC CCB BOC n. But Average Risk Weighting of Assets Down Change from end‐2008 to end‐H109. Fitch has noticed the growing popularity of another type of transaction. the agency highlighted one type of this activity. the most disconcerting trend Fitch has observed in China’s banking sector is the growing prominence of unreported loan transactions. Fitch  Key Themes in 2010  Few banking sectors in the world are undergoing as rapid change as China’s. and the list of areas to keep an eye on in the year ahead could fill this page. as these ratios can be heavily determined by internal decisions about how to categorize and weight different exposures. Fitch believes it is important for market participants to consider a range of metrics when examining Chinese banks’ capitalization rather than focusing solely on Tier 1 and total CARs. one of the foremost challenges facing Chinese banks and regulators in 2010 will be balancing continued brisk growth amid accelerating capital burn. As discussed in the previous section. Generally speaking.

which would be a very positive development and provide much‐needed transparency to this activity.Banks the vast majority of activity is not recorded by Chinese banks on‐ or off‐balance‐ sheet. or are engaged in heated legal disputes. While Fitch has major concerns about the transparency of this activity. and therefore is invisible to investors and analysts. The growing popularity of these transactions is increasingly distorting credit growth figures at an institutional and systemic level. and therefore current capital ratios may be even more strained than they appear. Fitch believes that Chinese banks could still be reputationally liable. there are anecdotal reports that this activity increased noticeably in H209 as the authorities pressured banks to slow loan growth and raise capital ratios. The China Foreign Exchange Trade System (CFETS) under the People’s Bank of China (PBOC) reportedly has submitted a proposal to the State Council to set up a formal trading platform for loan sales. Fitch’s concerns about these transactions centre on three core issues: · A larger portion of Chinese banks’ capital may be exposed to credit losses than on‐ and off‐balance‐sheet exposures would suggest. Information on loan sales is extremely limited. permitting banks to transfer all of the credit risk to third parties shields them from the consequences of bad credit decisions. it recognizes that to some extent it is a natural outgrowth of a rapidly developing financial system. eg in H209. loan sales have garnered an increasing amount of official attention in recent months. liquidity. Although there have been extremely few instances of asset quality problems with loans sold and/or re‐packaged to date. activity tends to accelerate. Indeed. However. Nevertheless. Whenever one or more of these parameters becomes more binding. in the very few instances of default on loans underlying wealth management products to date. Chinese Banks – Annual Review and Outlook December 2009  12  . the overriding motivations are to help Chinese banks free up space to extend new loans. China is in the awkward position of having reached the point where greater securitization could be helpful precisely at a time when the reputation of all securitization activity has suffered a major blow. This figure is impossible to verify due to poor disclosure. However. which over time could foster the same type of recklessness witnessed with the securitization of subprime loans in the US. However. Because of the growing distortions caused to credit growth figures. While there are push and pull factors driving both types of activity. concentration and sectoral exposures. contributing to pervasive understatement of loan growth. there have been recent media reports citing a figure of CNY800bn in total loan sales in 2008 compared with CNY4. but appears reasonable based on the very limited data Fitch has seen. where capacity to extend new credit is facilitated by active securitization markets.9trn in new loans. and to come into compliance with loan quotas and regulations on capital. · · Outright Sales of Loans While outright sales of loans have been taking place for some time in China’s banking sector. Banks explain that they do not disclose these deals in their financial statements because the full credit risk of the loans has been transferred to investors/buyers. and therefore they face no direct exposure to losses. and is one of the major factors weighing on the Individual Ratings of Chinese banks. Chinese banks either have stepped in and completely covered investor losses. allowing such activity to continue in an unregulated manner with extremely poor disclosure could lead to substantial hidden contingent liabilities. and no public data whatsoever is available on the nominal amount of these transactions.

Fitch No comprehensive information is available on the nominal amounts of loans underlying these products. Chart 2 on page 2 of this report is re‐displayed below. Another large purchaser of loans is China Postal Savings Bank.736 from July to November 2009. and shows an acceleration in re‐packagings in the latter half of 2009 from 884 new products issued in H109 to 1. the loans may not appear on either the seller’s or the buyer’s financial statements. Chart 2: No. Nevertheless. of Loan‐Related Wealth Management Products Issued 2007 1. such as city commercial banks. it shows that the institutions most heavily involved in this activity in 2009 are China Merchants Bank. but observers are able to track activity by the number of products issued each month. In these instances. Typically.000 750 500 250 0 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Oct‐Nov 09 Products with loans as a core component Source: Wind. which. China CITIC Bank.Banks The principal sellers of loans tend to be China’s nationwide banks. Sales and Re‐Packaging of Loans into Wealth Management Products Data on the sale and re‐packaging of loans into wealth management products is also sparse. it is possible to derive from this information an estimation of the average size of products.500 1. as China’s fifth largest deposit‐taking institution. and therefore significantly understate the true nominal amount of transactions. though some small local data providers will publish such data from time to time. Fitch Chinese Banks – Annual Review and Outlook December 2009  13  . Selling banks will sometimes enter a counter‐agreement to re‐purchase the loan at a later date.250 1. and selling banks record the income in fees and commissions. Broken out by bank. while the buyers typically are small financial institutions with excess cash on hand. credit cooperatives. has abundant liquidity relative to its small lending operations. trust companies and finance companies. Usually these figures only cover a small subset of loan‐ related wealth management products.250 1. and the loan may temporarily vanish.000 750 500 250 0 Merchants Minsheng Other banks BCOM CCB CEB SPDB BoB HXB SZDB ICBC CITIC BoSH GDB ABC BOC IND 2008 H109 Jul‐Nov 09 Source: Wind. China Construction Bank and Bank of Communications (see Chart 11). which has risen Chart 11: No. selling banks continue to service the loans. Purchasing institutions typically pay 10%‐20% below the base interest rate for the loan. collecting payments from borrowers and passing these funds onto the institutions that purchased the loans. of Loan‐Related Wealth Management Products Issued Loan‐only products 1.

such as Ministry of Finance or central bank securities or commercial paper. though it is worth noting that state banks’ share of the number of products issued has dropped over this period to 22% during July to November 2009 from 34% in H109. and generally match that of the underlying loans (see Chart 12). banks will use cash raised from new products to pay off old ones. Additional key features include the following: · The products have a wide range of maturities — one of the chief attractions for investors — from as short as a couple of weeks to as long as three years. No secondary trading of the products is available.Banks noticeably recently from roughly CNY180m per product in H109 to CNY440m in Q309. of Loan‐Related Wealth Management Products by Maturities Dec 09 600 400 200 0 Merchants Minsheng Other banks BCOM BoSH IND CCB CEB SPDB BoB HXB SZDB ICBC CITIC GDB ABC BOC H110 H210 2011‐12 Unspecified · · Source: Wind. Guarantees have since been banned. third‐party guarantees of the underlying loans remain present. In most re‐packaging transactions. higher‐ yielding investments. Chinese Banks – Annual Review and Outlook December 2009  14  . The products typically offer yields 100bp‐200bp above respective deposit rates. Chinese banks sell a portion of their own loans to a third‐party. Fitch believes Chinese banks’ role as distributors could still make them reputationally liable in the event of losses. In some cases. and are built around a single borrower (occasionally multiple borrowers if the underlying assets are discounted bills). product managers will include some non‐loan assets in the products. banks often guaranteed the principal on the wealth management products. Occasionally. to offer some diversification. In the past. but in some cases. but some observers have attributed this trend to a rise in the scale of transactions conducted by state‐owned banks. The products are then re‐sold by the bank and/or trust company to retail and corporate investors looking for relatively safe. in the event borrowers were to default. having purchased such wealth management products from other banks and trust companies for their own investment portfolios (only two banks disclosed such holdings in H109: China Minsheng Bank and Industrial Bank). This indeed may be the case. Occasionally. most commonly trust companies. Without more complete information. Nevertheless. though the majority of the product is backed by loan‐related assets. Chart 12: No. which re‐package the loans into wealth management products. banks will sell products in which the underlying loans were originated by a trust company or other banks. it is difficult to identify what is behind this increase. or pledged to unconditionally re‐purchase the products at maturity. when there is a maturity mismatch between the product and the loans. Fitch Due to the perceived high credit quality of the underlying loans and the fact that little to no direct exposure is retained once the product is sold. making them highly illiquid. Although the distributing bank has less involvement with the underlying loans in this latter type of transaction. Fitch believes that banks could still be 3 In some cases. Chinese banks may also be exposed to the investing side of these transactions. Chinese banks argue that they face minimal risk of losses from such deals. 3 The majority of products offer investors little to no diversification of risk.

Banks reputationally liable for some portion of losses. as it is unlikely the government would allow investors. Chart 13: Corporate Securities as Share of Total Investment Securities (%) 30 20 10 0 Merchants Minsheng SZDB SPDB BoB CCB BOC BCOM CITIC ICBC HXB IND 2008 H109 Source: Bank financial statements. analysts often overlook the interbank and investment securities portfolios when assessing the overall risk profile of Chinese banks. PBOC and policy bank instruments along with some holdings of US Treasuries etc. The first version of the guidelines could have led to a significant reduction in transactions. in the past couple of years. It also proposes an increase in the minimum investment required for a single investor. which often varies by bank but currently is in the neighbourhood of CNY50. Fitch has noticed a number of banks purchasing larger amounts of corporate‐related securities in a search for yield. many of which are retail. Because these assets are considered to have quite low credit risk and high liquidity. However. This is further underscored by the lack of clarity about product features in some disclosure statements provided to investors. while at the same time it is becoming increasingly commonplace to see banks holding reverse repurchase agreement assets that are collateralized by loans or discounted bills (see Charts 13 and 14). It is not inconceivable to envisage a situation in which a large portion of investors could claim to have been misled about a wealth management product’s underlying assets or guarantees. repos backed by loans & bills Source: Bank financial statements. Fitch Chinese Banks – Annual Review and Outlook December 2009  15  . arguing that they purchased the products based on the reputation of the bank. the CBRC has released for comment proposed guidelines governing this activity. In recent weeks. and hence met strong resistance from participating financial institutions.000. repos backed by securities Rev. H109 Non‐repo interbank 100% 80% 60% 40% 20% 0% Merchants Minsheng BCOM CITIC BoSH HXB IND SZDB GDB SPDB CCB BoB CEB ABC ICBC BOC Rev. Fitch Chart 14: Breakdown of Interbank Portfolios. Rising Credit and Liquidity Risk in the Interbank and Investment Portfolios The interbank and investment securities portfolios of Chinese banks historically have been dominated by sovereign‐ or quasi‐sovereign‐related exposures. such as MOF. to bear the full brunt of losses — reference the recent Lehman Brothers minibond scandal in Hong Kong. The latest version appears to be less stringent and calls on trust companies to take more active ownership of and responsibility for the loan assets underlying the wealth management products.

NY. NY 10004. PUBLISHED RATINGS. Fitch Ratings Ltd.Telephone: 1‐800‐753‐4824. suspended. Reproduction or retransmission in whole or in part is prohibited except by permission. Due to the relative efficiency of electronic publishing and distribution. insurers. Ratings may be changed. AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. other obligors. This is further underscored by the sizeable amount of securities that are locked up in pledges at some institutions. and underwriters for rating securities. the suitability of any security for a particular investor. other obligors. Indeed. (212) 908‐0500. sell. verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Consequently. or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch will rate all or a number of issues issued by a particular issuer. Fitch believes there are some potential fault lines in these portfolios that could become an issue in the event of a systemic disruption in interbank and fixed‐income markets. and other sources which Fitch believes to be reliable. The rating does not address the risk of loss due to risks other than credit risk. publication. Chinese Banks – Annual Review and Outlook December 2009  16  . AFFILIATE FIREWALL. IN ADDITION. or insured or guaranteed by a particular insurer or guarantor.000 to US$750. some of the increased credit risk is already addressed through higher risk weightings for corporate securities holdings. Ratings are not a recommendation to buy. unless such risk is specifically mentioned. Fax: (212) 480‐4435.000 to US$1. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled.COM/UNDERSTANDINGCREDITRATINGS . in a time of crisis. or hold any security. RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW. Fitch does not audit or verify the truth or accuracy of any such information.FITCHRATINGS. Ratings do not comment on the adequacy of market price. Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws. All of the information contained herein is based on information obtained from issuers. which are as high as 25%‐35% of total investment securities at some of China’s smaller nationwide banks. Such fees are expected to vary from US$10. Such fees generally vary from US$1. Nevertheless.Banks The main implication of these developments is that the interbank and investment securities portfolios of Chinese banks are displaying greater credit and liquidity risk than in the past. Fitch is not engaged in the offer or sale of any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. All rights reserved. The assignment. the Financial Services and Markets Act of 2000 of Great Britain.COM. COMPLIANCE. Copyright © 2009 by Fitch. these portfolios may not provide the level of ready liquidity one would expect. and its subsidiaries. guarantors. CRITERIA. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS. for a single annual fee.500. the information in this report is provided "as is" without any representation or warranty of any kind. As a result. Fitch does not provide investment advice of any sort.000 (or the applicable currency equivalent) per issue. Inc. or the tax‐exempt nature or taxability of payments made in respect to any security. CONFLICTS OF INTEREST. AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. This is not to say that major problems are expected in the interbank or investment securities portfolios down the road. underwriters. In certain cases. or the securities laws of any particular jurisdiction. FITCH'S CODE OF CONDUCT. A Fitch rating is an opinion as to the creditworthiness of a security. CONFIDENTIALITY. One State Street Plaza. Fitch receives fees from issuers.000 (or the applicable currency equivalent)..