Fitch Ratings has revised the Outlook on China Merchants Bank Co., Ltd.'s (CMB) Long-Term Issuer Default Rating (IDR) to Negative from Stable.
At the same time, Fitch has affirmed the bank's Long-Term Foreign-Currency IDR at 'A-', the Government Support Rating (GSR) at 'a-' and Short-Term IDR at 'F1'.
The revision of the Outlook follows the change in the Outlook on the China's 'A+' sovereign rating to Negative from Stable on 9 April 2024, which reflects increasing risks to China's public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model. The bank's Viability and xgs Ratings, where assigned, were not part of this review.
Key Rating Drivers
Outlook Mirrors Sovereign Rating Outlook: CMB's IDR is driven by its GSR, which is directly linked to China's sovereign rating. This reflects Fitch's view of a high probability of the central government supporting the bank in a timely manner in the event of stress. The Outlook revision to Negative from Stable for the bank mirrors that on China's sovereign rating. The Outlook revision on the China sovereign rating indicates a reduced ability to provide the same level of extraordinary support to CMB, although we believe the state's support propensity to the bank remains intact.
Large Size Constrains Support: The Chinese banking system has grown rapidly since 2008 with total assets of CNY417 trillion at end-2023, accounting for around 330% of 2023 GDP. The authorities designated 19 domestic systemically important banks (D-SIBs) in 2019, and this increased to 20 in 2023, with their combined assets accounting for close to 70% of sector assets. The large size of the banking sector as well as the number of D-SIBs constrains the government's ability to support the overall banking sector, in our view.
Support Propensity Remains Intact: Fitch's expectation of strong support propensity from the government for CMB remains unchanged. We expect the government to maintain its high propensity to support the bank given its relative size, domestic significance and leading consumer franchise, as well as its ownership by China Merchants Group, a large state-owned conglomerate. The bank is designated as a D-SIB in China.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The Long-Term IDR and GSR will most likely be downgraded if China's sovereign rating is downgraded. The ratings may also be downgraded, potentially by multiple notches, if we perceive that the central government's propensity to provide timely extraordinary support to the bank has diminished. Lower propensity may be through an enhanced resolution framework.
A reduction in the status of China Merchants Group's importance as a majority state-owned conglomerate, significant dilution in the parent's ownership and control over CMB, or reduced significance in CMB's retail franchise may also affect our assessment of the state's propensity to support the bank.
CMB's Short-Term IDR will be downgraded if its Long-Term IDR is downgraded to 'BBB' or below.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
We are likely to revise the bank's Long-Term IDR Outlook back to Stable if the rating Outlook for China is revised to Stable. An upgrade of the sovereign ratings could lead to positive rating action on CMB's GSR and support-driven IDR, if it were to indicate greater ability to support the bank with no less propensity to provide support, although this appears unlikely in the near term. More explicit statements of support from the government towards the bank may be credit positive.
CMB's Short-Term IDR can only be upgraded if its Long-Term IDR is upgraded to 'A' or above.
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
CMB's IDRs are directly linked to China's sovereign ratings.
ESG Considerations
CMB has an ESG Relevance Score of '4' for Financial Transparency due to structural issues around financial transparency and disclosure. These are not captured in headline performance metrics in China and affect our operating environment and financial profile assessments. The bank is more exposed to such risks relative to the state banks due to a greater exposure to wealth management products and entrusted investments. This stems from the use of off-balance-sheet transactions. This has a negative impact on its credit profile, and is relevant to its ratings in conjunction with other factors.
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.
CHINA MERCHANTS BANK CO., LTD. 
