Fitch Ratings, the international rating agency, has upgraded its Individual rating on China Merchants Bank ("CMB") to 'D' from 'D/E'. At the same time, CMB's Support rating was affirmed at '3'.

The rating upgrade reflects Fitch view that CMB is one of China's best-managed banks with an above average credit profile and relatively cautious risk management as reflected in its lower real estate and construction exposure.

CMB's profitability, although above average compared to its peers, is only modest by international standards, as loan loss provisions absorb a significant portion (22%) of its net interest income and non-interest income remained low as a percentage of total revenues, similar to other Chinese banks.

The bank's asset quality numbers are currently good, with an NPL ratio of 2.87% in 2004 (2003: 3.15%). Its loan loss reserves coverage appeared sufficient at 101%. The macro-economic adjustment from mid-2004 seems to have created some new NPLs for CMB in 2004, with an estimated new NPL formation rate of c. 0.5% of loans, although this was manageable. Management expects the slowdown may result in some new NPLs, but that they will remain at a manageable level.

CMB's loan growth slowed to 22% in 2004. Notably, individual loans (mainly residential mortgages) grew by 58% to represent 15% of end 2004's total loans (2003: 11%). The bank appears to be quite cautious in its real estate/construction lending - which stood at 7% of its loan book, compared with its peers which are typically at c. 15%. This should also help CMB fare better than its peers in the event of any economic slowdown.

The bank's capitalization level was low with an equity to asset ratio of 3.7%. Its end 2004 CAR stood at 9.55% with a Tier 1 ratio of 5.44%. For a bank operating in a high risk operating environment, Fitch would like to see a higher capital level to act as a cushion to absorb any potential losses through the economic cycle.

Fitch has also removed CNOOC Ltd. ("CNOOC") from Rating Watch Negative ("RWN") and affirmed its 'BBB+' Senior Unsecured foreign currency rating following the withdrawal of CNOOC's bid for Unocal. The Outlook is Positive.

On 24 June 2005, Fitch placed CNOOC on RWN after the company proposed to acquire Unocal in an all cash transaction that valued Unocal at USD67 a share or USD18.5 billion in total. At that time, Fitch was concerned that a bidding war would evolve and that CNOOC's credit metrics would potentially deteriorate as it took on more debt to finance the transaction.

Before the announcement of CNOOC's bid for Unocal, Fitch had revised the former's rating Outlook to Positive on account of its increasingly impressive performance, the strong fundamentals of Chinese energy demand and the acknowledgment that the company's credit metrics, which have remained stable and conservative over an extended period of time, would be more consistent with an issuer in a higher rating category.

In Fitch's view, its continuing strong performance and conservative credit metrics, supported by a more diverse business mix, could lead to an upgrade of the existing Long-term rating within the two-year time horizon of the rating Outlook.

However, Fitch emphasises that this positive view is counter-balanced to some extent by a number of other factors, including the recognition that CNOOC is becoming more acquisitive, the potential for future oil price reductions to impact its margins and cash flows, and its relative lack of diversity as compared to international peers.

By People's Daily Online