Fitch Ratings has assigned China Galaxy Securities Co., Ltd. (CGS) and its subsidiary, China Galaxy International Financial Holdings Limited (CGI), Long-Term Issuer Default Ratings (IDRs) of 'BBB+'.

The Outlook is Stable. Fitch has also assigned the two companies a Shareholder Support Rating (SSR) of 'bbb+'.

CGS is a leading integrated securities firm that provides brokerage, investment banking, proprietary trading, asset management and international business services, with an extensive coverage network. It is 51% owned by China Galaxy Financial Holdings Company Limited, which is 69% owned by Central Huijin Investment Co., Ltd. Central Huijin is authorised by the State Council to make equity investments in major state-owned financial enterprises and has control of CGS.

CGS wholly owns CGI, which is the exclusive offshore integrated securities platform of the group's international business.

Key Rating Drivers

CGS's rating is underpinned by our view of a high probability of extraordinary support from its largest shareholder, Central Huijin, if needed. CGS's market position and business performance in its respective markets, together with its shareholder linkages, allow the Chinese authorities to pursue a broader financial reform agenda and direct financing objectives. Central Huijin's controlling ownership and strong board and management oversight allow for influence over its business strategy and budget plans.

We believe a default by CGS would constitute high reputational risk for its parent and affect the parent's other portfolio financial institutions.

CGS, as one of China's top securities companies, has a successful record in supporting capital market development and serving as an essential window for Central Huijin to pursue the Association of Southeast Asian Nations (ASEAN) market in alignment with government reforms to expand overseas. We expect Central Huijin to remain as CGS's largest shareholder, given its role in assisting in China's financial market development, and for the company to sustain its market position and financial performance.

The ratings on CGI is aligned with that of CGS, reflecting our assessment of an extremely high propensity of support from CGS. CGI, as CGS's sole overseas subsidiary, carries out all of CGS's offshore business, which is one of CGS's three key business segments and is in alignment with Central Huijin's strategy to internationalise China's securities industry. CGI is highly integrated into CGS's operations and is a core subsidiary.

The Stable Outlook reflects our belief that the potential for extraordinary parental support will not change.

CGS's profitability has been stronger than the sector average, underpinned by its scale benefits. Nonetheless, the stability of profitability is liable to external shocks and adverse changes of market sentiment. Increased economic uncertainty has weighted on the company profitability, with operating profit/average equity falling to 6.8% in 1Q22, from an average of 12.0% in 2019-2021.

CGS is well capitalised and has maintained a sound leverage level relative to the business risks it undertakes, having an adequate capital buffer against unexpected market shocks. This is despite an increase in the use of its balance sheet amid strong market flow and its expanded investment portfolio. Net adjusted tangible leverage stood at 4.4x at end-1Q22 (2021: 4.2x).

Similarly to peers, CGS relies on wholesale funding and uses repos for short-term funding. This exposes the company to credit market volatility, but the risk is lowered by its sufficient liquidity coverage buffers and the adequate credit quality of underlying collateral against the repos.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Any change to China's sovereign rating (A+/Stable) that would affect Fitch's assessment of Central Huijin's credit profile is likely to affect the ratings on CGS and its offshore subsidiary to the same magnitude.

Wider notching would be triggered by a significant weakening in CGS's role in facilitating the development and stability of China's capital market and helping Central Huijin tap the overseas market. A downgrade could also be caused by a reduced propensity to provide support by Central Huijin, possibly reflected in weaker parent-subsidiary linkage through meaningfully diluted ownership. Persistently weak performance or an unexpected large one-off loss due to operational or governance incidents could also lead to a reassessment of support.

CGI could be downgraded if CGS shows signs of a reduced propensity and ability to support the subsidiary.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

CGS's rating could be upgraded if Fitch believes it has become more systemically important to the Chinese government - although this possibility seems remote against the large state-owned banks - or if the entity undertakes more significant policy roles.

A rating upgrade on CGI will follow similar rating action on CGS's rating.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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