Fitch Ratings has assigned
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
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
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
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
Wider notching would be triggered by a significant weakening in CGS's role in facilitating the development and stability of
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 '
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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