BEIJING, August 4, 2020 - S&P Global (China) Ratings has assigned its AAAspc rating to the 2020 Financial Bonds (Series 1) issued by ICBC Financial Leasing Co., Ltd.(“ICBCFL”). On July 10, 2020, S&P Global (China) Ratings published its rating action, affirming its ’AAAspc’ issuer credit rating (“ICR”) on ICBCFL. The outlook remains stable.

The payment obligation of this financial bond is ranked equally with all the general liabilities of the financial leasing company that has no liens on, and prior to equity capital settlement of ICBCFL. Therefore, we have equalized the credit rating of the financial bonds with the ICR. In our opinion, the issuance of this bond can help ICBCFL increase its long-term funding and reduce its use of short-term funding, thus improving the stability of its overall funding structure. The size of the Series 1 of this bond is RMB 3 billion, and its term is 3 years.

The ICR of “AAAspc” reflects our view that although COVID-19 puts pressure on ICBCFL’s asset quality and earnings, we expect the impact to be generally short term and controllable. Besides, we view that Industrial and Commercial Bank of China Limited (“ICBC”), its parent bank, has strong capability and willingness to provide support to ICBCFL in times of need.

We view that downward pressure from COVID-19 on asset quality and earnings is mainly being felt on aviation leasing. Distressed cash flows in the aviation industry have hurt the rental revenue of aviation leasing business through deferrals of rent payment, possible bankruptcy and return of aircraft by airlines, possible restructuring of lease contracts, and lower lease rates in a weak market. In our view, the risk related to domestic airlines has been mitigated by government support for the airline industry, while uncertainty is higher for exposure to international airlines.

We expect the pandemic impact to generally be short term, however this needs to be monitored closely as a prolonged impact from COVID-19 on the airline industry may place deeper stress on the performance of the aircraft leasing business and could have an impact on performance over time.

Because the aviation industry has been severely affected by the pandemic, we expect the growth of ICBCFL’s aviation leasing business to slow down significantly in the short term. Nevertheless, we believe its overall market position would remain unchanged and unchallenged thanks to its strong franchise and good product diversity. It has three major leasing business lines, including aviation, shipping and large equipment. Its total assets were RMB 271 billion as of the end of 2019. It reported a gross operating income of RMB 19 billion in 2019. As of the end of 2019, ICBCFL’s net lease assets were RMB 216 billion, about half of which were operating lease assets and another half were financial lease. In 2019, 62% of its gross operating income was from operating leasing, up by 6 percentage points YoY.

We view ICBCFL’s profitability as sustainable in the long term despite a short-term earning shock in 2020 because of the COVID-19 outbreak. It achieved a net income of RMB 3.8 billion in 2019, up by 27% YoY, and return on average equity increased from 9.8% in 2018 to 11.2% in 2019.

Despite the earning pressure, we expect the company to maintain its sound capital position. The slow growth of aviation leasing business amid COVID-19 may reduce its capital consumption in 2020. Thanks to its stable asset size and strong profitability, as of the end of 2019, its reported regulatory capital adequacy ratio was 13.61%, up by 1.12 percentage points YoY.

ICBCFL has aligned itself with ICBC in terms of risk culture and risk management practices. Its risk position is stronger than average financial companies in China given the on-going support from its parent in risk mitigation efforts. As of the end of 2019, its non-performing financial lease receivable ratio was 1.13%, basically unchanged from the previous year.

Although ICBCFL has a significant tenor mismatch between assets and liabilities, we expect it to have ample liquidity and very low refinancing risks going forward due to its good market position and liquidity support from its parent. ICBCFL has been making conscious efforts to extend the tenor of its debts by issuing bonds and securing longer-term bank loans. As of the end of 2019, its ratio of short-term debt to total debt dropped to 62% from 72% as of the end of the previous year.

Government regulation and ICBCFL’s own Articles of Association require capital and liquidity support from its parent bank if ICBCFL experiences capital or liquidity difficulties. Therefore, we view ICBCFL’s capitalization and liquidity profile as much more stable than average financial companies in China.

The stable outlook on ICBCFL reflects our expectation that the company will remain a core subsidiary of ICBC and the credit profile of ICBC will remain stable over the next two years or beyond.

Issuer Credit Rating Snapshot：

Initial Anchor：bb+

Adjusted Anchor：bbb-

Business Position: +2

Capital and Earnings：+1

Risk Position：+1

Funding and Liquidity：+1

Stand-alone Credit Profile：aspc+

Group Support：+4

Issuer Credit Rating：AAAspc

Outlook/CreditWatch：Stable

Related Research & Commentary:

Credit Rating Report: ICBC Financial Leasing Co., Ltd., July 10, 2020.

Issue Rating Notice: 2020 ICBC Financial Leasing Co., Ltd. Financial Bonds (Series 1) (Bond Connect) Rated “AAAspc”

Related Methodology and Research:

S&P Global (China) Ratings Financial Institutions Methodology.

General Considerations On Rating Modifiers And Relative Ranking.

Commentary: Understanding S&P Global (China) Ratings Financial Institutions Methodology.

Commentary: Understanding S&P Global (China) Ratings Approach To Support.

Commentary: Understanding S&P Global (China) Ratings General Considerations on Rating Modifiers and Relative Ranking

Methodology.

Group Support Sustains Credit Quality of Bank-affiliated Leasing Companies in China.

Media Contacts：

Sharon Tang,Beijing;  (86)10-6569-2988; sharon.tang@spgchinaratings.com

Analyst Contacts:

Longtai Chen, Beijing; longtai.chen@spgchinaratings.cn

Zheng Li, Beijing; zheng.li@spgchinaratings.cn

(Note: This document is prepared in both English and Chinese. The English translation is for reference only, and the Chinese version will prevail in the event of any inconsistency between the English version and the Chinese version.)