Xinhua Far East China Ratings Assigns the Issuer Ratings of Six Chinese Commercial Banks

Xinhua Far East China Ratings Assigns the Issuer Ratings of Six Chinese Commercial Banks

January 11, 2007

    HONG KONG, Jan. 11 /Xinhua-PRNewswire/ -- Xinhua Far
East China Ratings ("Xinhua Far East") today
assigned the issuer credit ratings for the following six
Chinese national joint-stock commercial banks: 

    Bank Name      Stock Code    Long-term    Outlook
Rating
                               Issuer Rating 
                                 
    Bank of 
     Communications 
      ("BoComm")    HK 3328         AA         
Stable
    China Merchants
     Bank ("CMB")   HK 3968,
                    SH A 600036    AA-          Stable
    Shanghai Pudong 
     Development 
      Bank("SPDB")  SH A 600000     A+         
Stable
    China Minsheng
     Bank Corporation
      ("CMBC")      SH A 600016     A-         
Stable
    Hua Xia Bank 
     ("HXB")        SH A 600015    BBB         
Stable
    Shenzhen 
     Development 
      Bank ("SDB")  SZ A 000001    BBB         
Stable


    The ratings reflect Xinhua Far East's positive view on
Chinese listed joint-stock commercial banks in what is a
buoyant economy and a market characterized by growing
levels of deposits. The ratings also incorporate concerns,
however, about intensifying competition faced by national
joint-stock commercial banks, which continue to rely
heavily on interest income and have somewhat immature risk
management systems. The ratings also consider the banks'
varying corporate governance and information disclosure
standards, as well as their differing abilities to weather
economic cycles and obtain shareholder support in times of
financial difficulty.

    Despite structural imbalances and risks within the
economy, we expect the Chinese banking industry's growth to
maintain its momentum, with the eco-political situation
remaining stable and depositor confidence in the banking
system remaining strong. These are the key factors
supporting the long-term ratings of Chinese banks. The
industry should continue growing rapidly, although the
growth rate could be moderated by government macro-economic
control policies, the trend towards disintermediation
(withdrawal of funds from banks to flow directly to users)
and the regulatory capitals limitations.

    On the other hand, national joint-stock commercial
banks face intensifying competition, with reforms of state
banks accelerating and more foreign players entering the
market. Although it takes time for the efficiencies,
service standards and credit cultures in state-owned banks
to be improved, and most foreign players will be more
likely to focus on niche commercial banking and private
banking due to disadvantages in franchises, joint-stock
commercial banks still need to formulate clear strategies
and sharpen their execution abilities to win in the
market.

    Xinhua Far East is also concerned that the credit
risks, interest rate risks and certain hidden risks still
face Chinese banks, in view of their immature risk
management systems and a heavy reliance on interest income.
With certain sectors in the economy experiencing over-supply
and profit squeezes, credit risks could be mounting,
especially as a strong credit culture has yet to be firmly
established in Chinese banks. Interest rate hikes could
also affect the performance of many sectors, thereby
compounding the credit risks faced by Chinese banks. They
could also put downward pressure on the growth rates of
loans and the prices of securities in which the banks
invest. Hidden risks could also be significant among those
banks lacking strict internal control systems, as is
evidenced by the practice of some banks lending to
problematic borrowers through third parties, with some
risks also hidden in off-balance sheet arrangements (e.g.
entrusted loans/ investments, guarantees, acceptance). 
However, the risks should have no significant impact in the
short run due to the overall booming economy.

    Xinhua Far East also recognizes the importance of
banks' governance and transparency in boosting investor
confidence and supporting bank credit profiles. Despite
significant progress in recent years, Chinese listed banks,
especially purely A-share listed banks, need to further
improve their disclosure of non-financial information,
including strategy, market prospects, market position, and
internal controls, as well as financial information in
segment reporting, risk disclosure, off-balance sheet items
and migration of NPLs.

    In summary, we believe domestic banks need further
internal reforms in respect to product structure, risk
management and corporate governance to be competitive in
the long term.  Those with more diverse income streams,
better risk management practices, greater information
disclosure and transparency and stronger government or
shareholder support will have a greater ability to
withstand risks and therefore maintain better credit
profiles.

    BoComm: The AA rating for BoComm reflects the strong
support that it is expected to receive from the government
as a result of its being majority-owned by government
entities. Its capital status, product development,
corporate governance and risk management systems are
improving as well, especially after its IPO and with HSBC's
participation as a strategic partner. However, Xinhua Far
East believes that its loan portfolio is still skewed too
far towards the manufacturing sector, and that its special
mention loan ratio is relatively high and NPL coverage
ratio relatively low. 

    CMB: the AA- rating for CMB reflects its leading market
position for retail banking, its fast-growing non-interest
income stream and its relatively strong prudent risk
management system. Both its debit and credit cards lines
have strong market recognition and strong consumer uptake.
The high percentage of its retail client base, relative to
other joint-stock commercial banks, helps it attract ample
deposits, enjoy lower financing costs and achieve rapidly
rising non-interest income. Its risk management system is
relatively better as well, as evidenced by its prudence in
provisioning and comparatively low exposure to the
manufacturing and real estate sectors.

    SPDB: the A+ rating for SPDB reflects the bank's
strength in corporate banking and its strong shareholder
support. SPDB's strength in corporate banking and its
regional focus on the Yangtze River Delta region enables it
to leverage this fast growing market, but also increases its
business concentration risks. SPDB's NPL ratio has been
improving over the years, with its NPL coverage ratio the
highest among Chinese banks. Its loan portfolio is skewed
towards the manufacturing and real estate sectors, however,
and it has some geographical risks. As a bank
majority-controlled by companies owned by the Shanghai
government, it is nevertheless in a favorable position to
obtain government support in the event of financial
difficulty.

    CMBC: the A- rating for CMBC reflects its position as
the fastest growing listed national commercial bank in
China - the result of its innovative culture and incentive
schemes. However, Xinhua Far East is concerned about the
bank's aggressive growth strategy and mounting risks in its
relatively concentrated loan portfolio, despite having the
lowest NPL ratio. We also note CMBC's continual financing
needs due to more stringent capital requirements and the
limited financial capacity of its current major
shareholders. It also has liquidity risk challenges as most
of its deposits come from corporate clients.

    HXB: the BBB rating for HXB reflects Xinhua Far East's
belief that HXB will grow to be a more
commercially-oriented bank, rectify its historical weakness
in corporate governance and information disclosure, and make
progress in risk management in the current favorable market
environment and with the introduction of foreign investors.
However, its relatively weak market position in the
increasingly competitive market, its dependence on
corporate deposits, its continuous financing needs, its
loan portfolio concentration, low coverage ratio and weak
profit generating ability prevent it from obtaining a
higher rating at this time.

    SDB: The long-term BBB rating for Shenzhen Development
Bank (SDB) is primarily based on the fact that its
financial position and risk management is improving
following the introduction of Newbridge as its leading
shareholder. It is also based on the expectation that it
will enhance its market position by adopting a more focused
strategy on working capital and trade financing loans.
However, its low capital adequacy ratio limits its further
expansion and poses risks to depositors, which has limited
its potential to be enhanced in the short run due to its
stagnancy in non-tradable shares reform. Further, its
relatively weak market position in the increasingly
competitive market, its legacy asset quality problems, its
loan portfolio concentration, low coverage ratio and high
loan-to-deposit ratio prevent it from getting a higher
rating.

    For the full rating report, please contact us via
[e-mail] .

    Note to Editors:

    About Xinhua Far East China Ratings

    Xinhua Far East China Ratings (Xinhua Far East) is a
pioneering venture in China that aims to rank credit risks
among corporations in China. It is a strategic alliance
between Xinhua Finance (TSE Mothers: 9399), and Shanghai
Far East Credit Rating Co., Ltd. Shanghai Far East became a
Xinhua Finance partner company in 2003 and the first China
member of The Association of Credit Rating Agencies in Asia
in December 2003.

    Capitalizing on the synergy between Xinhua Finance and
Shanghai Far East, Xinhua Far East's rating methodology and
process blend unique local market knowledge with
international rating standards. Xinhua Far East is
committed to provide investors with independent, objective,
timely and forward-looking credit opinions on Chinese
companies. It aims to help investors differentiate the
credit risks among the corporations in China, thereby,
cultivating their awareness and promoting information
disclosures and transparency in China market. 

    For more information, see
http://www.xfn.com/creditrating .

    About Xinhua Finance Limited

    Xinhua Finance Limited is China's unchallenged leader
in financial information and media, and is listed on the
Mothers board of the Tokyo Stock Exchange (symbol: 9399)
(OTC ADRs: XHFNY). Bridging China's financial markets and
the world, Xinhua Finance serves financial institutions,
corporations and re-distributors through four focused and
complementary service lines: Indices, Ratings, Financial
News and Investor Relations. Founded in November 1999, the
Company is headquartered in Shanghai with 20 news bureaus
and offices in 19 locations across Asia, Australia, North
America and Europe.  

    For more information, please visit
http://www.xinhuafinance.com . 

    About Shanghai Far East Credit Rating Co., Ltd

    Shanghai Far East Credit Rating Co., Ltd. is the first
and leading professional credit rating company with
comprehensive business coverage in China. It is an
independent agency established by the Shanghai Academy of
Social Sciences with the mission to develop internationally
accepted standards for capital market in China. The company
is a pioneer in conducting bond-rating business in China.
For years, it has been authorized by the Shanghai branch of
the PBOC to undertake loan certificate credit rating.

    Since establishment, it has rated over 1,000 corporate
long-term bonds and commercial papers, based on the
principles of objectivity, fairness and independence. The
company has also maintained over 50% market share in the
loan certificate-rating sector in Shanghai for three
consecutive years. With its strong local presence and
knowledge, it provides investors with unique and the most
insightful credit opinion. 

    For more information, see http://www.fareast-cr.com .


    For more information, please contact: 

    Hong Kong

     Joy Tsang, Corporate Communications Director
     Xinhua Finance
     Tel:   [phone] 
            [phone]
            [phone]
     Email: [e-mail] 

    US

     Taylor Rafferty (IR/PR Contact in US)
     Ms. Ishviene Arora
     Tel:   [phone]
     Email: [e-mail] 


SOURCE  Xinhua Far East China Ratings