Key Takeaways
- Environment, social, and governance factors influence credit quality for about 18% of the 34 largest banks in Asia-Pacific.
- Governance influences banks' credit quality in most instances.
- Social and environmental considerations are increasingly at the heart of banks' strategy, but these factors are less credit-relevant for now.
Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these factors into its ratings methodology and analytics. This enables analysts to factor in near-, medium-, and long-term impacts--both qualitative and quantitative--during multiple steps in the credit analysis (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019, on RatingsDirect). Strong ESG credentials do not necessarily indicate strong creditworthiness.
We define ESG credit factors as ESG risks, or opportunities, which influence an obligor's capacity and willingness to meet its financial commitments. This influence could be reflected through a change in the size and relative stability of the obligor's current or projected revenue base, its operating requirements, the emerging risks it is exposed to, its earnings, cash flows or liquidity, or the size and maturity of future financial obligations. This report explores how ESG credit factors influence the credit quality of some of the largest Asia-Pacific banks, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality compared to sector peers or the broader sector.
In our analysis of operating conditions in a given country, we recognize that banks are inherently exposed to those risks. Weak governance standards could be a systemwide issue affecting a country and its banks as a whole. For the most part, these systemwide considerations are incorporated in our Banking Industry Country Risk Assessment analysis (our country-specific analysis of the systemic risks a bank is exposed to, depending on where it operates) in addition to entity- specific ones (see chart)
Banks in Asia-Pacific in general are at the evolving stage in terms of ESG, compared with peers in Europe, Middle-East, and Africa (EMEA), and North America. ESG factors influence the capacity and willingness of an obligor to meet its financial commitments. This influence could be reflected through a change in: (1) the size and stability of an obligor's current or projected revenue base; (2) operating requirements; (3) exposure to emerging risks, (4) profitability or earnings; (5) cash flows or liquidity; or (6) the size and maturity of financial commitments.
ESG credit factors influence the credit quality of some of the 34 largest banks in Asia-Pacific. For six (18% of the sample), one (or a combination thereof) of the ESG credit factors directly influences the credit quality more than for peers'. Such examples are mainly in China, a country with wide governance and transparency disparities between the mega banks and the rest of the sector. From a credit perspective, and when compared with local peers', governance weighs more positively on the credit quality of some of the largest Chinese banks.
Banks are primarily exposed to climate-related risks via their lending and securities portfolios due to physical and transition risks, but the influence is rather limited for now. Nevertheless, we expect that firms in many industries will need to realign their business models as countries move toward reducing greenhouse gas emissions and carbon footprint. In our view, banks are exposed to the risk that many of their borrowers, and indeed the broader economies, could weaken due to this transition. The transitioning to a low-carbon economy affects certain countries in Asia-Pacific faster than in others owing to evolving environmental legislations or changing customer preferences.
The diversity of the region is unique--it comprises some of the most advanced and modern economies of the globe, but also still-developing ones with large appetite for growth and immense energy needs. The risk posed to banks is very different depending on its location because the degree of advancement of collective knowledge and priority from policymakers is not uniform. But like their U.S. and EMEA counterparts, Asian banks are not immune to those global energy transition trends. Some events such as recent bushfires in Australia also highlight climate-related risks that could weaken the broader economy and impact banks. However, we expect the influence on banks' creditworthiness to be insignificant.
Social challenges are numerous for banks, including how to avoid reputational or regulatory risks in retail activities. Similar to other regions, APAC banks are under heightened scrutiny in many countries amid stronger expectations from the population and regulators.
Without surprise, governance is--and has always been--a very important component of our assessment of the quality of management and strategy for banks. This factor influences the credit quality of the banks we rate the most. Governance and risk management lapses have emerged in some countries in the region in recent years, although typically such issues have not significantly hurt banks' creditworthiness. Even when credit quality is negatively influenced, most banks are likely to absorb the related costs and adjust their governance framework, especially the flagship banks.
| Entity name/Rating/Comments | Country | Analyst name |
|---|---|---|
| Agricultural Bank of China Ltd. (ABC)(A/Stable/A-1) | ||
| We believe governance is a credit factor that influences ABC's credit quality more positively than for other companies operating in China. Relative to Chinese companies in other sectors, ABC is subject to higher governance standards as a globally systemically important bank (G-SIB) and a prudentially regulated financial institution. ABC is listed on the Hong Kong and Shanghai stock exchanges and is therefore subject to the oversight of various regulators. This supports the bank's superior disclosure and transparency. ABC demonstrated sound governance during the domestic regulatory shakeup in the past couple of years, in our view. We see limited impact of a recent management change at the bank because it is common practice to rotate the leadership teams at state-controlled banks. We see environmental and social factors for ABC to be broadly in line with the banking industry. Like other large Chinese banks and global peers, ABC is exposed via lending activities to carbon-intensive sectors such as metals, mining, and other commodities, or to companies highly dependent on fossil energy. Energy transition could create risks in the loan and securities portfolio of ABC. However, the bank has diverse and granular exposures. | China, BICRA 6 | Robert Xu |
| Australia and New Zealand Banking Group Ltd. (ANZ) (AA-/Stable/A-1+) | ||
| We see ESG credit factors for ANZ to be broadly in line with industry and Australian peers. In our view, ANZ has a comprehensive and well-developed risk management and governance framework across the group's activities. We expect ANZ's strong business franchise and financial strength to help it to absorb potential financial penalties and customer remediation costs associated with governance shortfalls that have emerged in the practices and operations of major Australian banks in the past three years. Many Australian banks faced criticisms for issues such as overcharging customers, nonadherence to responsible lending standards, or failure to timely report suspicious transactions to the financial crimes regulator. We believe policymakers have increasingly called for greater penalties for such lapses, at least partly on the basis that these profitable banks must meet community expectations. Significant costs to remedy these lapses have affected earnings of ANZ and the other major Australian banks. Emergence of such issues often disrupts bank operations (for example, due to forced changes to board and senior management). Nevertheless, we consider that these banks can absorb the burden without a significant downside to their creditworthiness, given their strong financial and business profiles and a high likelihood of timely financial support from the government, if needed. In addition, we believe the consequent damage to the customer franchise is unlikely to be significant or long lasting. We see environmental factors as less relevant (than social and governance factors) to the creditworthiness of ANZ. The mining sector accounts for only about 1% of lending by the Australian banking sector. Still, we believe ANZ is indirectly exposed to the environmental factors because it operates in an economy where the commodities sector is significant. Evolution of domestic and global environment standards and legislations, and changing customer preferences leading to a transition toward less carbon intensive forms of energy could weaken the broader economy and ANZ's lending portfolio. | Australia, BICRA 3 | Nico N DeLange |
| Axis Bank Ltd.(BBB-/Stable/A-3) | ||
| ESG credit factors do not influence Axis' credit quality differently from industry and domestic peers. The majority of the bank's business is from retail customers in cities and urban regions in India. Direct exposure to sectors more vulnerable to potential environmental issues is small. Like its peers, Axis will need to manage energy transition risks because changing environmental norms could affect suppliers and sub-contractors of companies with high greenhouse gas emissions. Axis has issued green bonds, financed solar power installations, and had other environmentally focused initiatives. From a social perspective, Axis continues to meet its regulatory priority lending targets. This includes empowering women borrowers, lending to small and midsize enterprises (SMEs), and helping train young people (including those with special needs) to obtain steady employment. Indian banks have so far not been affected by major conduct misdemeanours by their retail clients in recent years. We view management of private sector banks in India as better than that of public sector banks, although we don't believe this is a differentiating factor for Axis. The bank has had governance hiccups with its former CEO retiring early after the central bank raised concerns over rising bad loans. | India, BICRA 5 | Michael D Puli |
| Bangkok Bank Public Co. Ltd.(BBB+/Positive/A-2) | ||
| ESG credit factors do not influence Bangkok Bank’s credit quality differently from industry and domestic peers. The bank's portfolio is well diversified among different corporate segments and borrower profiles. Bangkok Bank has increased focus on financing greener sources of energy in the past few years, with the share of renewable energy plants in the energy portfolio increasing to 46% from 34% since 2015. That said, 54% of the energy book remains exposed to fossil fuel power plants, which could expose the bank to energy transition risks. Over the past 10 years, the bank has provided long-term loans to renewable energy-based electricity generation projects of Thai baht (THB) 47.6 billion, of which THB41.4 billion was to solar power plants, and THB6.2 billion to wind power plants. Bangkok Bank is also very active in promoting financial inclusion. For example, it provides loans for micro entrepreneurs (total non-land assets less than THB5 million) to help these small businesses gain more access to finance. Bangkok Bank has continued its loan program for more than three years and has helped many micro entrepreneurs receive loans at reasonable interest rates without collateral. More than 2,000 micro entrepreneurs have taken loans of more than THB400 million from the bank. The bank has not suffered any case of major conduct demeanours in the retail segment in recent years. | Thailand, BICRA 6 | Rujun Duan |
| Bank of China Ltd. (BOC)(A/Stable/A-1) | ||
| We believe governance is a credit factor that influences BOC's credit quality more positively than for other companies operating in China. Relative to Chinese companies in other sectors, BOC is subject to higher governance standards as a G-SIB and a prudentially regulated financial institution. BOC is listed on the Hong Kong and Shanghai stock exchanges and is therefore subject to the oversight of various regulators. This supports the bank's disclosure and transparency. BOC demonstrated its sound governance during the domestic regulatory shakeup in the past couple of years, in our view. We see limited impact from a recent management change at the bank because it is common practice to rotate the leadership teams at state-controlled banks in China. We see environmental and social factors for BOC to be broadly in line with the banking industry. Like other large Chinese banks and global peers, BOC is exposed via lending activities to carbon-intensive sectors such as metals, mining, and other commodities, or to companies highly dependent on fossil energy. Energy transition could create risks in BOC's loan and securities portfolio. However, the bank has diverse and granular exposures. | China, BICRA 6 | Ming Tan |
| Bank of Communications Co. Ltd. (BoCom)(A-/Stable/A-2) | ||
| We believe governance is a credit factor that influences BoCom's credit quality more positively than for other companies operating in China. Relative to Chinese companies in other sectors, BoCom, together with the four G-SIBs in China and Postal Savings Bank, is subject to much tighter prudential supervision. BoCom is listed on the Hong Kong and Shanghai stock exchanges and is therefore subject to the oversight of various regulators. This supports its disclosure and transparency. The presence of HSBC PLC as the bank's second-largest shareholder with two board seats and one deputy CEO position, and the cooperation between the two banks, supports BoCom's governance. We see limited impact of recent management changes at the bank because it is common practice to rotate the leadership teams at state-controlled institutions. We see environmental and social factors for BoCom to be broadly in line with the banking industry. Like other large Chinese banks and global peers, BoCom is exposed via lending activities to carbon-intensive sectors such as metals, mining, and other commodities, or to companies highly dependent on fossil energy. Energy transition could create risks in BoCom's loan and securities portfolio. However, the bank has diverse and granular exposures. | China, BICRA 6 | Xi Cheng |
| China Construction Bank Corp. (CCB)(A/Stable/A-1) | ||
| We believe governance is a credit factor which influences CCB's credit quality more positively than for other companies operating in China. Relative to Chinese companies in other sectors, CCB is subject to higher governance standard as a G-SIB and a prudentially regulated financial institution. CCB is listed on the Hong Kong and Shanghai stock exchanges and is therefore subject to regulatory oversight of different regulations. This supports the bank's disclosure and transparency. CCB demonstrated sound governance during the domestic regulatory shakeup in the past couple of years, in our view. We see limited impact of the recent management change because it is common practice to rotate the leadership teams at state-controlled banks. We see environmental and social factor for CCB to be broadly in line with the banking industry. Like other large Chinese banks and global peers, CCB is exposed via lending activities to carbon-intensive sectors such as metals, mining, and other commodities, or to companies highly dependent on fossil energy. Energy transition could create risks in the bank's loan and securities portfolio. However, CCB has diverse and granular exposures. | China, BICRA 6 | Phyllis Liu |
| China Merchants Bank Co. Ltd. (CMB)(BBB+/Stable/A-2) | ||
| ESG credit factors have broadly the same influence on CMB's credit quality as they do for its industry and local peers. As one of the most market oriented banks in China, CMB's corporate governance and information disclosure are better than those of the bank's smaller peers. However, governance rules and requirements applicable to CMB are different from those for G-SIBs. CMB is listed on the Hong Kong and Shanghai stock exchanges and is therefore subject to the oversight of various regulators. This supports its better disclosure and transparency. We see environmental and social factors for CMB to be broadly in line with the banking industry. Like other large Chinese banks and global peers, CMB is exposed via lending activities to carbon-intensive sectors such as metals, mining, and other commodities, or to companies highly dependent on fossil energy. Energy transition could create risks in CMB's loan and securities portfolio. However, the bank has diverse and granular exposures. | China, BICRA 6 | Robert Xu |
| China Minsheng Banking Corp. Ltd. (CMBC)(BBB-/Stable/A-3) | ||
| ESG credit factors for CMBC are broadly in line with that for industry and domestic peers. CMBC's governance standards are in in line with other companies in China. As a listed national joint stock bank, the bank's information disclosure is transparent. CMBC is listed on the Hong Kong and Shanghai stock exchanges and is therefore subject to the oversight of various regulators. This supports the bank's better disclosure transparency. However, governance rules and requirements applicable to CMBC are different from those for G-SIBs. We see environmental and social factors for CMBC to be broadly in line with the banking industry. Like other Chinese banks, CMBC is exposed via lending activities to carbon-intensive sectors or to companies highly dependent on fossil energy. Energy transition could create risks in CMBC's loan and securities portfolio. However, the bank has diverse and granular exposures. | China, BICRA 6 | Robert Xu |
| Commonwealth Bank of Australia (CBA)(AA-/Stable/A-1+) | ||
| We see ESG factors for CBA to be broadly in line with those for its industry and domestic peers. In our view, CBA has a comprehensive and well-developed risk management and governance framework across the group's activities. We expect CBA's strong business franchise and financial strength to help it to absorb potential financial penalties and customer remediation costs associated with governance shortfalls that have emerged in the practices and operations of major Australian banks in the past three years. Many Australian banks faced criticisms for issues such as overcharging customers, nonadherence to responsible lending standards, or failure to timely report suspicious transactions to the financial crimes regulator. We believe policymakers have increasingly called for greater penalties for such lapses, at least partly on the basis that these profitable banks must meet community expectations. Significant costs to remedy these lapses have affected earnings of CBA and the other major Australian banks. Emergence of such issues often disrupts bank operations (for example, CBA's CEO left the bank in 2018 following the emergence of the bank's breach of anti-money laundering regulation. CBA incurred significant financial penalty for this breach and carries additional regulatory capital). Continued governance failures could make CBA and its domestic peers less attractive to equity and debt investors that are more sensitive to ESG factors. Nevertheless, we believe CBA can absorb the burden without a significant downside to its creditworthiness, given its strong financial and business profile and a high likelihood of timely financial support from the government, if needed. In addition, we believe consequent damage to the bank's customer franchise is unlikely to be significant or long lasting. We see environmental factors as less relevant (than social and governance factors) to the creditworthiness of CBA. The mining sector accounts for only about 1% of the total domestic lending by Australian banks. Still, we believe CBA is indirectly exposed to the environmental factors because it operates in an economy where the commodities sector is significant. Evolution of domestic and global environment standards and legislations, and changing customer preferences leading to a transition toward less carbon intensive forms of energy could weaken the broader economy and the bank's lending portfolio. | Australia, BICRA 3 | Lisa Barrett |
| DBS Bank Ltd.(AA-/Stable/A-1+) | ||
| DBS' ESG credit factors are broadly in line with those for the industry and domestic peers. The bank's portfolio is well diversified with non-material exposure to environmentally vulnerable sectors. Still, energy transition risks in the loan book are not marginal; we estimate about 10% of the bank's gross loan book is exposed to environmentally sensitive sectors such as agriculture, chemicals, energy, infrastructure, mining, and metals. DBS leads its ASEAN peers in promoting sound ESG initiatives and adopting digital solutions, in our view. The bank has been the main financier of a number of sustainability performance-linked loans. It was the joint bookrunner for some landmark green bonds and social covered bonds in 2018. DBS is also the first bank in southeast Asia to be included in the Dow Jones Sustainability Index Asia Pacific. It is also a constituent of the FTSE4 Good Global Index. This framework supports the strength and sustainability of DBS' business model. In April 2019, DBS announced it will cease financing new coal-fired power plants, after meeting its existing commitments. It also financed 17 mandated or completed renewable energy-related projects in 2018. DBS's corporate governance is in line with leading regional peers and supports the management team's stability and consistency in corporate strategies. The bank is in full compliance with the stringent corporate governance and disclosure guidelines issued by Monetary Authority of Singapore (MAS). Seven out of the 11 board members are independent directors from various industrial backgrounds, nationalities, ages, and knowledge bases. The board authorizes five key committees at the board level to oversee specific responsibilities and guide the CEO and management. The Board Risk Management Committee sets the bank's risk appetite, the enterprise-wide risk management policies and processes, and risk appetite limits. | Singapore, BICRA 2 | Rujun Duan |
| HDFC Bank Ltd.(BBB-/Stable/A-3) | ||
| ESG credit factors for HDFC Bank are broadly in line with the industry and those of other Indian peers. The HDFC group, as a rule of thumb, does not fund projects that have an adverse impact on environment, health, and safety. All loans exceeding Indian rupee (INR) 100 million and with a tenor of more than five years are assessed through an internal framework and validated for their environmental and social impact. HDFC Bank has among the lowest exposure among top banks in India to sectors such as power, iron and steel, and coal mining. However, energy transition risk remains for the bank. It is also a frontrunner in digital banking, which helps reduce paper consumption and travel to branches by customers. Through its social initiatives, HDFC Bank has deployed INR4.4 billion for the development and empowerment of communities in rural areas; it reaches 54 million beneficiaries in the process. These initiatives include financial inclusion, especially for women in unbanked areas. Governance is a neutral factor for HDFC Bank's credit assessment. While, we believe management is strong relative to the rest of the financial sector, governance is broadly in line with industry. Five out of the ten directors on the board are independent. The bank's reputation has remained clean at a time when a lot of governance and transparency issues have surfaced including those at peer banks. | India, BICRA 5 | Nikita Anand |
| ICICI Bank Ltd.(BBB-/Stable/A-3) | ||
| ESG credit factors do not influence ICICI's credit quality more, or less, than industry or domestic peers. The bank looks to minimize its impact on the environment. Nine of its offices have the highest rating for sustainability by the Indian Green Building Council. Similar to other Indian banks, ICICI is exposed to sectors such as petroleum (5.8%) and power (2.7%). These could be vulnerable in the context of the energy transition. The ICICI group maintains a foundation to provide training and sustainable livelihood opportunities to the underserved, and support rural customers with advice and appropriate financing. A particular focus is on rural branches to improve financial literacy and support women entrepreneurs. This positioning supports the bank's customer franchise and client loyalty. Similar to other private sector banks in India, ICICI's management and governance is generally better than that at public sector banks. There have been some governance issues at the bank, namely the sacking of its former CEO and managing director for not reporting a potential conflict of interest. This triggered a review by India's chief investigative agency and the bank stopping future benefits accruing to the person. | India, BICRA 5 | Michael D Puli |
| Industrial and Commercial Bank of China Ltd. (ICBC)(A/Stable/A-1) | ||
| We believe governance is a credit factor that influences ICBC's credit quality more positively than it does for other companies operating in China. Relative to Chinese companies in other sectors, ICBC is subject to higher governance standards as a G-SIB and a prudentially regulated financial institution. ICBC is listed on the Hong Kong and Shanghai stock exchanges and is therefore subject to regulatory oversight of different regulators. This supports the bank's superior disclosure and transparency. ICBC demonstrated sound governance during the domestic regulatory shakeup in the past couple of years, in our view. We see limited impact of recent management changes at the bank because it is common practice to rotate the leadership teams at state-controlled banks. We see environmental and social factor for ICBC to be broadly in line with the banking industry. Like other large Chinese banks and global peers, ICBC is exposed via lending activities to carbon-intensive sectors such as metals, mining, and other commodities, or to companies highly dependent of fossil energy. Energy transition could create risks in the loan and securities portfolio of ICBC. However, the bank has diverse and granular exposures. | China, BICRA 6 | Xi Cheng |
| Industrial Bank of Korea (IBK)(AA-/Stable/A-1+) | ||
| ESG credit factors for IBK are broadly in line with those for its industry and domestic peers. IBK is the largest lender in the SME segment in Korea. The bank's conduct and compliance needs require prudent management, especially in know-your-customer checks and in anti-money laundering controls. After the New York Department of Financial Services' warning on the lax anti-money laundering (AML) framework of the bank’s New York branch in 2016, IBK has strengthened risk controls by leveraging its long history and know-how of interacting with SMEs. This is evidenced in the bank's stable profitability and good brand image in Korea. Therefore, we believe the warning, and social risks in general, do not weigh on the bank's credit quality more than on industry peers. We view IBK's corporate governance standards as being largely in line with local norms. The Korean government influences IBK’s corporate governance as the majority owner. The government nominates and elects the bank’s CEO; it is also involved in strategic decisions. The bank recently appointed an ex-government official as its new CEO for a three-year term, the previous three CEOs were elected from the internal management team. We believe IBK maintains a consistent strategy that is set in coordination with the government and is well executed, as evidenced by the bank's record of stable profitability and asset quality. Environmental risks are less significant for IBK. The bank is seeking to reduce its own carbon footprint and will have to manage energy transition risk in the lending portfolio. | Korea, BICRA 3 | Scott Han |
| KEB Hana Bank(A+/Stable/A-1) | ||
| ESG credit factors for KEB Hana Bank are broadly in line with those for the industry and local peers. The bank has an adequate management structure with limited external influence, in our view. This enables it to continue to pursue its operational and strategic targets. We believe KEB Hana Bank maintains independence in its board of directors, with the majority of directors from outside. The bank's governance structure and relationship with the labor union have stabilized in the past few years, despite some noises during the integration of Hana Bank and Korea Exchange Bank in 2015. Social risk is becoming increasingly relevant for KEB Hana Bank amid higher regulatory focus on business conduct and changing consumer preferences. We believe risks stemming from potential mis-selling, and product design and sale processes are particularly relevant for the bank. This follows an incident in 2019, where derivative-linked funds sold by the bank incurred losses for some customers. KEB Hana Bank is likely to partially compensate these customers considering some mis-selling practices and lack of internal controls related to these products. However, we expect the compensation expenses to not be significant. Such potential events could have reputational and regulatory consequences, although they would have a limited direct financial impact. We believe risks related to know-your-customer checks, anti-money laundering controls, and cyber security are also relevant, given the bank's large retail franchise and cross-selling efforts with its brokerage affiliate. Environmental considerations are not that different for KEB Hana Bank than they are for its peers. The bank looks to reduce its own carbon emissions and manage energy resources efficiently. It has a diversified loan portfolio with nonmaterial exposure to environmentally vulnerable sectors. That said, some energy transition risk remains in the corporate portfolio. | Korea, BICRA 3 | Emily Yi |
| Kookmin Bank(A+/Stable/A-1) | ||
| ESG credit factors do not influence Kookmin Bank's credit quality more, or less, than they do for its industry and domestic peers. We view the bank's governance to be on par with that of major peers in Korea. We expect Kookmin Bank to focus on improving its governance structure by reinforcing the management appointment procedure, strengthening internal control, and improving the independence and diversity of the board of directors. The bank's strategic planning and risk control capabilities have also strengthened as evidenced by its improved profitability and well-managed asset quality. There were issues related to loosened internal control at an overseas branch in 2013, customer information leakage at KB Kookmin Card in 2013, and a conflict between the top management of Kookmin Bank and KB Financial Group Inc. in 2014. Kookmin Bank, as one of the major commercial banks in Korea, has been increasing attention to social risks. Risks relate to cyber security, product design, and sales processes are more relevant because they can impact Kookmin Bank's reputation. This is given the bank's significant retail banking franchise and active cross-selling with affiliates in the fields of credit card, brokerage, and insurance. Kookmin Bank is keen to reflect environmental risk management in its long-term strategy. The bank is committed to promoting financing of corporates that develop eco-friendly products and services and improve operational eco-efficiency by saving energy and resources. The bank has a diversified loan portfolio with nonmaterial exposure to environmentally vulnerable sectors. But Kookmin Bank, like its peers, could be exposed to energy transition risks. The bank issued sustainability notes that are allocated to projects related to renewable energy and financing of social minorities in 2019. | Korea, BICRA 3 | Emily Yi |
| Macquarie Group Ltd.*(BBB+/Stable/A-2) | ||
| ESG credit factors for the Macquarie group are broadly in line with those for its industry and domestic peers. In our view, the Macquarie group's risk management and governance framework are commensurate with the unique and complex nature, and broad range of, the group's businesses. No significant adverse conduct issues have emerged in relation to the Macquarie group in recent years. About 30% of Macquarie group's earnings have come from its Australian operations in recent years. We therefore believe the group is indirectly exposed to a number of governance shortfalls in the practices and operations of the broader Australian banking industry in the past three years. Many Australian banks faced criticisms for issues such as overcharging customers, nonadherence to responsible lending standards, or failure to timely report suspicious transactions to the financial crimes regulator. We believe policymakers have increasingly called for greater penalties for such lapses, at least partly on the basis that these profitable banks must meet community expectations. We see environmental factors as less relevant (than social and governance factors) to the creditworthiness of the Macquarie group. Nevertheless, following the acquisition of Green Investment Bank in the U.K., we believe the Macquarie group is well placed to capitalize on opportunities arising from environmental sustainability related projects in its asset management and investment banking activities. The mining sector accounts for only about 1% of the domestic lending by Australian banks. Still, we believe the Macquarie group is indirectly exposed to environmental factors because it operates in an economy where the commodities sector is significant. Evolution of domestic and global environment standards and legislations, and changing customer preferences leading to a transition toward less carbon intensive forms of energy could weaken the broader economy and the Macquarie group's lending portfolio. | Australia, BICRA 3 | Nico N DeLange |
| Malayan Banking Bhd. (Maybank)(A-/Stable/A-2) | ||
| Maybank's ESG credit factors are broadly in line with those of the industry and local peers in Malaysia. Commodities such as palm oil and fossil fuel energy play an important role in the Malaysian economy. However, Maybank's loan portfolio is diversified with only single-digit exposure to sensitive sectors. The bank has developed risk acceptance criteria for high ESG risk sectors such as palm oil, forestry and logging, oil and gas, and mining and quarrying, to manage environmental and energy transition risks. It has also leveraged on its islamic finance expertise and leads local peers in financing major green deals compliant with sustainable development goals or Shariah-based infrastructure projects (through green sukuk). The bank has consistently contributed 1% of its annual net profit to local community programmes as part of its commitment to society. This also supports its commercial franchise. Maybank has adequate corporate governance standards compared with regional leading banks, in our view. The management has been stable with consistent and transparent strategies. This supports the bank's business resilience and solid financial profile over credit cycles. Maybank also has sound board supervision, with nine directors on the 12 member board being independent. | Malaysia, BICRA 4 | Rujun Duan |
| Mitsubishi UFJ Financial Group Inc. (MUFG)*(A-/Positive/--) | ||
| ESG credit factors for MUFG are broadly in line with those for the industry peers in Japan. Corporate governance practices are typically of high standards in Japan and in many countries where MUFG has material exposure. Since the bank's exposure and business are highly diversified, the impact of energy transition in the corporate loan portfolio on its asset quality, earnings, or businesses, are manageable. MUFG has been strengthening areas of environmental sustainability. For example, it has set a goal to provide ¥20 trillion sustainable financing by 2030. This includes ¥8 trillion to the environmental sector. The bank also plans to cease financing to new coal fired power plant. Social factors are critical for MUFG because they could impact financial performance or reputation. However, MUFG's exposure to social factors is not a major rating driver because of the bank's anti-money laundering and cyber security controls. In our view, MUFG's costs to enhance controls and supervisions will increase to meet higher standards and regulations as a bank with global operations. The demographic issue could be a social credit factor in Japan in the long-run. However, we believe MUFG is less exposed to this factor than domestic banks because of its highly diversified portfolio in terms of clients, services, and geography. | Japan, BICRA 3 | Chizuru Tateno |
| Mizuho Financial Group Inc. (Mizuho FG)*(A-/Positive/--) | ||
| ESG credit factors do not influence Mizuho FG's credit quality in a different way than they do for industry and domestic peers in Japan such as MUFG and Sumitomo Mitsui Financial Group. We do not expect environmental risk factors to significantly affect the ratings on Mizuho FG because the group's exposures are highly diversified with no major exposure to industries with high environmental risks. Still, similar to any large international bank, Mizuho FG is exposed to energy transition risk in its lending exposure. The group sets standards based on gas emissions for its new exposures to power generation projects and has various targets to promote a recycling-based society. Social factors may cause serious financial and reputational damage to Mizuho FG, given it is a commercial banking group providing services to the general public. Nevertheless, we see limited impact of such factors on the group's creditworthiness. Strong and effective regulation and supervision by the regulators tempers the risk. Coordination among financial regulators over certain risk factors also enables the group to meet global standards, such as on anti-money laundering. While not imminent, the social risk that may challenge the group most is likely to be ageing and de-population of Japan amid overcapacity issues and rapid transformation of the industry through technology enhancement. We believe Mizuho FG is in a stronger position than its domestic peers due to its larger franchise and exposure to the overseas market. | Japan, BICRA 3 | Kensuke Sugihara |
| National Australia Bank Ltd. (NAB)(AA-/Stable/A-1+) | ||
| We see ESG factors for NAB to be broadly in line with those for its industry and domestic peers. In our view, NAB has a comprehensive and well-developed risk management and governance framework across all of the group's activities. We expect NAB's strong business franchise and financial strength to help it to absorb potential financial penalties and customer remediation costs associated with a number of governance shortfalls that have emerged in the practices and operations of major Australian banks in the past three years. Many Australian banks faced criticisms for issues such as overcharging customers, nonadherence to responsible lending standards, or failure to timely report suspicious transactions to the financial crimes regulator. We believe that policymakers have increasingly called for greater penalties for such lapses, at least partly on the basis that these profitable banks must meet community expectations. Significant costs to remedy these lapses have affected earnings of NAB and the other major Australian major banks. Emergence of such issues often disrupts bank operations (for example, the leaving of NAB's CEO and board chair in the first half of 2019 following pointed observations in relation to the bank management by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry). Nevertheless, we believe these banks can absorb the burden without a significant downside to their creditworthiness, given their strong financial and business profiles and a high likelihood of timely financial support from the government, if needed. In addition, we believe the consequent damage to the customer franchise is unlikely to be significant or long lasting. We see environmental factors as less relevant (than social and governance factors) to the creditworthiness of NAB. The mining sector accounts for only about 1% of domestic lending by Australian banks. Still, we believe NAB is indirectly exposed to environmental factors because it operates in an economy where the commodities sector is significant. Evolution of domestic and global environment standards and legislations, and changing customer preferences leading to a transition toward less carbon intensive forms of energy could weaken the broader economy and the bank's lending portfolio. | Australia, BICRA 3 | Nico N DeLange |
| Nomura Holdings Inc. *(BBB+/Stable/A-2) | ||
| ESG credit factors for Nomura are broadly in line with those for the industry and other peers in Japan. Nomura's exposure to environmental and social risk factors is comparable to the rest of the banking sector. We do not consider environmental risk to be a significant driver of Nomura's credit quality because the securities business mainly involves the company acting as a financial intermediary or service provider. Still, energy transition is an important consideration for Nomura, as it is for any investor, deal arranger, book runner, or other intermediary in the selection of clients and sectors. Nomura may even have business opportunities with the growing popularity of ESG investments. Nomura's social exposure that may lead to serious financial and reputational damage is limited. This is primarily because of significant regulation and supervision. For example, Japan's Financial Services Agency issued a business improvement order to Nomura in May 2019 in connection with improper communication related to the listing and delisting criteria for the Tokyo Stock Exchange. Following the order, some customers decided not to work with Nomura for some time. The negative impact on Nomura was limited because the group took necessary steps to strengthen legal, compliance, and internal control systems to restore the trust of customers. Legal and regulatory-related expenses would rise for Nomura if it were to sell financial products in an inappropriate manner. In the fiscal year ended March 31, 2019, Nomura had about ¥12 billion in legal expenses related to transactions around the time of the global financial crisis. We consider the impact to be manageable for Nomura from a credit perspective. | Japan, BICRA 3 | Toshihiro Matsuo |
| NongHyup Bank(A+/Stable/A-1) | ||
| ESG credit factors do not influence NH's credit quality more, or less, than they do for industry and other Korean peers. We expect NH to continue to reduce its conduct and compliance risks, and sustain its strong market presence in Korea. Know-your-customer checks, anti-money laundering (AML) controls, and established sale processes are important safeguards, and failings in these areas can have material adverse financial and reputational consequences. The bank's record in mitigating these risks is adequate, in our view. NH increased focus on enhancing the management of compliance risks and risk culture after a US$11 million penalty was imposed on the bank’s New York branch by the New York Department of Financial Services in 2017. This was for failing to maintain an adequate AML framework. We see NH's corporate governance as consistent with industry norms. We believe the bank has a stable senior management team and exhibits disciplined strategic execution and operational control. NH is still influenced by National Agricultural Cooperative Federation (NACF), its ultimate parent, in some aspects of its corporate governance including nomination of senior personnel. However, this is not to the extent that we would consider it to be a credit weakness. Environmental risks are less significant for NH, and not very distinctive from its peers. The bank is seeking to reduce its carbon footprint by improving energy efficiency in its operations and reducing its paper consumption. It also indirectly supports environmentally-friendly agricultural technology by paying agricultural support project expenses to NACF. | Korea, BICRA 3 | Scott Han |
| Norinchukin Bank(A/Stable/A-1) | ||
| Norinchukin Bank's ESG credit exposure is broadly in line with that of industry and Japanese peers. We do not consider Norinchukin Bank's environmental risk as a significant driver of its credit quality, mainly because of the bank's high level of diversification of loans and securities investments. In fact, Norinchukin Bank may have business opportunities with a growing popularity of ESG investments. Norinchukin Bank has a basic policy to make investments and provide loans with a high level of public responsibility and a broad range of social responsibilities. For example, the bank adopted the Equator Principles in May 2017. Environmental factors will not directly affect the business performance and balance sheet of Norinchukin Bank in the next few years, in our view. Managing social factors is of utmost importance for Norinchukin Bank because these may have a negative impact on its financial performance or reputation. We have not identified serious issues such as inadequate loans and investments or illegal activities that could lead to significant reputational risk and brand damages for the bank. With long-term negative trends such as a decline in population and increased aging in Japan, Norinchukin Bank is focusing or more customer-orientated businesses to mitigate social risks. These businesses include development of agriculture, fishery and forestry industries, food production and consumption, and revitalization of local communities. | Japan, BICRA 3 | Shoki Nagano |
| Oversea-Chinese Banking Corp. Ltd. (OCBC)(AA-/Stable/A-1+) | ||
| ESG credit factors for OCBC are broadly in line with those for the industry and peers in Singapore. As the leading bank in ASEAN, OCBC's portfolio is well diversified with no material exposure to ESG-vulnerable sectors. About 10% of the bank's gross loan book is to higher ESG risk sectors such as palm oil, chemicals, energy, infrastructure, mining, and metals. OCBC has integrated the ESG considerations into its daily lending and investment activities. Transactions with high ESG or reputational risks are escalated to the Reputational Risk Review Group for review and clearance. The bank has developed credit policies for high ESG industries where it prohibits or conditions lending on clients' compliance with stringent ESG requirements. For example, in April 2019, the bank stopped financing new coal-fired power plants, except where the bank had an existing commitment. It also prohibits lending to lignite coal mines. OCBC's corporate governance is in line with leading regional peers' and supports management stability and consistency in strategies. The bank is in full compliance with the stringent corporate governance and disclosure guidelines issued by MAS. It has a Board Diversity Policy, similar to its peers, which sets the board member selection approach to embed diversity of skills, knowledge, experience, age, gender, length of service, as well as merit and independence. Seven out of the bank's 11-member board are independent directors (including the chairman of the board). | Singapore, BICRA 2 | Rujun Duan |
| Postal Savings Bank of China Co. Ltd. (PSBC)(A/Stable/A-1) | ||
| Social credit factors influence PSBC's credit quality more positively than they do for domestic peers in China. To assess the potential government support PSBC could receive at the time of need we mainly factored: (1) the bank's uniqueness and dominance in serving rural and remote communities' financial services needs through its about 40,000 outlets in China; and (2) its substantial and increasing support for financial inclusion initiatives including lending to micro and SMEs. PSBC serves nearly 600 million retail customers and the share of inclusive finance in its total loans is significantly higher than that for the other mega banks in China. PSBC's governance is a neutral factor for its credit quality. The bank's governance is stronger than that of most nonfinancial sector players because PSBC is one of the six large state-owned commercial banks that are closely supervised by financial regulators. However, the bank has a short history as a full-fledged commercial bank and as a publicly listed entity. Its governance is therefore less developed when compared with the other five state-owned commercial banks. We see the environmental factor for PSBC to be broadly in line with the banking industry in China because the bank is exposed to similar energy transition risks. | China, BICRA 6 | Phyllis Liu |
| Shinhan Bank(A+/Stable/A-1) | ||
| ESG credit factors for Shinhan are broadly in line with those for its industry and local peers. Governance risks are important drivers for effective management of banks. We see Shinhan's governance as largely consistent with major peers' in Korea. We believe the bank has a good record of strategic planning and execution, and prudent risk management compared with these peers. Shinhan's management structure has been stable with limited external influences, enabling the bank to have a stable financial performance in the past several years. There were concerns about the Shinhan's governance structure in 2010 due to conflicts between the former CEO and the group's chairman. The management team was replaced and the issue has been fully resolved, in our view. Shinhan has been increasing attention to social risks and to sustaining its strong market presence in Korea. We believe nonfinancial risks related to product design, sales processes, and cyber security are particularly relevant for Shinhan considering its large retail customer base and its cross-selling practices with its credit card, insurance, and brokerage affiliates. Given Shinhan's overseas business expansion, typically in countries with higher risk than Korea, adequate control for know-your-customer checks and anti-money laundering are important. The bank may face reputational and regulatory consequences if such risks are not managed well. Environmental risk factors are less significant to Shinhan's credit quality, in our view, although these are important for the bank's long-term strategy. Shinhan is looking to reduce its carbon footprint and has incorporated environmental factors in its risk management policies. While Shinhan has a diversified loan portfolio with nonmaterial exposure to environmentally vulnerable sectors, like its peers, the bank will have to manage energy transition risk in its lending portfolio. Shinhan was one of the first Korean banks to issue green bonds. It issued green bonds worth Korean won 200 billion in 2018 and sustainability bonds worth US$400 million in 2019. | Korea, BICRA 3 | Emily Yi |
| State Bank of India (SBI)(BBB-/Stable/A-3) | ||
| ESG credit factors for SBI are broadly in line with those for its industry and other peers in India. SBI's loan portfolio is weighted toward retail, agriculture, and SME lending. The bank's direct exposure to potential environmental issues is manageable, with petroleum (1.5%), iron and steel (2.7%), and power (10.1%). Like its Indian peers, SBI could face the impact of energy transition on its loan portfolio. SBI is using its market-leading digital platforms to help spearhead its social contribution. These platforms, coupled with the bank's enormous branch network across the country (including rural towns), enhance SBI's ability to reach customers in need and support local communities. We consider SBI's governance practices to be better than those of other public sector banks in India, and commensurate with the private sector. The bank's leadership has not been embroiled in public questions of competency or illegality. We note that of its 15 board members, there is only one woman. Its previous managing director (stressed assets, risk and compliance), Anshula Kant, is now the World Bank group managing director. | India, BICRA 5 | Michael D Puli |
| Sumitomo Mitsui Financial Group Inc. (SMBC Group)*(A-/Positive/--) | ||
| We view ESG credit factors for SMBC Group to be broadly in line with those of industry and local peers in Japan. We do not consider the group's environmental risk as a primary driver of the credit quality of its lead bank (Sumitomo Mitsui Banking Corp.), mainly because of the high level of diversification of the bank's loans and securities investment portfolio. The group disclosed that the bank’s carbon-related assets were 7.8% of all loans at March-end 2019. It estimated that the bank’s credit costs for the energy and power sectors will increase by ¥2 billion-¥10 billion annually due to transition risk under a scenario of a 2-degree Celsius rise in temperature through 2050, compared with the stated policy scenario based on the government’s energy plans. We believe this increase is manageable in the group context. Still, as a large international bank with a large corporate portfolio, management of energy transition risks is a challenge. The bank will stop providing financial support to borrowers engaged in businesses contrary to public responsibility or those that may have a significant negative impact on the global environment. SMBC Group's social exposure that may cause serious financial and reputational damage is limited. This is primarily because of significant regulation and supervision. For example, Sumitomo Mitsui Banking Corp. entered into a written agreement with the Federal Reserve in April 2019 to improve its New York branch's compliance with the Bank Secrecy Act and related U.S. anti-money laundering laws and regulations. This was after the Fed found the previous compliance program to be inadequate. SMBC Group has implemented a governance system of cyber security, and established policies and frameworks for managing customer information. Nevertheless, the cost will potentially increase to mitigate the social risk or to adhere with high standards of regulatory requirements. | Japan, BICRA 3 | Toshihiro Matsuo |
| Sumitomo Mitsui Trust Bank Ltd. (SMTB)(A/Positive/A-1) | ||
| ESG credit factors for the consolidated group under Sumitomo Mitsui Trust Holding (SMTH), the holding company of SMTB, are broadly in line with those for its industry and domestic peers. We do not consider SMTH's environmental risk as a significant driver of its credit quality, mainly because of high level of diversification of its loans and securities investment portfolio. Still, SMTH's asset allocation, as an investor or asset manager, will likely gradually follow energy transition trends because the value of investments (equity or fixed-income) in environment-exposed sectors may fluctuate. On the other hand, SMTH may have business opportunities with the growing popularity of ESG investments. SMTH's social exposure that may lead to serious financial and reputational damage is limited. This is primary because of significant regulation and supervision. Corporate governance is critical for SMTH's credit quality, mainly because of the need to manage potential conflicts of interest between trust and banking operations. In our view, the company manages these risks well. Since 2017, SMTH has shifted to a committee governance structure, and completed integration of the asset management business of SMTB and Sumitomo Mitsui Trust Asset Management. | Japan, BICRA 3 | Toshihiro Matsuo |
| United Overseas Bank Ltd.(AA-/Stable/A-1+) | ||
| ESG credit factors for UOB are broadly in line with those for its industry and Singapore peers. In the area of responsible financing, UOB has integrated the principles of The Association of Banks in Singapore (ABS) guidelines on responsible financing into its business model. The bank’s responsible financing policy applies to all borrowing corporate customers and capital market activities. UOB seeks representation and warranties from all borrowers to ensure compliance, including with local ESG regulations in the countries in which they operate. In recognition of the increasing threat of climate change, UOB discontinued all new financing of coal-fired power plant projects and project financing of greenfield thermal coal mines in 2019. Governance factors are the priority for UOB's management and stakeholders. The bank has demonstrated a strong commitment to complying with applicable laws and regulations. Its compliance programs are in line with international standards such as the Volcker Rule, Foreign Account Tax Compliance Act, and the Organisation for Economic Co-operation and Development's Common Reporting Standard. UOB has been pursuing a consistent business strategy as a leading ASEAN bank. The strategy is driven by an experienced and stable senior management team with well-rounded expertise and experience. Corporate governance standards are upheld by independent directors and five board committees. | Singapore, BICRA 2 | Ivan Tan |
| Westpac Banking Corp.(AA-/Stable/A-1+) | ||
| We see ESG factors for Westpac to be broadly in line with those for its industry and domestic peers. In our view, Westpac has a comprehensive and well-developed risk management and governance framework across all the group's activities. We expect Westpac to be able to address a number of governance shortfalls that have emerged in the past three years in the practices and operations of the Australian major banks. Many Australian banks faced criticisms for issues such as overcharging customers, nonadherence to responsible lending standards, or failure to timely report suspicious transactions to the financial crimes regulator. We believe policymakers have increasingly called for greater penalties for such lapses, at least partly on the basis that these profitable banks must meet community expectations. Significant costs to remedy these lapses have affected earnings of Westpac and the other major Australian major banks. Such issues often disrupt bank operations (for example, Westpac announced the departure of its CEO and the board chair in November 2019 following allegations against the bank by the Australian financial crimes regulator). Nevertheless, we believe these banks can absorb the burden without a significant downside to their creditworthiness. In our opinion, any damage to the customer franchise is unlikely to be significant or long lasting. We see environmental factors as less relevant (than social and governance factors) to the creditworthiness of Westpac. The mining sector accounts for only about 1% of lending by the Australian banking sector. Still, we believe Westpac is indirectly exposed to environmental factors because it operates in an economy where the commodities sector is significant. Evolution of domestic and global environment standards and legislations, and changing customer preferences leading to a transition toward less carbon intensive forms of energy could weaken the broader economy and the bank's lending portfolio. | Australia, BICRA 3 | Sharad Jain |
| Woori Bank(A/Positive/A-1) | ||
| ESG credit factors do not weigh on Woori Bank's credit quality more, or less, than they do for industry or local peers. We expect Woori Bank to maintain its improved risk management, internal risk control, and adequate governance structure. The bank's management has continued to clean up its bad assets to restore its underlying profitability. This has stabilized asset quality and credit costs in recent years. Five directors out of the board of eight are independent. The importance of social factors are growing for Woori Bank due to increasing regulatory focus on the bank's business conduct and changing consumer preferences. In particular, nonfinancial risks related to potential mis-selling, product design, and sale processes, are relevant for Woori Bank. This follows a recent incident where derivative-linked funds sold by the bank incurred losses for some customers. The bank is likely to partially compensate for customers' losses considering some mis-selling practices and lack of internal control related to these products. Although we expect the compensation expense to not be significant, such events could increase social risks that can lead to reputational and regulatory changes. The impact of environmental-related exposure on Woori Bank are not that different from that on peers because the bank's developments on these fields are similar with domestic peers'. The bank adopts internal policies to reduce waste and save energy and water resources. Woori Bank issued its first sustainability bonds in 2019. It plans to allocate these to projects related to renewable energy, reduction of carbon emissions, and financing of social minorities. Woori has a diversified loan portfolio with non-material exposure to environmentally vulnerable sectors. Energy transition may pose risks to some counterparties/sectors Woori Bank is lending to. These include shipping, shipbuilding, construction, or steel. | Korea, BICRA 3 | Emily Yi |
| *The legal entity referenced is the holding company at the top of the group. The ratings are those of the holding company and not those on the operating bank, which are typically one notch, and in some cases two, higher. | ||
This report does not constitute a rating action.
| Primary Credit Analysts: | Andy Chang, CFA, FRM, Taipei (8862) 8722-5815; andy.chang@spglobal.com |
| Sharad Jain, Melbourne (61) 3-9631-2077; sharad.jain@spglobal.com | |
| Secondary Contacts: | Ryan Tsang, CFA, Hong Kong (852) 2533-3532; ryan.tsang@spglobal.com |
| Peter Sikora, Melbourne (61) 3-9631-2094; peter.sikora@spglobal.com | |
| Philip P Chung, CFA, Singapore (65) 6239-6343; philip.chung@spglobal.com | |
| Kiyoko Ohora, Tokyo (81) 3-4550-8704; kiyoko.ohora@spglobal.com | |
| HongTaik Chung, CFA, Hong Kong (852) 2533 3597; hongtaik.chung@spglobal.com | |
| Gavin J Gunning, Melbourne (61) 3-9631-2092; gavin.gunning@spglobal.com | |
| Geeta Chugh, Mumbai (91) 22-3342-1910; geeta.chugh@spglobal.com | |
| Harry Hu, CFA, Hong Kong (852) 2533-3571; harry.hu@spglobal.com | |
| Pierre Gautier, Paris (33) 1-4420-6711; pierre.gautier@spglobal.com |
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