Moody's said the 722-million-yuan fine imposed on China Guangfa Bank Co. Ltd. by the country's banking regulator is credit negative for the bank.
The rating agency said Dec. 14 that the regulator's investigation and subsequent findings identify highlighted deficiencies in China Guangfa Bank's risk management system and internal controls.
The China Banking Regulatory Commission, or CBRC, imposed a 722 million yuan fine on the lender after having determined that the bank offered illegal guarantees on 1 billion yuan of debt securities.
The investigation revealed that the illicit activities, which occurred at the lender's Huizhou branch, were overlooked by the bank's headquarters, translating into shortcomings in its internal control procedures.
The regulator said the bank's performance evaluation placed too much emphasis on the sales rankings and cited the lender's weakness in fulfilling its fiduciary duties.
Moody's noted that the fine and forfeiture will significantly affect the bank's financial performance and could significantly weaken its capitalization. These effects come amid the profitability pressure faced by the lender on the back of high and rising fund costs.
However, the CBRC's punitive action is unlikely to derail the bank's current capital-raising plan. Additionally, the fine and forfeiture credit effect is mitigated by the strong commitment of its largest shareholder, China Life Insurance Co. Ltd.
Moody's expects China Life to maintain its commitment to the bank and to participate in its capital-raising plan.
As of Dec. 14, US$1 was equivalent to 6.61 Chinese yuan.