China Bank's ratings reflect its loan concentration and modest franchise relative to larger domestic banks, notwithstanding its strong niche in the Chinese Filipino SME market. The ratings also consider the bank's satisfactory balance sheet and earnings, which have helped support its resilience through economic cycles. Upward rating action may arise over the medium-term if this growth strategy translates into improved loan diversity and earnings profile, as well as a stronger domestic franchise.

On the other hand, negative rating pressures may also arise from rapid expansion, leading to a significant weakening of asset quality or capital. However, Fitch views this as a low prospect in the near term given its sound core capitalisation and management's prudent record.
China Bank's loan loss absorption capacity is strong relative to other rated Philippine banks, with a core Tier 1 capital adequacy ratio of 16% at end-March 2012. The bank's reserve coverage on non-performing loans was 135% and on foreclosed properties was 25% at end-2011, higher than the domestic peer average of around 100% and 15% respectively.

Fitch also expects China Bank to maintain a liquid balance sheet; its loan/deposit ratio was 67% at end-March 2012. Its retail base remains stable with individual depositors accounting for more than 70% of total deposits.

Earnings are underpinned by reasonably broad-based revenue flows, close oversight over operating costs and steady asset quality despite expansion over the last five to six years. However, profitability is likely to moderate in H212-2013 due to narrower margins from tight competition in the corporate loan sector. The bank's branch expansion to secure low-cost deposits has yielded some results but overall funding costs may remain higher in the medium term relative to larger domestic peers that have a higher current and savings account mix. Fitch expects China Bank's asset quality to be manageable in the near term, due to a steady domestic economy and its satisfactory underwriting track record which helps to partly mitigate loan concentration risk.

Its '4' Support Rating reflects a modest probability of government support for the bank, due to its systemic importance as a medium-sized Philippine bank with about 4% of banking system assets.