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FINANCIAL INSTITUTIONS

CREDIT OPINION26 May 2017

Update

Contacts

Sean Hung [email protected]

Yifan Chen 852-3758-1597Associate [email protected]

Nicholas Zhu, Ph.D. 86-10-6319-6536VP-Senior [email protected]

Minyan Liu 852-3758-1553Associate [email protected]

ICBC Financial Leasing Co., Ltd.Update After Rating Action

Summary Rating RationaleOn 24 May 2017, we affirmed ICBC Financial Leasing Co., Ltd's (ICBC Leasing) long-termissuer rating of A1. At the same time, we revised the outlook to stable from negative,following similar rating action on the company's parent, Industrial and Commercial Bank ofChina Limited (ICBC, A1 stable).

ICBC Leasing's A1 long-term issuer rating incorporates the company's ba3 standalone creditstrength and an eight-notch uplift, based on our assumption of support from its parent, ICBC.

The A1 rating is based on ICBC Leasing's strategic importance to, and linkages with, ICBC.ICBC has full ownership of the company. Since establishing the leasing subsidiary, ICBC hasprovided considerable support in the form of business referrals, risk management systems,information platforms, several rounds of capital injections and funding access. We believethat the amount of extraordinary parental support ICBC Leasing would receive under asituation of stress has increased in the context of the company's management control,business development, operations and regulatory framework over the past few years.

The ba3 standalone credit strength takes into account the leading franchise that ICBCLeasing has quickly built in the rapidly growing leasing industry in China. The company alsohas good asset quality and has entered into diverse business lines. Moreover, the company'ssteady business and asset growth in the past two years has offset its risk management andcapital pressure.

While ICBC Leasing maintains its solid performance and is gradually diversifying its fundingsources, the company's standalone credit strength is constrained by three key considerations:

First, ICBC Financial Leasing depends heavily on short-term bank funding, thus creating asignificant maturity and interest rate mismatch between the company's assets and liabilities.Given ICBC Leasing's status as a core subsidiary of ICBC, the associated refinancing risk ismitigated by ICBC’s commitment to provide liquidity support. Nonetheless, the company'sbalance sheet structure does have intrinsic weaknesses that have been reflected in ourassessment of its standalone credit profile.

Second, the company is exposed to asset concentration, particularly in the citytransportation segment. While the underlying borrowers associated with this concentrationare mostly linked to local governments and the underlying assets are strategically important,the company's profitability and capital could be materially affected by single-name defaults.

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Third, ICBC Leasing continues to support the funding agreements of the company's managed offshore leasing platform via keepwellagreements and guarantees, which increase the company’s contingent liabilities and financial obligations.

Exhibit 1

ICBC Leasing's Total Assets and Asset Growth

83992

119060

149211

174184

184384

165493

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

2011 2012 2013 2014 2015 2016

RM

B m

illio

n

Source: Company data

Credit Strengths

» ICBC Leasing is a leading franchise affiliated to ICBC

» Performance of the company's onshore business is stable

» Asset risk is mitigated by integrated risk management

Credit Challenges

» Short-term borrowings and wholesale funding pose risks

» Rapid growth of overseas business may challenge risk controls

Rating OutlookThe outlook is stable and is in line with the stable outlook on the ratings of ICBC.

Factors that Could Lead to an UpgradeThe ratings of ICBC Leasing are aligned with the company's parent bank. The company's issuer ratings are unlikely to rise unless there isan upgrade of its parent's ratings.

We would consider raising ICBC Leasing's standalone credit strength if the company (1) maintains good asset quality; (2) reducesthe tenor mismatch between its assets and liabilities; (3) improves its profitability; and (4) strengthens its capital ratio relative to itsmanaged assets.

Factors that Could Lead to a DowngradeThe ratings of ICBC Leasing are aligned with the ratings of the company's parent. Any rating action on the parent would likely result inrating action on the company.

The ratings of ICBC Leasing could also be downgraded if we observe (1) weakening liquidity and capital support from the company'sparent; (2) a declining business relationship and management control of the parent; or (3) a significant reduction of ICBC shareholdingto below 50.1%.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 26 May 2017 ICBC Financial Leasing Co., Ltd.: Update After Rating Action


The company's standalone credit strength could be lowered in case of (1) deteriorating asset quality and rising credit costs; (2)weakening liquidity and funding profiles; and (3) insufficient capital.

Detailed Rating ConsiderationsA leading franchise affiliated with ICBCICBC Leasing is the largest leasing company in China by assets, with total assets of RMB177 billion as of the end of June 2016.

Established in 2007, ICBC Leasing started off with equipment leasing and subsequently expanded into other business segments, such asaircraft, shipping, ocean engineering, railway transportation, water and gas supplies. Equipment leasing remains the company's largestbusiness by assets and revenue contribution.

To develop its business, the company has leveraged its relationship with its parent, ICBC, which has a vast network and strong franchisein China.

The company is incorporated in Tianjin, which (amid its efforts to position itself as an important economic hub), has been offeringfavorable policies to leasing companies.

Moderate growth rate to reduce pressure on the company's capital adequacyICBC Leasing has a moderate capital position. The company's leverage has remained stable, as its parent has repeatedly injectedcapital to support growth and meet regulatory guidelines. ICBC Leasing started with a RMB2 billion capital position in 2008 and thecompany's paid-in capital increased to RMB11 billion as of the end of 2016, after a series of capital infusions by its parent. The companyis currently not required to pay dividends to its parent.

ICBC Leasing's total asset growth slowed to around 6% in 2015 from 42% in 2012. This moderate asset growth is in line with theoverall economic slowdown in China. The slowdown also reflects significant exposure of the company’s onshore business to clientswith public or semi-public functions (such as transportation, urban development, water and gas supplies, which are mainly financialleasing businesses). As of the end of 2016, the company’s total assets decreased 10% to RMB165.5 billion from the end of 2015.

As a result of ICBC Leasing’s slowed asset growth and stable profitability, the company's capital adequacy can be supported by itsinternal capital generation. According to our calculation, the company’s ratio of tangible common equity to tangible managed assetsincreased to 13.7% as of the end of 2016 from 11.05% as of the end of 2015 and 10.38% as of the end of 2014. This increase was inline with its peers.

Asset risk mitigated by integrated risk managementICBC Leasing's overall risk management framework is aligned with that of its parent. The company adheres to its parent's rules forinternal credit ratings, credit management and provisioning, as well as to capital requirements and provisioning rules set by the ChinaBanking Regulatory Commission (CBRC). All credits are managed through a centralized monitoring system by the company's parent.ICBC Leasing has no exposure to high-risk sectors such as highway and solar energy. The company also conducts a monthly creditinformation exchange with its parent.

We believe ICBC Leasing inherited its parent's risk culture and philosophy as the majority of the company's senior management andboard members have extensive experience working with ICBC. As a private company, ICBC Leasing does not have any independentdirectors.

ICBC Leasing has also improved the company's risk management practices by focusing on preserving lease asset values, while closelymonitoring the credit profiles of its customers and optimizing transaction structures for maximizing risk-adjusted returns.

Intrinsic volatility in ICBC Leasing's assets and cash flow could be high, because the company's exposures are susceptible to volatilityin economic growth. The company's targeted sectors for growth, such as aircraft, shipping and construction equipment, are closelycorrelated with the macro economy. This risk is partially offset by the company's business exposure to the more stable public servicesand the utility sectors, such as metro transportation, water and gas supplies, and power plants.



The company's client profile, which primarily includes medium-sized enterprises and large corporates, helps it mitigate credit risk.It also focuses on medium and large aircraft from the narrow-bodied series, with better liquidity and stronger market demand. Thecompany’s nonperforming asset ratio was around 0.81% as of the end of 2016, slightly increased from 0.7% as of the end of 2015.

Diversified business lines but lumpy public projects lead to concentration riskICBC Leasing enjoys a geographically diversified portfolio. The company's aircraft, shipping and ocean engineering businesses are mainlylocated in coastal areas and economically advanced cities in China. The company's equipment leasing clients, such as miners and powergenerators, are concentrated in central and inner China.

ICBC Leasing has spread into several business lines, with pillar projects in large cities as the company's main exposures. For instance,it has been providing funds to large-ticket assets, such as train cars, telecommunication equipment and signal systems for metrotransportation projects in provincial capitals and economically advanced cities.

A significant portion of the company's exposures is to clients with public or semi-public functions, such as transportation, urbandevelopment, water and gas supplies. While the underlying borrowers associated with these concentrations are mostly linked to localgovernments and the underlying assets are strategically important (such as subway equipment), the company's profitability and capitalcould be materially affected by single-name defaults.

Short-term borrowing and wholesale funding pose risksSimilar to the company's peers, ICBC Leasing depends heavily on short-term borrowings from banks, including inter-bank placementsand bank loans. Although eligible leasing companies have been allowed to issue debt since 2009, limited debt has been issued todate, given cost considerations and the lengthy process. The company has explored additional funding sources, including factoring andissuing wealth management products. However, these are not significant financing sources for Chinese leasing companies.

Intrinsic weakness in ICBC Leasing's liquidity, derived from the company's reliance on short-term borrowings, has led to asset liabilitymismatches. Rolling over short-term debt to support long-term assets is inherently risky and likely to cause an interest rate mismatch.

ICBC Leasing's weak liquidity is partially mitigated by (1) the company's affiliation with ICBC, which provides flexible funding andfacilitates strong relationships with financial institutions (credit limit from ICBC accounted for around 40% of ICBC Leasing's totalliabilities as of the end of 2016); (2) its diversified and well-established bank loan providers, including both large and small banks; (3)close monitoring of the company's liquidity position and cash flow projections on a daily basis.

Rapid growth of overseas business to challenge risk controlsFinancial leasing companies in China are not allowed to have overseas subsidiaries. In order to conduct offshore business, ICBC Leasinghas set up ICBC International Leasing Co. Ltd (ICBCIL, unrated), which was established in Ireland and is indirectly 100% owned by ICBCas the company's overseas business platform. Although there is no shareholding relationship between ICBC Leasing and ICBCIL, ICBCLeasing has management control over ICBCIL and its subsidiaries via a service agreement signed in 2010.

In the past, ICBC Leasing has also demonstrated strong willingness to support some of ICBCIL's and its subsidiaries' financial obligationsby providing guarantees for syndicated loan facilities and keepwell agreements for bonds. For example, in March and November2015, ICBC Financial Leasing provided a keepwell agreement for notes issued by ICBCIL Finance Co., Limited, which is a subsidiary ofICBCIL. As the business of ICBCIL is developing rapidly, we expect ICBC Leasing might face challenges with regard to the company'srisk controls for its overseas business. In particular, we expect contingent liabilities and financial obligations with regard to ICBICIL mayincrease.

Strong parental supportICBC Leasing is wholly owned by ICBC and is an integral part of its parent's strategy to provide customers with a full range of financialservices. Our support assumption considers ICBC Leasing's strong liquidity and capital support from ICBC, under the new regulation onfinancial leasing companies that was issued by the CBRC in March 2014.

To comply with the new regulation, ICBC Leasing amended its articles of association in December 2014. The new articles include anexplicit clause that requires ICBC (1) to provide the necessary support for ICBC Leasing's business development; (2) to provide liquidity



support in case the company experiences payment difficulty; and (3) to promptly replenish the company's capital levels in case ofoperational losses leading to capital loss or erosion.

Furthermore, over the past few years ICBC has demonstrated its strong willingness to provide additional support to ICBC Leasing'sgrowth and capital needs. In January 2014, ICBC injected RMB3 billion to bring ICBC Leasing's registered capital to RMB11 billion, whichhelped the company reduce its leverage and enhanced its capital adequacy ratio.

In addition, ICBC and ICBC Leasing have increased their business cooperation and client referral activities. All of ICBC Leasing's clientsin equipment leasing, who accounted for around 60% of the company's onshore leasing business as of the end of 2016, were ICBC’sclients.

Ratings

Exhibit 2Category Moody's RatingICBC FINANCIAL LEASING CO., LTD.

Outlook StableIssuer Rating A1ST Issuer Rating P-1

PARENT: INDUSTRIAL & COMMERCIAL BANK OFCHINA LTD

Outlook StableBank Deposits A1/P-1Baseline Credit Assessment baa2Adjusted Baseline Credit Assessment baa2Counterparty Risk Assessment A1(cr)/P-1(cr)Subordinate Baa3 (hyb)Pref. Stock Non-cumulative Ba2 (hyb)

Source: Moody's Investors Service



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