OREANDA-NEWS. S&P Global Ratings said today that it had assigned its 'BBB' long-term and 'A-2' short-term issuer credit ratings to Guotai Junan International Holdings Ltd. (GTJAI). The outlook on the long-term rating is stable. At the same time, we assigned our 'cnA' long-term and 'cnA-2' short-term Greater China regional scale ratings to the Hong Kong-based securities company.

The rating on GTJAI reflects our view of the company's status as a core subsidiary of Guotai Junan Securities Co. Ltd. (GTJA: BBB/Stable/A-2; cnA/cnA-2). We expect potential extraordinary government support to the parent to be indirectly available to GTJAI. We therefore equalize our ratings on GTJAI with that on GTJA, which is the second-largest securities company in China by revenue and the third-largest by net assets as of end-December 2015.

Our assessment of GTJAI's group status reflects the company's key role within, and meaningful business contribution to, the wider parent group. GTJAI is an intermediary holding company within the parent group in which GTJA has 65.1% ownership. The Hong Kong subsidiary is the sole international business platform for the group, serving as the gateway for the parent's international expansion. It provides brokerage, financing, underwriting, asset management, and various financial advisory services to meet global demands of the wider group's clients. GTJAI accounted for 6.9% of the group's total assets, 6.3% of net assets, and 5.1% of revenue in 2015.

"We expect GTJAI's contribution to the parent group to increase over the next one to two years," said S&P Global Ratings credit analyst Liang Yu. "The company should benefit from the parent's support for business expansion, client referral, and cross-selling opportunities."

On a stand-alone basis, we believe GTJAI's credit profile is comparable to that of its parent. GTJAI benefits from significantly lower economic risk and industry risk in Hong Kong than in mainland China, and the company's solid capital position. These strengths are tempered by GTJAI's small market share and significant reliance on short-term funding for its margin finance business.

We expect GTJAI to maintain its relatively simple business structure and modest risk appetite. Such an approach has helped the company's financial performance to be less volatile than that of other Hong Kong-based subsidiaries of Chinese securities firms. GTJAI's business prudence and modest risk appetite helped limit its credit and market losses in the turbulent second half of 2015, and preserved its strong capitalization.

We do not expect GTJAI's risk profile to change significantly in 2016. The company has adopted a client-oriented business model, with interest income and fees dominating its revenue mix. The financing business accounted for almost half of GTJAI's total revenue in 2015, followed by brokerage, corporate finance, FICC (fixed income, currency, and commodities), and asset management.

GTJAI is likely to continue to rely heavily on short-term debt and bank borrowing to fund its margin lending business. The company issued US$300 million in perpetual bonds in June 2016, which should improve its funding and liquidity metrics.

"The stable outlook on GTJAI reflects the outlook on GTJA and our view that GTJAI will maintain its core status to the group over the next 24 months," said Ms. Yu. "We expect GTJAI to remain an indirect beneficiary of any potential extraordinary government support to the parent. As such, the rating on GTJAI will move in tandem with that on GTJA."