Xiaogan Rural Commercial Bank has become the first bank this year to have its issuer credit rating downgraded.

Recently, CCXI Global announced it has lowered the issuer credit rating of Xiaogan Rural Commercial Bank from A+ to A, and downgraded the credit ratings of its two issued Tier 2 capital bonds from A to A-. The rating downgrade is primarily attributed to pressures on the bank's asset quality, weakened profitability, and capital replenishment pressures.

According to incomplete statistics, a total of 56 banking institutions have had their issuer credit ratings lowered since 2016, with 45 occurring before 2022 and fewer instances after 2022. Without exception, these institutions are all small and medium-sized banks, with rural commercial banks accounting for nearly 90%.

The First Bank Downgraded This Year

Public information shows that Xiaogan Rural Commercial Bank (full name: Hubei Xiaogan Rural Commercial Bank Co., Ltd.) was established in July 2014, with its predecessor being the Xiaonan District Rural Credit Cooperative of Xiaogan City. Its registered capital at establishment was 660 million yuan.

Previously, the bank's issuer credit rating had consistently been maintained at A+ with a stable outlook. However, this status was recently broken as the bank faced a rating downgrade.

On July 3, CCXI Global released its 2026 follow-up rating report for Xiaogan Rural Commercial Bank, deciding to lower the bank's issuer credit rating from A+ to A while maintaining a stable outlook. It also lowered the credit ratings of its bonds "18 Xiaogan Nongshang Tier2 01" and "19 Xiaogan Nongshang Tier2" from A to A-.

This marks the first commercial bank to have its issuer credit rating downgraded this year.

CCXI Global pointed out that the downgrade of the issuer and bond credit ratings is primarily based on the following considerations: negative factors including the growth of non-performing and special-mention loans due to fluctuations in the regional economic environment, pressure on asset quality, a decline in the loan loss provision coverage ratio, a drop in net profit, weakened profitability, capital replenishment pressures, and increased risk management difficulty due to larger exposures to the real estate sector.

Regarding the industry distribution of loans, influenced by local resource endowments and economic structure, loans to the wholesale and retail trade and the construction sector account for a relatively high proportion in Xiaogan Rural Commercial Bank's portfolio, representing 14.82% and 13.26% of total loans respectively at the end of 2025. The bank's combined exposure to the real estate sector, construction sector, and residential mortgage loans accounted for 23.26% of total loans, indicating a significant exposure to real estate and related industries. Furthermore, the proportions of non-performing and special-mention loans within the construction sector loans were relatively high, at 4.55% and 3.98% respectively at the end of 2025.

In terms of asset quality, the report stated that the small, micro, and retail customers primarily served by Xiaogan Rural Commercial Bank have weaker risk resilience. In 2025, affected by macroeconomic fluctuations and other factors, some of the bank's wholesale and retail trade customers faced significant operational pressure, poor cash flow, and substantial repayment difficulties. Simultaneously, real estate enterprises encountered difficulties in sales collections, transmitting related risks to construction sector clients. Coupled with decreased stability in resident incomes leading to rising risks in personal loans, the bank's loan quality continued to face pressure.

Data shows that as of the end of 2025, Xiaogan Rural Commercial Bank's non-performing loan balance increased from 292 million yuan at the beginning of the year to 414 million yuan, and the non-performing loan ratio rose from 2.19% to 2.99%. Affected by the weakened repayment capacity of customers, the bank's special-mention loans grew rapidly in 2025, with their proportion of total loans climbing from 2.07% to 3.09%. "Considering that the actual operational conditions of customers with extended loans are weak, and related loans face the risk of deterioration, the bank's asset quality is under downward pressure," the report noted.

Due to the growth in non-performing loans and the substantial consumption of provision balances from large write-offs, as of the end of 2025, Xiaogan Rural Commercial Bank's loan loss provision coverage ratio significantly decreased by 38.62 percentage points from the beginning of the year to 126.95%, approaching the regulatory red line of 120%. CCXI Global stated that considering the significant downward pressure on the bank's asset quality and its weak loan loss provision coverage, its risk resilience is relatively weak.

It was noted that in February this year, according to a notice from the Xiaogan Supervision Branch of the National Financial Regulatory Administration, Xiaogan Rural Commercial Bank was fined 1.2 million yuan for violations including non-compliant approval procedures for major connected transactions, concealing non-performing loans through restructuring methods such as granting new loans to repay old ones, misappropriation of personal loan funds, and window-dressing of deposits and loans.

Over 50 Banks Downgraded in the Past Decade

Facing significant pressure on provision accrual, combined with slow growth in earning assets, narrowing net interest margins, and reduced investment income, Xiaogan Rural Commercial Bank's net profit declined, and its profitability weakened.

In 2025, while Xiaogan Rural Commercial Bank's various businesses continued to develop, the low growth rate of loans led to slow growth in earning asset scale. Influenced by factors such as LPR reductions, intensified interbank competition, and declining bond investment yields, the bank's return on earning assets decreased, with the net interest margin narrowing to 1.05%. It achieved net interest income of 233 million yuan for the year, representing a year-on-year decrease.

Simultaneously, Xiaogan Rural Commercial Bank's non-interest net income primarily consists of investment income. Affected by market interest rate fluctuations and reduced bond trading activity, the bank's net investment income sharply decreased from 492 million yuan to 125 million yuan in 2025, causing non-interest net income to plummet from 491 million yuan to 128 million yuan.

Affected by the above factors, Xiaogan Rural Commercial Bank's net operating income in 2025 was halved from the previous year's 737 million yuan to 360 million yuan, a year-on-year decrease of 51.12%. Net profit was 36 million yuan, a decline of 31.79% from the previous year's 53 million yuan. The average return on equity and average return on assets fell to 3.26% and 0.16% respectively, indicating a low level of profitability.

It is understood that Xiaogan Rural Commercial Bank primarily supplements capital through profit retention. However, due to weakened profitability, the bank's internal capital generation capability is weak.

In 2025, with slow growth in credit assets and a reduction in interbank assets and interbank certificate of deposit investments—and new investments mainly in low-risk-weight government bonds—the bank's risk-weighted asset balance slightly decreased. As of the end of the year, the bank's core tier 1 capital adequacy ratio increased by 0.22 percentage points from the beginning of the year to 9.04%.

However, due to the increase in non-performing loan balance, large-scale write-offs, and the reversal of impairment losses on debt investments, Xiaogan Rural Commercial Bank's excess loss provisions decreased. Additionally, the failure to exercise redemption rights on Tier 2 capital bonds issued in previous years led to a year-by-year decrease in the proportion eligible for inclusion in Tier 2 capital, resulting in a reduction in total capital. As of the end of the year, the bank's capital adequacy ratio decreased by 1.38 percentage points from the beginning of the year to 10.52%.

In fact, banking institutions facing rating downgrades similar to Xiaogan Rural Commercial Bank are not isolated cases.

According to statistics from Corporate Warning, a total of 56 banking institutions have had their issuer credit ratings lowered since 2016, with 45 occurring before 2022 and fewer instances after 2022. These institutions are all small and medium-sized banks without exception, with rural commercial banks accounting for nearly 90%.

In the view of industry insiders, there is a divergence in credit ratings among banking institutions. Banks with sound corporate governance and outstanding performance may have the potential for rating upgrades. Conversely, regional banks in areas with unreasonable industrial structures, deteriorating asset quality, and profitability pressures have a probability of being downgraded.

A rating downgrade may increase the financing costs and difficulty for the affected entity and impact its cooperative relationships with external institutions, thereby affecting business expansion. New bond issuances may also encounter difficulties. However, for the market, a rating downgrade is not the sole reference factor.

The report shows that CCXI Global also affirmed Xiaogan Rural Commercial Bank's relatively important position in the local financial system and its credit strengths such as good deposit stability. Furthermore, this rating action also considered the support provided to the bank by the Hubei Provincial Rural Credit Cooperatives Union.