HONG KONG, 31 March 2023. CSPI Ratings has affirmed Bank of China Limited’s (BOC) global-scale foreign-currency long-term issuer credit rating (LTICR) at ‘AA-’ and short-term issuer credit rating (STICR) at ‘A-1+’. The Outlook is Stable.

The LTICR reflect our view of an extremely strong willingness of extraordinary government support for the Beijing-based lender, if needed. This view considers BOC's state ownership as a whole, irreplaceable systemic importance, and key role to government’s policy implementation both domestically and internationally. The rating is one notch below CSPI’s sovereign rating on China (AA/Stable).

BOC’s LTICR incorporates a standalone credit profile (SACP) rating of ‘bbb+.’ This reflects the bank’s robust market franchise, good profit generation supported by business diversification, and stable loss-absorption buffer. It also considers BOC’s weaknesses in risk exposures to industries of weaker credit and susceptibility to market volatilities.

The stable outlook reflects our view that BOC will remain a fundamentally important component of China's financial system. As such, we expect the Chinese government will continue to demonstrate an extraordinarily strong willingness to provide support to BOC if needed.

We would consider downgrading BOC's long-term issuer credit rating if China's sovereign rating were to decline due to a weakening of the country's fiscal strength and/or a diminishment in the government's willingness to support BOC. The latter could be signaled by a substantial change in BOC's ownership or a shift in public policy priorities.

We would consider upgrading BOC's long-term issuer credit rating if China's sovereign rating were upgraded and/or the government's propensity to support BOC were to increase.

KEY RATING RATIONALE

Credit Strengths

Unwavering Government Support: We expect the Chinese government to demonstrate an extraordinarily strong willingness to support BOC in times of financial distress. As one of China's six major state-owned banks, BOC's long-term strategy is largely aligned with public policy objectives and blueprints. BOC's management has articulated a strategy focused on supporting the Chinese government's aims to buttress strategically significant industries, maintain financial and social stability, and advance key initiatives in economic recovery.

Robust Franchise Strength: BOC's market position benefits from its status as one of the world's and China's four largest banks in terms of total assets and deposits. BOC commands a solid and diversified deposit base, representing around 7.5% of China's total deposit market share at end-2021. The bank's franchise is further supported by its relatively extensive overseas branch network, providing greater diversification and capabilities to capture more cross-border businesses than domestic peers. As such, forecast the lender's overseas earnings to continue to harvest from foreign economies’ interest rate hikes in 2023-2024.

BOC, along with ICBC and CCB, is distinct among Chinese banks in its capacity to serve large client groups with global operations. The bank possesses a stronger overseas franchise and more expansive international service network than major domestic competitors. Tasked with policy mandates to promote economic growth and industry developments, BOC is positioned to enjoy the benefits from facilitating international settlements and cross-border initiatives. BOC also benefits from liquidity support from Chinese authorities and plays a key role in channeling funding across the financial system.

Good Profitability Diversification: BOC’s profitability will continue to remain stable as revenue diversification offsets margin pressures and rising credit costs. While BOC's returns on average shareholder’s equity and average assets have trended down in recent years, fee and commission income as percentage of total operating income has performed steadily at about 13-14% with consistent contribution from the agency services and settlement businesses.

In geographic terms, BOC's overseas operations have contributed over 21% of pre-tax profit, providing the bank a competitive advantage of earning mix. We expect BOC's net interest margin (NIM) to remain around 1.7%-1.8% in 2022-2024 as the bank flexibly allocates higher-yielding assets. In 2021, the bank’s NIM was 1.75%, a decrease of 10 basis points compared with that of the prior year, mainly reflecting declining yields from RMB loans in mainland China.

Stable Lost-absorption Buffer: We forecast BOC to maintain a steady capital profile over the next 12-18 months, given its long track record of keeping a healthy loss-absorption buffer. The bank registered handsome capitalization with a common equity tier 1 (CET1) capital ratio of 11.3%, tier 1 capital ratio of 13.3%, and total capital adequacy ratio (CAR) of 16.5% at end-2021.

Chinese regulators require systemic banks such as BOC to hold additional capital surcharges and leverage ratios to strengthen stability and control systemic risks. China's Total Loss-Absorbing Capacity (TLAC) rules, aligned with international standards, imposes additional capital surcharges and minimum TLAC requirements of risk-weighted-assets (RWA) and leverage ratio exposure (LRE) for enlisted D-SIBs to further boost their capital strength against unexpected crises. We believe BOC will dynamically adjust its balance sheet and replenish capital buffer with qualified tools if needed.

Credit Weaknesses

Large Industry Exposures: We expect BOC to show a moderate hike in its non-performing loan (NPL) ratio for the coming 12-18 months, considering the uncertainties around bank’s large exposure to sectors that face challenges during the pandemic lockdown. In 2021, the overall NPL ratio decreased to 1.33% from 1.46% of the previous year. While the bank's overall NPL ratio declined to 1.33% at end-2021 from 1.46% at end-2020, we note there’s around a third of BOC's special mention loans (SML) migrated to NPLs.

Vulnerability to Economic Volatilities: As a major state-owned bank, BOC is mandated to support economic growth and industry development, which exposes it to counterparts and borrowers of weaker credit quality. BOC will therefore remain subject to volatility arising from a gloomy economic outlook or delayed recovery. Deteriorating global conditions or a protracted domestic downturn could undermine its asset quality.

Note: ratings mentioned above are unsolicited.

ANALYSTS CONTACT

Primary Analyst

Kaichung Lee

+852 3615 8340

kaichung.lee@cspi-ratings.com

Secondary Analyst

Ke Chen, PhD

+852 3615 8316

ke.chen@cspi-ratings.com

Committee Chair

Winnie Guo

+852 3615 8344

winnie.guo@cspi-ratings.com

MEDIA CONTACT

media@cspi-ratings.com

RATING SERVICE CONTACT

Allen Wei

+852 3615 8324

allen.wei@cspi-ratings.com

Date of Relevant Rating Committee: 20 March 2023

Additional information is available on www.cspi-ratings.com

Related Criteria

Global Banking Rating Criteria (16 August 2019)

Government-Related Entities Rating Criteria (31 August 2018)

Rating Symbols and Definitions (7 May 2018)

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