HONG KONG, 9 April 2024. 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.
BOC’s LTICR incorporates a standalone credit profile (SACP) rating of ‘bbb+’. This reflects the Bank’s stronger overseas franchise, resilient profitability supported by business diversification, and stable capital buffer. It also considers BOC’s weaknesses in risk exposures and susceptibility to market volatilities. In addition, we believe that the Chinese government (‘AA’/Stable) has an extremely strong willingness to support BOC in times of need, given the state ownership, the Bank’s irreplaceable importance to the financial system, and its key role in government initiatives.
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 is downgraded and/or if the government’s willingness to support noticeably weakens.
We would consider upgrading BOC's long-term issuer credit rating if China's sovereign rating were upgraded and/or the government's willingness to support BOC were to increase.
KEY RATING RATIONALE
Credit Strengths
Extremely Strong Government Support: We expect the Chinese government to demonstrate an extraordinarily strong willingness to support BOC in times of need. As one of China's six major state-owned banks, BOC's long-term strategy is largely aligned with public policy objectives. 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. Given the long history of Chinese government support and its quasi-policy role, we believe Bank’s important position will continue over the medium to long term.
Stronger Overseas Franchise: BOC’s market franchise is supported by its global network, with more extensive overseas branches, and greater capabilities to capture more cross-border businesses than state-owned peers. As of the end of 2022, BOC had 531 overseas institutions spanning across 62 countries and regions globally, with the number of overseas institutions and personnel and regional coverage consistently ranking first among the state-owned peers. We believe that BOC will maintain its status as a global systemically important bank (G-SIB) and a domestic systemically important bank (D-SIB) in China, considering it ranks as the fourth largest bank in the world and China in terms of its total assets.
Good Profitability Benefits from Diversification: BOC’s profitability will continue to be resilient as the bank’s diversification benefits offset the pressures of margin compression in the onshore market. The asset yield increased by 11 basis points to 3.36% in 2022 due to the interest rate hikes overseas. BOC’s net interest margin (NIM) rose from 1.75% to 1.76%, while state-owned peers’ NIMs experienced varying degrees of decline during 2022.
While BOC’s cost-income ratio decreased to 27.88% in 2022, driven by the management’s stringent cost control and optimization of expense structure, in terms of geographical distribution, BOC’s overseas business generated around 20% of the group’s profit before tax, providing the Bank a competitive advantage in earning mix.
Stable Loss-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 11.29%, a tier 1 capital ratio of 13.56%, and a total capital adequacy ratio (CAR) of 17.13% as of 30 June 2023.
Chinese regulators require systemic banks, such as BOC, to hold additional capital surcharges and leverage ratios to maintain stability and control systemic risks. China's Total Loss-Absorbing Capacity (TLAC) rules, aligned with international standards, impose 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. In January 2024, BOC announced its decision to issue TLAC non-capital bonds in the next two years, with a scale of no more than RMB150 billion.
Credit Weaknesses
Vulnerability to Economic Volatilities: As a major state-owned bank, BOC will continue to be subject to a high degree of market volatility, as the Bank is tasked with policy mandates to support economic growth and industry developments. BOC’s loan portfolio tracks closely with that of the broader market, with large exposure to commercial services, manufacturing, and transportation, representing 14.15%, 12.44%, and 10.84% of total loans at the end of 2022, respectively.
The complex and challenging international and domestic situation is likely to continue to put pressure on BOC’s asset quality and earnings. The intensified international geopolitical conflicts and risk events at Silicon Valley Bank and Credit Suisse may increase the volatility of global financial markets. Major developed economies continued to tighten monetary policy, albeit with a slowdown in interest rate hikes. Domestically, the slow recovery of the domestic macroeconomy, the mounting pressure in the property and LGFV sectors, and the tightening of financial regulation have led to the credit risk exposure in certain regions and industries.
Note: The ratings mentioned above are unsolicited.
ANALYSTS CONTACT
Primary Analyst
Tingting Qiao
+852 59508746
tingting.qiao@cspi-ratings.com
Secondary Analyst
Stella Shi
+86 755 8287 2106
Committee Chair
Ke Chen, PhD
+852 3615 8316
MEDIA CONTACT
Date of Relevant Rating Committee: 27 March 2024
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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