HONG KONG, 14 September 2023. CSPI Ratings has affirmed Bank of Communications Co., Ltd.’s (BOCOM or the Bank) global-scale long-term issuer credit rating (LTICR) of ‘A+’ and short-term issuer credit rating (STICR) of ‘A-1’. The Outlook is Stable.
The LTICR incorporates a standalone credit profile (SACP) rating of ’bbb’ which reflects the bank’s solid market franchise, adequate capitalization, satisfactory asset quality, and good funding and liquidity. It also takes into account BOCOM’s moderate profitability as well as its susceptibility to economic volatility with continuous pressures on asset quality and profitability. In addition, we believe that the Chinese government (‘AA’/Stable) has a very strong willingness to support BOCOM in times of need, considering the state ownership, the bank’s strategic importance to the financial system, and the lender’s quasi-policy role in government initiatives.
The Stable Outlook reflects our view that the Bank will remain an integral part of the Chinese financial system and, as such, the government will continue to have a very strong willingness to provide support.
We would consider downgrading the Bank if the foreign-currency LTICR of the sovereign is downgraded and/or if the government’s willingness to support noticeably weakens.
We would consider upgrading the Bank if the foreign-currency LTICR of China is upgraded and/or if the government’s willingness to support further strengthens.
KEY RATING RATIONALE
Credit Strengths
Very Strong State Support: We forecast the government’s willingness to support BOCOM in times of need to be very strong, given the bank’s state ownership, strategic importance to the government, and a record of direct state support. Being one of the six large state-owned banks (LSOBs) with government holdings of 23.88% under the Ministry of Finance (MOF) and 15.54% under the National Council for Social Security Fund (SSF), the bank was designated as a domestic systemically important bank (D-SIB) in 2021 and 2022 due to its leading market shares. It is also tasked with policy functions and sovereign mandates for promoting economic growth and facilitating industry development. The bank received various forms of support from the central government, including capital injection, non-performing asset divestment, and financial subsidies.
Solid Market Franchise: We believe BOCOM’s market franchise will remain stable in the next 12-24 months with its ranking staying at about fifth to sixth largest among its Chinese peers in terms of total assets size, loans/deposits amount, and shareholder’s equity base. These warrant its status as a domestic systemically important bank (D-SIB). With a long history of operation and high brand awareness, BOCOM has established a wide network of 271 domestic and overseas branches, providing a full range of comprehensive financial services. It had a domestic deposit market share of around 3% in recent years, which was relatively low compared to LSOB peers but significantly higher than other domestic banks.
Adequate Capitalization: We see BOCOM’s capital profile as adequate, with a common equity tier 1 (CET1) capital ratio of 10.03%, tier 1 capital ratio of 12.07%, and total capital adequacy ratio (CAR) of 14.79% on 31 March 2023, compared to regulatory requirements on bucket three of D-SIBs at 8.25%, 9.25%, and 11.25%, respectively. Despite an average asset expansion of 9.5% per year over the last three years, BOCOM’s capital position was largely stable thanks to moderate profitability and the issuance of capital instruments. In 2022, with risk-weighted assets increasing by 13.15% and the issuance of Tier 2 capital bonds totaling RMB 80 billion, the bank’s capital ratios had a modest decrease of 50-80 bps and became slightly lower than the sector average but remained higher than the regulatory requirements.
Satisfactory Asset Quality: We expect BOCOM to continue to report satisfactory asset-quality metrics due to manageable NPL formation on the back of continuous economic recovery and the bank’s NPL resolution. BOCOM’s non-performing loan (NPL) ratio improved to 1.35% at the end of 2022 from 1.48% at the end of 2021 despite the real-estate NPL ratio rising to 2.80% from 1.25%. Its NPL ratio was compared favorably to the sector average of 1.63% but weaker than the LSOB average of 1.27%. Its direct exposure to property developers increased to 7.13% of loans at the end of2022 from 6.40% at the end of 2021. Further attention will be needed to the bank’s exposure to the real-estate sector and the changes in the real-estate NPL ratio.
BOCOM’s special mention loan (SML) ratio increased to 1.44% at the end of 2022 from 1.35% at end-2021 but remained lower compared to the sector average of 2.25% and the LSOB average of 1.55%. The provision coverage ratio increased to 180.68% at the end of 2022 from a low of 143.87% at the end of 2020 but remained relatively low compared to sector peers and LSOB peers. BOCOM’s percentage of loans overdue more than 3 months also declined to 0.78% at the end of 2022 from 0.98% at the end of 2021.
BOCOM’s financial investment amounted to RMB 3.96 trillion at the end of 2022, up 12% from last year. Among the investment portfolio, bond investments accounted for 86%, including 66% in bonds with minimal credit risk issued by the government, central bank or policy banks. Bonds issued by banks or other financial institutions, corporates and public sector entities accounted for 14%, 5%, and 1%, respectively. The remaining 14% of the portfolio was invested in equity instruments and others. As of 31 Dec 2022, the bank’s investment assets in the second and third stage of the expected credit loss model amounted to RMB 6.78 billion and RMB 2.19 billion, respectively. The credit provision for investment assets totaled RMB 2.76 billion at the same time. We expect further provision will be needed.
Good Funding and Liquidity: We expect BOCOM’s funding and liquidity position to be broadly stable, supported by its good funding franchise and large retail deposit base. As of 31 Dec 2022, BOCOM had customer deposits of RMB 7.95 trillion, which accounted for 66% of its liabilities. Its retail deposits increased by 23% in 2022 and accounted for 38% of its total deposits. It reported a loan-to-deposit ratio of 89.8% as of 31 Dec 2022, compared to 91.1% at the end of 2021. Its liquidity coverage ratio and net stable funding ratio remained solid at 122% and 107%, respectively.
We expect BOCOM and other large state-owned banks to benefit from the risk aversion of market funds when overall confidence in the financial sector weakens. Hence, we believe they will have stronger and more stable liquidity positions in stressed market conditions compared to other small and medium-sized banks whose funding is more susceptible to market shocks.
Credit Weakness
Moderate Profitability: BOCOM is expected to consistently report moderate profitability with a lower Net Interest Margin (NIM) and a lower cost-income compared to the sector average and LSOB peers. In 2022, the bank’s corporate business accounted for 64% of its total loans and 64% of its customer deposits, gradually down from 68% and 70% in 2017, respectively, but remained significantly higher than its LSOB peers. In addition, the bank’s higher reliance on interbank funding also weighs on its NIM. Customer deposits only accounted for about 67%-69% of its total funding, approximately 10%-20% lower than its LSOB peers.
In 2022, BOCOM’s NIM slid down to 1.48% from 1.56% in 2021, as the average yield of loans was down to 4.21% from 4.33% due to cuts of the central bank’s loan prime rates (LPR) amid a government call to lower costs for real economy growth. Meanwhile, the average cost of deposits edged up to 2.19% in 2022 from 2.10% in 2021, driven by intensified competition in the deposit market and increased fixed-term deposits. The bank’s credit cost declined to RMB 62.31 billion from RMB 68.69 billion in 2021. The return on average assets (ROAA) and average shareholder’s equity (ROAE) slightly declined to 0.75% and 10.33% from 0.80% and 10.76% in 2021, respectively.
Susceptible to Economic Volatilities: As one of the six LSOBs, BOCOM will continue to be subject to a high degree of market volatility due to its role in serving the real economy and stabilizing the financial system. BOCOM’s loan portfolio tracks closely with that of the broader market, with large exposure to manufacturing, transportation, and leasing, and commercial services representing 11.46%, 11.28%, and 10.00% of total loans at end-2022, respectively.
The complex and challenging international and domestic situations are likely to continue to put pressure on BOCOM’s asset quality and earnings. The frequent outbreaks of international geopolitical conflicts and the simmering Ukraine crisis, spillover effects of interest rate hikes in developed economies, and risk events at Silicon Valley Bank and Credit Suisse may negatively affect the world’s economic growth and increase the volatility of global financial markets. Domestically, the relatively weak foundation of economic recovery, the mounting pressure in the property and LGFV sectors, the increasingly stringent regulatory requirements, and the intensifying market competition increase the difficulties for BOCOM to control its asset-quality risk and deliver stable earnings.
Note: The ratings mentioned in this press release are unsolicited ratings.
ANALYST CONTACTS
Primary Analyst
Ke Chen, PhD
+852 3615 8316
Secondary Analyst
Long Qing, CFA
+86 755 2348 3690
Committee Chair
Winnie Guo
+852 3615 8344
MEDIA CONTACT
RATING SERVICE CONTACT
Allen Wei
+852 3615 8324
allen.wei@cspi-ratings.com
Date of Relevant Rating Committee: 31 August 2023
Additional information is available on www.cspi-ratings.com
Related Criteria
Global Bank Rating Criteria (16 August 2019)
Government-Related Entities Rating Criteria (31 August 2018)
Rating Symbols and Definitions (7 May 2018)
DISCLAIMER
Unsolicited ratings – non-participative – disclosed and results not affected
CSPI Credit Ratings Company Limited (“CSPI Ratings”, “Pengyuan”, “the Company”, “we”, “us”, “our”) publishes credit ratings and reports based on the established methodologies and in compliance with the rating process. For more information on policies, procedures, and methodologies, please refer to the Company’s website www.cspi-ratings.com. The Company reserves the right to amend, change, remove, publish any information on its website without prior notice and at its sole discretion.
All credit ratings and reports are subject to disclaimers and limitations. CREDIT RATINGS ARE NOT FINANCIAL OR INVESTMENT ADVICE AND MUST NOT BE CONSIDERED AS A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITIES AND DO NOT ADDRESS/REFLECT MARKET VALUE OF ANY SECURITIES. USERS OF CREDIT RATINGS ARE EXPECTED TO BE TRAINED FOR INDEPENDENT ASSESSMENT OF INVESTMENT AND BUSINESS DECISIONS.
CREDIT RATINGS ADDRESS ONLY CREDIT RISK. THE COMPANY DEFINES THE CREDIT RISK AS THE RISK THAT THE RATED ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS MUST NOT BE CONSIDERED AS FACTS OF A SPECIFIC DEFAULT PROBABILITY OR AS A PREDICTIVE MEASURE OF A DEFAULT PROBABILITY. Credit ratings constitute the Company’s forward-looking opinion of the credit rating committee and include predictions about future events which by definition cannot be validated as facts.
For the purpose of the rating process, the Company obtains sufficient quality factual information from sources which are believed by the Company to be reliable and accurate. The Company does not perform an audit and undertakes no duty of due diligence or third-party verification of any information it uses during the rating process. The Company had access to the accounts and other relevant public documents of the rated entity or its related party. The Company has examined the quality of information used in the rating process in accordance with established process and it is satisfied with the quality of information used.
Users of the Company’s credit ratings shall refer to the rating symbols and definitions published on the Company’s website. Credit ratings with the same rating symbol may not fully reflect all small differences in the degrees of risk, because credit ratings are relative measures of the credit risk.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF ANY INFORMATION GIVEN OR MADE BY THE COMPANY IN ANY FORM OR MANNER. In no event shall the Company, its directors, shareholders, employees, representatives be liable to any party for any damages, expenses, fees, or losses in connection with any use of the information published by the Company.
The Company reserves the right to take any rating action for any reasons the Company deems sufficient at any time and in its sole discretion. The publication and maintenance of credit ratings are subject to availability of sufficient information.
The Company does not receive compensation for its unsolicited credit ratings. The rated entity did not participate in the rating process. The unsolicited credit rating has been disclosed to the rated entity or to its related party and, following such disclosure, the credit rating result has not been amended before being issued.
The Company reserves the right to disseminate its credit ratings and reports through its website, the Company’s social media pages and authorised third parties. No content published by the Company may be modified, reproduced, transferred, distributed or reverse engineered in any form by any means without the prior written consent of the Company.
The Company’s credit ratings and reports are not intended for distribution to, or use by, any person in a jurisdiction where such usage would infringe the law. If in doubts, please consult the relevant regulatory body or professional advisor and ensure compliance with applicable laws and regulations.
In the event of any dispute arising out of or in relation to our credit ratings and reports, the Company shall have absolute discretion in all matters relating to resolving the dispute, including but not limited to the interpretation of disclaimers and policies.
Copyright © 2023 by CSPI Credit Ratings Company Ltd. All rights reserved.