HONG KONG, 21 August 2024. 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 local and 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 local and foreign currency LTICR of the sovereign 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 government holdings of 23.9% under the Ministry of Finance (MOF) and 15.5% under the National Council for Social Security Fund (SSF). Being one of the six large state-owned banks, the bank has high systemic importance to China and the global banking industry. 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 12-18 months with its ranking staying at about fifth to sixth largest among its Chinese peers in terms of total assets and shareholder’s equity base. These warrant its status as a domestic systemically important bank (D-SIB). Due to the continuous expansion of its asset scale, the bank was enlisted as a global systemically important bank (G-SIB) for the first time in 2023. With a long history of operation and high brand awareness, BOCOM has established a wide network of over 2,800 domestic branches and 23 overseas branches, providing a full range of comprehensive financial services. It had a domestic deposit market share of around 2.9% in recent years, which was significantly higher than other domestic banks except state-owned big banks.
Adequate Capitalization: We see BOCOM’s capital profile as adequate, with a common equity tier 1 (CET1) capital ratio of 10.2%, a tier 1 capital ratio of 12.2%, and a total capital adequacy ratio (CAR) of 15.3% at the end of 2023. Despite an average asset expansion of 9.6% per year over the last three years, BOCOM’s capital position was largely stable thanks to moderate profitability and capital instrument issuances. In 2023, with a risk-weighted asset growth rate of 6.0% and the issuance of Tier 2 capital bonds totaling RMB30 billion, the bank’s capital ratios showed an improvement. We anticipate that the implementation of Total Loss-Absorbing Capacity (TLAC) and the additional capital requirements will set higher standards for its capital adequacy level.
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 1.33% at the end of 2023 from 1.35% at the end of 2022, despite the real-estate NPL ratio rising to 4.99% from 2.80%. Its NPL ratio was compared favorably to the sector average of 1.59% but weaker than the state-owned peers’ average of 1.25%. Its direct exposure to property developers was 6.2% of loans at the end of 2023. 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 and the proportion of overdue loans showed a slight increase during 2023. BOCOM has adopted prudent classification criteria for NPL identification. The bank’s domestic corporate loans overdue for more than 60 days have been included in non-performing loans, and the ratio of NPLs to loans overdue for more than 90 days has gradually increased from 87.5% in 2017 to 154.5% by the end of 2023. The bank's loan loss provisions have improved over the past three years, with a provision coverage ratio of 195.2% at the end of 2023, slightly lower than the industry average of 205.1%. BOCOM’s financial investment amounted to RMB4.1 trillion at the end of 2023. Among the investment portfolio, bond investment accounted for 88.2%, including 69.1% in bonds with minimal credit risk issued by the government, central bank, or policy banks.
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 the end of 2023, BOCOM had customer deposits of RMB 8.6 trillion, which accounted for 66.0% of its liabilities. Its retail deposits increased by 13.6% in 2023 and accounted for 39.3% of its total deposits. Its liquidity coverage ratio and net stable funding ratio remained solid at 128.5% and 113.0%, respectively. We anticipate that BOCOM and other large state-owned banks will benefit from the risk aversion of market funds when overall confidence in the financial sector deteriorates. Hence, we believe they will have a stronger and more stable liquidity profile in stressed markets than other small and medium-sized banks, whose funding is more vulnerable to market shocks.
Credit Weakness
Moderate Profitability: BOCOM is expected to consistently report moderate profitability with a lower net interest margin (NIM). This is mainly due to the bank’s historical focus on corporate banking, which usually has lower loan yields, higher funding costs. During 2023, the bank’s average balances of corporate business accounted for 65.7% of its total loans and 61.1% of its customer deposits, respectively. Although the proportion of corporate business has declined in recent years, it is significantly higher than that of other state-owned banks. In addition, the bank’s higher reliance on interbank funding also weighs on its NIM. Customer deposits only accounted for about 66%-67% of its total funding, approximately 10%-20% lower than that of other state-owned banks. In 2023, BOCOM’s NIM slid down to 1.28% from 1.48% in 2022, which is lower than the industry average of 1.69%. The return on average assets (ROAA) and average shareholder’s equity (ROAE) slightly declined to 0.69% and 9.68% from 0.75% and 10.34% in 2022, respectively. Despite the higher reliance on interbank funding and the contraction in NIM, BOCOM reported an operating income of RMB257.6 billion and a net income of RMB93.3 billion in 2023, up by 0.3% and1.4%, respectively, thanks to the expansion of interest-earning assets, increasing non-interest income, and lower credit costs.
Susceptible to Economic Volatilities: As a major state-owned bank, 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 12.0%, 11.4%, and 10.9% of total loans at the end of 2023, respectively. The complex and challenging international and domestic situation is likely to continue to put pressure on the bank’s asset quality and earnings. The intensified international geopolitical conflicts, macro-policy uncertainty in developed economies, may increase the volatility of global financial markets. 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 increased credit risk exposure in certain regions and industries.
Note: The ratings mentioned in this press release are unsolicited ratings.
ANALYSTS CONTACT
Primary Analyst
Tingting Qiao
+852 3615 8339
tingting.qiao@cspi-ratings.com
Secondary Analyst
Stella Shi
+86 755 8287 2106
Committee Chair
Larissa Wu
+852 3615 8317
MEDIA CONTACT
Rating Services Contact
Allen Wei
+852 3615 8324
allen.wei@cspi-ratings.com
Date of Relevant Rating Committee: 14 August 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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