HONG KONG, 31 December 2020. Pengyuan International has affirmed Bank of China Limited’s (BOC) global-scale foreign-currency and local-currency long-term issuer credit rating (LTICR) at ‘A+’ and concurrently assigned a first-time global-scale short-term issuer credit rating (STICR) of ‘A-1’ to BOC. The Outlook on the ratings is Stable.

The ratings incorporate a standalone credit profile (SACP) of ‘bbb’, which reflects the bank’s strong market position, adequate profitability, and sufficiently robust capital buffer. We expect BOC to maintain its asset quality, and sufficient earnings and capitalization, while the bank faces uncertainties brought on by the COVID-19 pandemic and China-US tensions. In addition, we are of the view that the Chinese government (‘AA/AA+’, Stable) has a very strong willingness to support BOC’s senior unsecured creditors in times of need, given the bank’s ownership structure, systemic importance to the financial system, and critical quasi-policy role.

The Stable Outlook reflects our expectation that BOC’s credit profile will remain stable over the next 12-24 months. The outlook on BOC also reflects our view that the Chinese government’s capacity and willingness to provide extraordinary support for BOC remains unchanged during this period.

We would consider a downgrade if we believe the government’s willingness to support BOC shows signs of weakening – which may be reflected by a material change in ownership or public policy – or if China’s sovereign rating is downgraded.

We would consider an upgrade if China’s sovereign rating is upgraded, given that there is no material change in BOC’s ownership structure and/or systemic importance.

Rating Rationale

Credit Strengths

• Strong Market Position. BOC has a very strong market position across main business lines. The bank is the fourth largest commercial bank in China based on asset size, accounting for around 8% of loans and deposits domestically as of 30 June 2020. Compared with other Chinese state-owned banks, BOC has better geographic diversification, with significant profit derived from outside mainland China. This diversification contributes to BOC’s business stability and places the bank in a unique position to facilitate capital into and out of the mainland China.

• Sufficiently Robust Capital Buffer. As a global systemically important bank (G-SIB), BOC has a strong track record of meeting the regulator’s capital and liquidity requirements. Our expectation is for the bank to maintain a common equity tier-1 (CET-1) ratio of around 11%, a tier-1 ratio of 12% and total capital adequacy ratio (CAR) of 15% from 2021-2022. In our opinion, this level of capitalization is sufficient to withstand the potential shocks from the economic slowdown we anticipate over this period.

• Strong Funding and Liquidity Profile. BOC’s stable funding profile is supported by the bank’s strong deposit franchise in mainland China and Hong Kong. Consumer deposits fund about 77% of the bank’s total liability as of 30 June 2020. In addition, we believe BOC will maintain a strong ability to raise wholesale funding as required. The bank maintains a strong liquidity profile with a healthy loan-to-deposit ratio of 81% in our analytical horizon. BOC’s liquidity coverage ratio and net stable funding ratio are also well above minimum regulatory requirements.

• Very Strong Willingness of the Chinese Government to Provide Extraordinary Support. BOC has been designated as a G-SIB since 2011. In our opinion, there is a high certainty that BOC would be designated as a domestic systemically important bank (D-SIB) as well, when that scheme is officially rolled out in China. The bank’s systemic importance suggests that its potential failure may be detrimental to the stability of the domestic and global financial systems. BOC’s long-term strategy is closely aligned with the central government’s social and economic objectives. This is evident from the bank’s contribution to efforts such as Renminbi (RMB) internationalization, micro finance, and the belt-and-road initiative. This strategic positioning and the bank’s ownership and management structure inform our view that the government has a very strong incentive to provide liquidity and capital support in times of need.
  

Credit Weaknesses

• Challenging Earnings Outlook. We expect BOC’s return on average equity (ROAE) and return on average assets (ROAA) to be around 9.3% and 0.8%, respectively, in the next two years. This may result from the combination of NIM contraction as yields fall, higher credit costs, and more stringent provisioning requirements under IFRS-9, which requires that the banks set aside reserves on a more proactive and forward-looking basis.

• Vulnerability to a Downturn in the Chinese Economy: As the fourth largest bank domestically, BOC’s financial performance is necessarily subject to a high degree of industry-level volatility. We also have some concerns over the bank’s potential nonperforming loan (NPL) exposure during a material adverse downcycle. In particular, we note that around 21% of the bank’s special-mention loan (SML) ratios have, in the past few years, migrated to the NPL category.

Note: Ratings mentioned in this press release are unsolicited ratings.

ANALYSTS CONTACT

Primary Analyst
Ke Chen, PhD

+852 3615 8316
ke.chen@pyrating.com
Secondary Analyst
Winnie Guo
+852 3615 8344
winnie.guo@pyraing.com
Committee Chair
Brian Lam
+852 3615 8339
brian.lam@pyrating.com

MEDIA ENQUIRIES
Charley Lui
+852 3615 8296
charley.lui@pyrating.com
RATING SERVICES ENQUIRIES
Gloria Song
+852 3615 8324
gloria.song@pyrating.com

Date of Relevant Rating Committee: 23 December 2020

Additional information is available on www.pyrating.com

Related Criteria

Global Banking Rating Criteria (16 August 2019)
Government-Related Entities Rating Criteria (31 August 2018)

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Unsolicited ratings – non-participative rating – not disclosed

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