HONG KONG, 3 March 2022. Pengyuan International has upgraded Bank of China Limited’s (BOC) global-scale foreign-currency long-term issuer credit rating (LTICR) to ‘AA-’ from ‘A+’, one notch below China’s sovereign rating (AA/Stable). At the same time, we have also upgraded the bank’s short-term issuer credit rating (STICR) to ‘A-1+’ from ‘A-1’ accordingly. The Outlook is Stable. The upgrade is primarily underpinned by the change in our assessment of the Chinese government’s willingness to extend extraordinary support to the bank, to Extremely Strong from Very Strong, according to the recent update of the government-related entities (GRE) criteria published on 4 February 2022.
BOC’s LTICR incorporates a standalone credit profile (SACP) of ‘bbb+’, which is edged up from ‘bbb’ as driven by the upgrade of China’s Banking System Credit Index (BSCI) to ‘bbb’ from ‘bbb-’. The SACP captures BOC’s strong market franchise, reasonable profitability, and resilient capital buffer. It also considers the bank’s weaknesses in asset quality and susceptibility.
The Stable Outlook reflects our expectation that the Chinese government’s capacity and willingness to provide extraordinary support for BOC remain unchanged over the next 12-18 months.
We would consider lowering the bank’s rating if China’s sovereign rating is downgraded and/or if the government’s willingness to support BOC shows signs of weakening.
We would consider raising the bank’s rating if China’s sovereign rating is upgraded.
KEY RATING RATIONALE
Credit Strengths
Market Franchise Remains Strong: We expect BOC’s market franchise to remain strong in the following 12-18 months, given its position as both the world’s and China’s fourth largest bank in terms of its total asset and deposit size, which warrant its status as a global systemically important bank (G-SIB) and a domestic systemically important bank (D-SIB) in China. The bank has a solid and balanced deposit base, which was about 8% of domestic deposit market share as of end-2020, supported by its extensive domestic network and stronger overseas franchise. BOC enjoys a moderate geographic diversification comparing to its state-owned peers, and acts as an important intermediary for international settlement, and facilitates certain Greater Bay Area initiatives.
Sovereign Support Anchors Ratings: Our latest assessment of the government’s extremely strong willingness to support BOC in times of need uplifted the bank’s LTICR to ‘AA-’ from ‘A+’, which was previously based on a very strong willingness to support, considering the bank demonstrated a higher level of policy-driven natures in its product and offering especially during the COVID-19 pandemics as the government employed multiple tools to safeguard economic recovery. This substantiates the bank’s critical importance to the government as defined in the GRE criteria. Our assessment also incorporates the bank’s direct state ownership of 67%, critical importance to the government, and global systemically importance position.
As one of the six officially designated large state-owned banks in the country, BOC took indispensable responsibilities of maintaining financial system stability, supporting the real economy, and promoting key efforts such as cross-border transaction, microfinance and poverty alleviation. Hence, any signs of weakening in the sovereign’s willingness or capability to support BOC will pose immediate downgrade pressures on the rating.
Diversification Contains Profitability Pressure: The Beijing-based lender’s profitability will continue to be under pressure in the challenge of margin compression and credit cost. Returns on average shareholder’s equity and average assets have been on a downward trend in recent years, coming to new lows of 10.61% and 0.87% respectively in 2020. The decline was consistent with the industry trend and also partly contributed by the fee reductions and rate concessions offered to clients in response to the government’s call for stabilising the economy.
That said, the management has been dedicated to maintaining competitive overseas business, diversifying revenue contribution, and optimising the cost structure, in order to secure the earnings performance across multiple cycles. BOC’s cost-income ratio was relatively stable and better than the industry average, with a decrease to 26.7% in 2020 from 28.0% in 2019. Moreover, we regard the bank’s continual efforts in active asset allocation towards medium- and long-term loans of higher yield as helpful in mitigating the downward pressure of margin compression in the industry.
Capital Buffer to Sustain: We forecast BOC to further enhance its capitalisation within the rating horizon. The bank has a good track record of keeping a healthy loss-absorption buffer with a common equity tier 1 (CET1) capital ratio of 11.3%, tier 1 capital ratio of 13.2%, and total capital adequacy ratio (CAR) of 16.2% at end-2020. To strengthen the supervision and improve risk management framework of the banking industry, China Banking and Insurance Regulatory Commission (CBIRC) published the D-SIB regulation and total loss-absorbing capacity (TLAC) rules in October 2021, imposing additional capital surcharges and minimum TLAC requirements of risk-weighted-assets (RWA) and leverage ratio exposure (LRE) for enlisted D-SIBs. The regulatory measures require most banks to enhance capital level. However, there is no urgent need for the management to significantly boost its capital buffer in the short term, given BOC’s outperforming capital adequacy metrics.
Credit Weaknesses
Asset Quality Concerns: We expect BOC to show improvement in its asset quality with a normalised non-performing loan (NPL) ratio for 2022-2023 with the backdrop of uncertainties in the bank’s large exposure to the property sector and the direct pressures of loan moratorium expirations. At end-2020, BOC’s overall NPL ratio rose to 1.46% from 1.37% of the previous year. At the same time, around 32.6% of the bank’s special-mention loan (SML) migrated to the NPL category with the ratio significantly increased from 21.5% in 2019. However, the bank’s adequate NPL provision, steady loan growth, and adequate reserve buffer should mitigate the associated risks.
Vulnerability to Economic Volatilities: BOC will continue to be necessarily subject to a high degree of market volatility, as the bank is tasked with policy mandates to promote economic growth and industry developments, which might require taking in credit exposures of weaker quality. BOC has rapidly increased its lending to micro-and-small enterprises (“MSEs”) by 48% in 2020 based on its annual report, which was in accordance with the government requirement of increasing MSE loans by at least 40%.
Note: Ratings mentioned in this press release are unsolicited ratings.
ANALYST CONTACTS
Primary Analyst
Kaichung Lee
+852 3615 8340
Secondary Analyst
Ke Chen, PhD
+852 3615 8316
Committee Chair
Winnie Guo
+852 3615 8344
RATING SERVICES CONTACT
Allen Wei
+852 3615 8324
MEDIA CONTACT
Date of Relevant Rating Committee: 21 February 2022
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)
Rating Symbols and Definitions (7 May 2018)
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