HONG KONG, 15 August 2022. Pengyuan International has upgraded the global-scale long-term issuer credit rating (LTICR) on Bank of Communications (BOCOM or the Bank) to ‘A+’ from ‘A’, two notches below China’s sovereign rating (AA/Stable). We have also affirmed the short-term issuer credit rating (STICR) of ‘A-1’ at the same time. The Outlook is Stable.
The Bank’s LTICR mainly incorporates BOCOM’s standalone credit profile (SACP) of ‘bbb’, which was adjusted from ‘bbb-’ in our review of the Bank’s capital profile. The SACP reflects the BOCOM’s solid market franchise, average profitability, and adequate capital buffer. It also takes into account the Bank’s below-average net interest margin and moderate asset quality.
The rating also considers the update of our government-related entities (GRE) criteria published in February 2022. The Stable Outlook reflects our expectations that China’s sovereign rating and willingness to support will remain stable 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 noticeably weakens.
We would consider raising the Bank’s rating if China’s sovereign rating is upgraded, and/or if the government’s willingness to support further strengthens.
KEY RATING RATIONALE
Credit Strengths
Solid Market Position: The Shanghai-based lender’s franchise will remain stable in our forecast for the next 12 to 24 months with its domestic franchise hovering between the fifth and the sixth largest among its peers in terms of total assets size, deposits amount, and shareholder’s equity base. BOCOM has maintained a domestic deposit market share of 3% in recent years. As one of the large state-owned commercial banks in China, BOCOM promotes government mandates and supports policy objectives in the growing real economy, which enabled it to access public funding pools for certain initiatives and to entrench its business relationships with corporate clients. BOCOM was designated as a domestic systemically important bank (D-SIB) in China; the Bank belongs to Bucket 3 of this framework with an additional capital surcharge of 0.75%.
Average Profit Generation: We expect BOCOM to keep reasonable profitability metrics with the return on average assets (ROAA) at around 0.8% in our rating horizon, considering the Bank’s revenue diversification strategy and cost control capability. Management is targeting higher fee income through efforts to grow consumer finance and wealth management businesses. Net fee and commission income as a percentage of total revenue was stable at about 17-18% in 2020-2021 with steady contribution from the bank card and asset management services. The cost-income ratio decreased to 29% in 2021 from over 30% in previous years due to its adoption in information technology and optimize the service network.
BOCOM’s returns on average shareholder’s equity (ROAE) and ROAA increased to 10.76% and 0.80% in 2021 from 10.35% and 0.77% in 2020, respectively. We noticed the net gain from trading activities was RMB23.3 billion in 2021, a satisfying growth of 68.6% over the previous year.
Adequate Loss-Absorption Buffer: BOCOM’s capitalization is to slightly improve given its strategic adjustments on asset expansion for capital management purposes. We believe the Bank will dynamically replenish its cushions to comply with new regulatory measures, including the latest D-SIB regulations and total loss-absorbing capacity (TLAC) standards. BOCOM’s capitalization is on the lower end among its state-affiliated peers with a common equity tier 1 (CET1) capital ratio of 10.6%, tier 1 capital ratio of 13.0%, and total CAR of 15.5% at end-2021 – largely adequate to absorb losses of moderate hits.
Very Strong Government Support: The Chinese government will continue to have a very strong willingness to extend extraordinary support to BOCOM in times of need, taking into account the Bank’s state ownership and solid market franchise, namely key market franchise in the Yangtze River Delta with a long history of affinity to the sovereign, and an integral role in promoting key government initiatives through the Bank’s network of branches. As one of the six officially designated large state-owned banks in China, BOCOM has been incorporating public policies in its objectives blueprints and decision-making process to a considerable extent, strengthening the Bank’s ties with the government and anchoring our state support factors on a forward-looking basis.
Credit Weaknesses
Below-Average Net Interest Margin: We anticipate BOCOM’s net interest margin (NIM) for 2022 to 2024 to fall in the ballpark of 1.55% to 1.57%. Due to its average loan pricing capacity and noticeable reliance on interbank funding, the Bank’s funding costs will remain higher than its peers’. The management intends to continue containing deposits of higher costs and seeking cheaper funding through fixed-income instruments.
The average cost of deposits moderately fell by 10 bps to 2.10% in 2021, against the trend of state-owned peers which saw a pick-up during the competition in deposit markets. The Bank reported a NIM of 1.56% in 2021, lower than the state-owned banks’ average of 1.93%.
Asset Quality Susceptible to Headwinds: BOCOM will continue to be sensitive to market volatility with an increasing non-performing loan (NPL) ratio in our projection, given the Bank’s policy role of promoting economic recovery, which might require extending credits to customers of weaker profile. We noticed that BOCOM’s asset impairment losses widened to RMB68.7 billion in 2021, up by 9.83% on a year-over-year basis. Nonetheless, the Bank’s provision coverage for total loans and NPLs improved to 2.46% and 166.5% from 2.40% and 143.9% at end-2021, respectively. This together with its adequate provision coverage, slower loan growth and lower concentration on mortgage exposure should help mitigate the potential losses.
Note: Ratings mentioned in this press release are unsolicited ratings.
ANALYST CONTACTS
Primary Analyst
Kaichung Lee
+852 3615 8340
Secondary Analyst
Stella Shi
+86 755 8287 2106
Committee Chair
Winnie Guo
+852 3615 8344
MEDIA CONTACT
RATING SERVICES ENQUIRIES
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 3 August 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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