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    601169   CNE100000734

BANK OF BEIJING CO., LTD.

(601169)
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Bank of Beijing : Fitch Affirms Bank of Beijing's Long-Term IDR at 'BB+'; Outlook Stable

09/01/2021 | 07:09am EDT

Fitch Ratings has affirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) of Bank of Beijing Co., Ltd. (BOB) at 'BB+' and assigned a Short-Term IDR of 'B'.

The Outlook on the Long-Term IDR is Stable. At the same time, Fitch has affirmed BOB's Viability Rating (VR) at 'b+'.

Key Rating Drivers

IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

The bank's Long-Term IDR is driven by state support and is at the bank's Support Rating Floor (SRF) of 'BB+'. This reflects Fitch's expectation of a moderate probability of extraordinary support from the Chinese sovereign (A+/Stable) in the event of stress. This considers the bank's limited size and modest domestic significance. The bank does not have direct central government ownership or history of direct government support. We believe the Beijing government, which owns a 17.2% stake in BOB, has limited ability to provide adequate and timely support under stress, and extraordinary support, if needed, would come primarily from the state.

We expect BOB to be designated a domestic systemically important bank (D-SIB), probably later in 2021, but we think the government's ability to provide support to a large number of D-SIBs may be constrained by the size of China's banking system in the event of systemic stress. This implies a formal D-SIB designation alone may not materially affect the support propensity for BOB relative to peers with higher systemic importance or closer government linkages. At the same time, we do not believe the implementation of a resolution framework in China will significantly diminish support prospects for D-SIBs. If and when details on a framework are announced, we will update our views on the sovereign's propensity to provide extraordinary support to BOB.

BOB's 'B' Short-Term IDR is mapped to its Long-Term IDR, in accordance with Fitch's Exposure Draft: Bank Rating Criteria published 17 August 2021.

VIABILITY RATING

BOB's VR benefits from its higher loan concentration (around half of its loans) in Beijing, where the local economy is among China's most resilient. BOB relies on corporate banking, especially loans to Beijing-based state-owned enterprises, and has the lowest exposure to sectors that are most affected by the pandemic, such as unsecured consumer lending. It reported a stable non-performing loan (NPL) ratio of 1.5% at end-1Q21 due to its active NPL resolution in recent years. Its impaired-loan ratio was 1.6% at end-2020, with an allowance coverage of 206% (no quarterly figure available); this is similar to its NPL ratio on a local regulatory standard. BOB reported a common equity Tier 1 (CET1) ratio of 9.4% at end-1Q21, on a par with the mid-tier bank average, but it has one of the highest exposures to entrusted investments, which were around 16% of assets at end-2020 (mid-tier average of 10%).

Fitch has revised the operating environment (OE) score for BOB to 'bbb-'/positive from 'bb+'/stable, in line with the change for China's state banks and large joint-stock commercial banks. The revision captures the progress that China has made to curb systemic and contagion risks in the financial system, aided by its relative economic resilience during the Covid-19 pandemic.

Under Fitch's criteria, the benchmarks for the financial metrics of banks in a 'bbb' category OE are different from those in a 'bb' category OE, which would typically lead to upward potential for a bank's implied financial profile scores, and ultimately its VR. However, we have affirmed BOB's VR as it maintains a greater risk appetite than most Fitch-rated commercial banks such that it has the highest exposure to entrusted investments among Fitch-rated Chinese banks, offsetting the benefits of the improved OE. Furthermore, reported financial metrics in China may not fully reflect the extent of off-balance-sheet exposures or non-loan assets. BOB has not reduced its exposure to these activities meaningfully in recent years. Sustained regulatory tightening could also expose greater vulnerabilities at BOB in the near term given its higher risk exposure as well as limited capital buffers. These risks may continue to constrain our assessment of BOB's standalone credit profile, even if China's bank OE were to improve further.

RATING SENSITIVITIES

IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of China's sovereign ratings could lead to positive rating action on the bank's SRF and its support-driven IDRs if that were to indicate greater ability to support BOB, with no less propensity to support. Formal designation of BOB as a D-SIB with a relative peer ranking that implied a higher systemic importance than we currently factor into our support assessment could lead to positive changes in the Support Rating (SR), SRF and IDRs of the bank.

BOB's Short-Term IDR would be upgraded if its Long-Term IDR is upgraded.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The bank's Long-Term IDR, SR and SRF will come under pressure if Fitch perceives that the central government's propensity and/or ability to provide timely extraordinary support to the bank has diminished. For example, a sovereign rating downgrade could reflect diminished ability to support; lower propensity may also be reflected through an enhanced resolution framework, though we do not expect either scenario to occur in the near term.

A reduction in Bejing government ownership or influence in BOB may also lower the propensity of the state to support the bank if the reduction were to be significant, or if the bank's systemic importance were to be reduced.

BOB's Short-Term IDR will be downgraded if its Long-Term IDR is downgraded to or below 'CCC+', which we consider highly unlikely in the short-to-medium term.

VIABILITY RATING

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A sustained reduction in the bank's risk appetite such as material reduction of its shadow activities or improvement in transparency towards these activities, further reduction of its growth and sustained improvement of its capital buffers would be positive to its VR assessment, for example, if its CET1 ratio were to rise and stay above 10%.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

BOB's VR could be downgraded if there is a sustained increase in the bank's risk appetite, evident from continuous growth in entrusted investments or wealth-management products that significantly erodes asset quality and capital buffers. A sustained deterioration in the bank's financial metrics could lead to a VR downgrade, including a combination of the following reported core metrics:

The four-year average of impaired loans/gross loans increasing to and sustained at around 8% (2017-2020 reported four-year average of 1.4%), although Fitch's assessment of asset quality will also consider other indicators, such as 'special-mention' loans, loan-loss provisioning, and whether and to what extent we believe reported metrics understate any deterioration in asset quality and;

CET1 ratio falling below 7.5% without a credible path to return to existing levels.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

BOB's IDRs are directly linked to China's sovereign ratings.

ESG Considerations

BOB has an ESG Relevance Score of '4' for Financial Transparency. There are still structural issues around financial transparency and disclosure, which are not captured in headline performance metrics in China and affect our OE assessment. BOB, like other mid-tier banks, remains more exposed to this risk than the state banks due to its larger exposure to wealth-management products and entrusted investments stemming from the use of off-balance-sheet transactions. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
Bank of Beijing Co., Ltd.	LT IDR	BB+ 	Affirmed		BB+
	ST IDR	B 	New Rating		
	Viability	b+ 	Affirmed		b+
	Support	3 	Affirmed		3
	Support Floor	BB+ 	Affirmed		BB+

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure: Bank of Beijing Co., Ltd.

(C) 2021 Electronic News Publishing, source ENP Newswire

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Financials
Sales 2021 67 672 M 10 603 M 10 603 M
Net income 2021 22 921 M 3 591 M 3 591 M
Net Debt 2021 628 B 98 392 M 98 392 M
P/E ratio 2021 4,15x
Yield 2021 7,01%
Capitalization 93 875 M 14 708 M 14 708 M
EV / Sales 2021 10,7x
EV / Sales 2022 11,0x
Nbr of Employees 15 558
Free-Float 57,8%
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Number of Analysts 13
Last Close Price 4,44 CNY
Average target price 5,33 CNY
Spread / Average Target 20,1%
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Managers and Directors
Dong Ning Zhang Chairman & President
Zhi Hong Du Chief Financial Officer, Director & Vice President
Ying Zeng Chairman-Supervisory Board
Bao Ren Li Independent Director
Hong Yu Liu Independent Director