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    3988   CNE1000001Z5

BANK OF CHINA LIMITED

(3988)
  Report
Delayed Hong Kong Stock Exchange  -  04:08 2022-10-03 am EDT
2.550 HKD   -0.78%
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Correction: Fitch Affirms Bank of China's Long-Term IDR at 'A'; Outlook Stable

08/02/2022 | 06:03am EDT

This is a correction of a release published on 29 July 2022.

It includes Fitch's National Scale Rating Criteria, which was omitted from the original release.

Fitch Ratings has affirmed Bank of China Limited's (BOC) Long- Term Foreign-Currency Issuer Default Rating (IDR) at 'A', Government Support Rating (GSR) at 'a', Short-Term IDR at 'F1+' and Viability Rating (VR) at 'bbb'. The Outlook is Stable.

Key Rating Drivers

Government Support-Driven IDR: BOC's Long-Term IDR is driven by our assessment of the very high likelihood of government support, as expressed by its GSR at 'a', which is one notch below China's sovereign rating (A+/Stable). The state's 70% ownership in BOC, the bank's long history of receiving government support and its systemic importance drive our assessment. The Stable Outlook on the bank's IDR mirrors the Stable Outlook on the Chinese sovereign rating. BOC was designated as a global systemically important bank (G-SIB) in 2011.

D-SIB Designation: BOC was also designated a domestic systemically important bank (D-SIB) in October 2021 by the Chinese authorities, and sits in Bucket 4, similar to Industrial and Commercial Bank of China Limited (A/Stable), China Construction Bank Corporation (A/Stable), and Agricultural Bank of China Limited (A/Stable).

Short-Term IDR Reflects Support: BOC's Short-Term IDR is at the higher of the two options for its Long-Term IDR, reflecting our expectations that sovereign support is more certain in the near term.

OE Outlook Revised to Stable: We have revised the outlook on China's bank operating environment (OE) score to stable from positive, as the confluence of economic developments has increased the risk of a slowdown in structural reforms. Lingering weakness in the property market and renewed Covid-19 lockdowns, along with rising global inflation and interest rates, weigh on China's near-term economic growth prospects, resulting in targeted policy easing. However, we do not expect a material reversal in regulatory reforms already implemented.

We have assigned the OE score of 'bbb-' above the 'bb' category implied score, as we believe China's robust external finances and strong economic performance, as reflected in the sovereign rating, will support financial market and economic stability. BOC's assigned VR is in line with the implied rating, and does not drive its IDRs.

Stronger Overseas Franchise: BOC's franchise is supported by its relative strengths in overseas markets, with higher geographic diversification and ability to capture more cross-border opportunities than other Chinese banks. That said, contribution from overseas fell to about 21% of BOC's pre-tax profits in 2021 (four-year average: 26%) because of low interest rates globally.

We expect the bank's overseas earnings to benefit from higher interest rates in 2022 and 2023. BOC's business profile score of 'bbb+' has been assigned below the 'a' category implied score, reflecting management and governance limitations. These are not uncommon in China given frequent management rotation and regulatory intervention.

Resilient Asset Quality Trends: Slower economic growth in China could modestly raise the impaired-loan ratio this year, but we expect a build-up in loan loss allowance coverage to 187% in 2021 (2020: 178%) to mitigate this. BOC's direct exposure to Chinese commercial real estate was manageable at around 5% of loans. The impaired-loan ratio for the real-estate sector rose by 0.4pp, less than most state-owned peers, to 5.1% in 2021, while the overall impaired-loan ratio fell to 1.3% (2020: 1.5%) on the economic recovery and non-performing loan resolution.

Modest Improvement in Operating Profit: We expect the bank's operating profit to risk-weighted assets ratio to remain steady as its overseas business will benefit more from higher interest rates. BOC's operating profit to risk-weighted assets recovered to 1.71% (2020: 1.65%) with net profit rising by 11%, which was faster than its recent four-year average growth of 5%, partly off a low base in 2020, when the Covid-19 pandemic started.

Steady Capital Position: We expect BOC's common equity Tier 1 (CET1) ratio to be steady at around 11% in the next two years (2021: 11.3%). Its leverage ratio of 7.7% was stable (2020: 7.7%). The capital and leverage score of 'bbb-' is above the 'bb' category implied score as we believe BOC will benefit from ordinary government support. BOC will need to meet total loss-absorbing capacity (TLAC) requirements as a G-SIB. Its total capital adequacy ratio was 16.5% at end-2021, and we expect it to issue more TLAC-eligible instruments in the next three years.

Stable Funding and Liquidity Profile: We expect the bank's four-year average Fitch-calculated loan-to-deposit ratio to steadily rise (2021: 87%) in the next two years, similar to other state-banks.

Rating Sensitivities

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

IDRS and GSR

The bank's IDR and GSR will come under pressure if Fitch perceives that the central government's propensity or ability to provide timely extraordinary support to the bank has diminished. Lower propensity may be through an enhanced resolution framework and diminished ability potentially highlighted by a sovereign rating downgrade. However, we do not expect either scenario to occur in the near term.

BOC's Short-Term IDR will be downgraded if the sovereign's Short-Term IDR is downgraded and/or if BOC's Long-Term IDR is downgraded.

VR

A weaker OE or more extensive use of directed policy lending resulting in a further meaningful build-up in credit risk without a corresponding increase in loss-absorption buffers could be negative for BOC's VR. A delay in economic recovery globally could also affect BOC more relative to the other state banks due to its larger international presence.

In addition, 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 operating profit/risk-weighted assets likely to be sustained below 1.5% (average over 2018-2021: 1.7%); and

CET1 ratio falling below 11% without a credible plan to increase it back above this level.

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

IDRS and GSR

An upgrade of the sovereign ratings could lead to positive rating action on BOC's GSR and its support driven IDRs, if that were to indicate greater ability to support the bank with no change in support propensity. There is no upside for BOC's Short-Term IDR as it is already at the highest level on the scale.

VR

Further upward revision in the OE assessment is a prerequisite for a VR upgrade and would need to be in conjunction with a sustained reduction in the bank's risk appetite and a substantial and sustained improvement in financial metrics. We believe this is unlikely in the near term.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

BOC's senior debt instruments are rated in line with its Long-Term IDR as they represent its unsecured and unsubordinated obligations.

Fitch uses the bank's support-driven Long-Term IDR as the anchor rating for its undated Additional Tier 1 (AT1) capital bonds as we believe government support is likely to be extended further down the capital structure into more junior obligations. The undated AT1 capital bonds are notched down once to reflect non-performance risk given support for AT1 instruments is viewed as moderately lower relative to Tier 2 and senior debt instruments, and notched down a further two times to reflect high loss severity. However, the rating is capped at 'BB+' for issuers with government-support driven IDR in the 'A' or 'BBB' category as per our criteria.

The Basel III Tier 2 bonds are notched down twice from their anchor rating to reflect high loss severity relative to senior unsecured instruments, resulting in the rating of 'BBB+'.

Amipeace Limited was established solely to undertake offshore debt issuance for its parent and its debt is guaranteed by BOC's Macau branch. Hence, the ratings on the instruments issued by Amipeace are equalised with BOC's IDRs. Fitch expects Amipeace to receive strong support from BOC in the event of repayment strains.

BOC Taipei branch is part of the legal entity, BOC. Therefore, the bank's IDR also drives the rating on its Taipei branch's senior unsecured bonds, which are rated 'AA+(twn)'. The rating suggests low default risk relative to issuers based in Taiwan.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

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

A downgrade of BOC's Long-Term IDR would lead to negative action on the ratings of its senior debt instruments and subordinated Tier 2 notes, as well as those issued under Amipeace and its Taipei branch. The ratings on BOC's Basel III-compliant AT1 preference shares will be downgraded if BOC's Long-Term IDR falls below 'BBB.'

The ratings on the bank's subordinated notes and AT1 preference shares are also sensitive to a change in the anchor rating, potentially from a change in Fitch's assumptions around the state's ability and propensity to prevent BOC from triggering the notes' loss-absorption features. For example, if we expect that state support is unlikely to be extended to these instruments, we would revert to the VR as the anchor for the rating.

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

An upgrade of BOC's Long-Term IDR would lead to positive rating action on its senior debt instruments and subordinated Tier 2 notes, as well as those issued under Amipeace. The ratings on BOC's Basel III compliant AT1 preference shares will be upgraded if BOC's IDR is upgraded to 'AA-' or above.

The ratings on BOC Taipei branch's senior debt instruments would only be upgraded if BOC's IDR were to be upgraded by two notches or more into the 'AA' category.

VR ADJUSTMENTS

The OE score of 'bbb-' has been assigned above the 'bb' category implied score on the following adjustment reason: sovereign rating (positive).

The business profile score of 'bbb+' has been assigned below the 'a' category implied score on the following adjustment reason: management and governance (negative).

The capital and leverage score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reason: capital flexibility and ordinary support (positive).

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

BOC's IDRs and GSR are directly linked to China's sovereign ratings.

ESG Considerations

BOC has an ESG Relevance Score of '4' for Financial Transparency risk. There are still structural issues around financial transparency and disclosure that are not captured in headline performance metrics and affect our assessment. This negatively affects the bank's credit profile and is relevant to the rating 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

(C) 2022 Electronic News Publishing, source ENP Newswire

Stocks mentioned in the article
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BANK OF CHINA LIMITED -0.78% 2.55 Delayed Quote.-8.54%
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Financials
Sales 2022 631 B 88 631 M 88 631 M
Net income 2022 224 B 31 424 M 31 424 M
Net Debt 2022 - - -
P/E ratio 2022 3,20x
Yield 2022 10,0%
Capitalization 845 B 119 B 119 B
Capi. / Sales 2022 1,34x
Capi. / Sales 2023 1,25x
Nbr of Employees 304 521
Free-Float 35,3%
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Number of Analysts 21
Last Close Price 2,31 CNY
Average target price 3,16 CNY
Spread / Average Target 36,7%
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Managers and Directors
Jin Liu Vice Chairman & President
Lian Ge Liu Chairman
Ke Qiu Zhang Chairman-Supervisory Board
Qian Meng General Manager-Software Center
Guo Hua Jiang Independent Non-Executive Director
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