Research: Rating Action: Moody’s affirms Bank of Communications (Hong Kong)’s A2 deposit rating and upgrades its BCA; outlook revised to stable


Hong Kong, June 28, 2022 — Moody’s Investors Service (“Moody’s”) has affirmed Bank of Communications (Hong Kong) Limited’s (“BoCom (HK)”) A2 long-term deposit rating and P-1 short-term deposit rating .

Moody’s has upgraded the bank’s Baseline Credit Assessment (BCA) and adjusted BCA to baa1 from baa2, long-term Counterparty Risk Assessment (CR Assessment) to A1(cr) from A2(cr) and long-term Counterparty Risk Rating (CRR) to A1 from A2, and affirmed the bank’s short-term CR Assessment at P-1(cr) and short-term CRR at P-1.

Moody’s has also upgraded the bank’s non-cumulative preferred stock rating to Ba1(hyb) from Ba2(hyb).

The outlook on the bank and its deposit rating was changed to stable from positive.

RATINGS RATIONALE

The upgrade of BoCom (HK)’s BCA reflects the bank’s maintenance of strong financial profile, with sound asset quality and strong capitalization amid challenging economic conditions in Hong Kong SAR, China. It also takes into account Moody’s expectation of a slowdown in the bank’s balance sheet growth and improvement in its profitability amid rising market interest rates.

Although the bank has a relatively short operating history, having commenced business only in 2018, the parent has maintained a presence in Hong Kong SAR, China since the late 1990’s. The bank mainly serves smaller corporate and retail customers in Hong Kong, whereas the parent’s Hong Kong branch now serves larger corporate customers.

Moody’s expects the bank to broadly maintain good asset quality in 2022 as the loans transferred from the parent’s Hong Kong branch from 2018 through 2021 have been largely sound. The bank reported a low impaired loan ratio of 0.1% at end-2021. Intermediate, offshore loans to mainland developers pose potential risks.

Moody’s also expects the bank to maintain stable capitalization with Common Equity Tier 1 (CET1) ratio at current level . Although the bank’s CET1 ratio fell to 15.6% at end-2021 from 18.6% at end-2020, its capitalization remains very strong and is roughly in line with Hong Kong industry average.

The bank’s profitability has recovered since the first half of 2021 and Moody’s expects its profitability to continue improving with widening net interest margins amid rising market interest rates. The bank’s return on average assets rose to 0.60% in 2021 from 0.47% in 2020.

Interbank funding accounts for a relatively high proportion of the bank’s overall liabilities, with such source of funding making up 12% of overall funding at end-2021. Development, the bank maintains strong liquidity, with large holdings of highly liquid assets. The bank’s loan-to-deposit ratio was conservative at 57% at end-2021. The bank’s deposits are comprised mostly of relatively stable retail deposits.

Moody’s assumes a very high level of affiliate support for the bank from its parent Bank of Communications Co., Ltd. (A2 stable, baa3), in times of need, given the subsidiary’s strategic importance to the group. However, as the parent’s BCA is lower than that of the bank at baa3, Moody’s does not incorporate any affiliate support uplift in the bank’s Adjusted BCA, leaving it at baa1.

BoCom (HK) is subject to Hong Kong’s Financial Institutions (Resolution) Ordinance and Moody’s considers Hong Kong an operational resolution regime. Moody’s therefore applies the Advanced Loss Given Failure (LGF) approach in rating BoCom (HK).

Moody’s Advanced LGF analysis indicates a low loss given failure for depositors, with one notch of uplift from the bank’s Adjusted BCA, taking into account loss absorption provided by subordinated liabilities. The LGF uplift for the bank’s CR Assessment and CRR are three notches and two notches, respectively, from the subordination of the bank’s unprotected deposits, senior unsecured liabilities and junior liabilities.

The bank’s deposit rating of A2 incorporates one further notch of support uplift from the Chinese government. Moody’s expects BoCom (HK) to receive very high indirect support from the Chinese government through its parent, in times of need, given the parent’s systemic importance in China, and BoCom (HK)’s strategic importance to the group. BoCom (HK)’s A1 CRR also reflects a very high indirect support from the Chinese government.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD MOVE THE RATING UP

An upgrade of the bank’s BCA is unlikely without an upgrade of its parent Bank of Communications Co., Ltd. ‘s BCA, given the financial and reputational linkages between the two entities. A widening of the gap between the two banks’ BCAs is unlikely, given the close links between the two entities and potential contagion risks from the parent.

BoCom (HK)’s deposit rating could be upgraded if the Chinese government’s ability to support the bank — as indicated by China’s sovereign rating — strengthens.

Moody’s could also upgrade the bank’s deposit ratings if the issuance of junior liabilities leads to greater subordination of junior liabilities and result in lower loss given failure.

WHAT COULD MOVE THE RATING DOWN

Moody’s could downgrade the bank’s deposit rating if the Chinese government’s indirect support for the bank diminishes, or China’s sovereign rating is downgraded.

The bank’s BCA could be downgraded if its asset quality or capitalization deteriorate rising, with problem loan ratio above 3.5%, or with the CET1 ratio falling consistently below 12.5%.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Bank of Communications (Hong Kong) Limited is headquartered in Hong Kong. Its reported assets totaled HKD458 billion at end-2021.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Moody’s considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody’s. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody’s with information for the purposes of its ratings process. Please refer to https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody’s Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK . Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Sonny Hsu, CFA
VP – Senior Credit Officer
Financial Institutions Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Sophia Lee, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Release Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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