Hong Kong, August 12, 2022 — Moody’s Investors Service has affirmed BOCOM International Holdings Company Limited’s (BOCOM International) A3 long-term issuer rating and P-2 short-term issuer rating.
At the same time, Moody’s has lowered BOCOM International’s standalone assessment to Ba2 from Ba1.
Moody’s has also changed the entity-level outlook on BOCOM International to negative from stable.
RATINGS RATIONALE
Today’s rating action follows BOCOM International’s profit warning on 21 July 2022, which stated that the company expects to record a net loss of approximately HKD1,650 million-HKD1,750 million for the first half of 2022. The expected net loss was mainly driven by the net loss resulted from fair value changes and partial disposal of equity securities and debt investments held by the company; guarantee fee payment due to changes in the market value of assets under management in accordance with asset management agreements; and the increase in the impairment provision for the expected credit losses of debt investments and loans[1].
The change of outlook to negative and the lowering of the standalone assessment to Ba2 from Ba1 reflects the company’s significant losses in the first half of 2022, which have materially eroded its shareholders’ equity. The level of significant losses and the reduction in shareholders’ equity was higher than Moody’s previous expectations.
The rating action also reflects the still-high investment risks and higher leverage that BOCOM International has, arising from its sizeable securities investments, including China property bond investments, unlisted equity investments, and unconsolidated asset management plans with return guarantee to a client, amid a volatile market environment.
On the other hand, the affirmation of BOCOM International’s A3 long-term issuer rating considers the strong liquidity, supported by sizable credit facilities from various banks including its parent bank, Bank of Communications Co., Ltd. (BOCOM, A2 stable, baa3 Baseline Credit Assessment).
As of 31 December 2021, BOCOM International reported HKD6.8 billion in shareholder’s equity. Its expected loss of HKD1,650 million-HKD1,750 million would reduce the company’s shareholders’ equity by a quarter and we estimate that this would raise its leverage considerably.
In addition, BOCOM International’s total assets grew rapidly in the past three years at compound annual growth rate (CAGR) of 31%, mainly driven by the expansion of securities investments. As of the end of 2021, the company held HKD23.8 billion in financial assets at fair value, representing 73% of total assets. Its sizeable securities investments challenges the company’s risk management and capital management, and leads to high volatility in financial performance, especially in a volatile market environment.
BOCOM International’s A3 long-term issuer rating incorporates its standalone assessment of Ba2, a two-notch uplift based on Moody’s assumption of a very high level of affiliate support from BOCOM, and a three-notch uplift based on Moody’s assumption of a very high level of indirect support from the Chinese government (A1 stable) via its parent in times of stress.
The very high level of affiliate support is based on BOCOM International’s strategic importance to, and linkages with BOCOM. A failure by BOCOM to support BOCOM International, in times of need, would raise significant business, operational and reputational risks for BOCOM.
Moody’s also assesses a very high level of indirect government support from the Chinese government for BOCOM International through BOCOM, if needed, considering the Chinese government’s majority ownership of BOCOM, BOCOM’s systemic importance, and the company’s importance to BOCOM’s business strategy.
Moody’s regards BOCOM International’s significant asset growth and challenges faced in its risk management and capital management as a governance risk in its financial strategy and risk management under the agency’s environmental, social and governance (ESG) framework. Today’s action reflects the impact on BOCOM International’s profitability and capital adequacy from these governance weaknesses, and the deterioration in credit quality it has triggered.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, an upgrade of BOCOM International’s ratings is unlikely.
However, BOCOM International’s outlook could return to stable if BOCOM International reduces its investment risk exposure and its shareholders’ equity would not deteriorate significantly further, while improving its profitability and maintaining a good liquidity and funding profile.
BOCOM International’s rating could be downgraded if we assess that the willingness and capacity of BOCOM or the Chinese government to support the company weakens, or its standalone assessment is further lowered.
BOCOM International’s standalone assessment could be lowered if the company’s shareholders’ equity significantly further erodes and its profitability remains very weak, which could be a result of further material investment losses; its liquidity and funding profile weaken considerably; its proprietary investments and structured finance expand rapidly; or it encounters significant risk management failures.
The principal methodology used in these ratings was Securities Industry Market Makers Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/65549. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Headquartered in Hong Kong SAR, China, BOCOM International Holdings Company Limited reported assets of HKD32.7 billion as of the end of 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 subsequently 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.
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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.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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.
REFERENCES/CITATIONS
[1] BOCOM International’s profit warning posted at hkexnews.hk, 21 July 2022
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.
Jessie Hong
Analyst
Financial Institutions Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
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Sophia Lee, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Yat Man Sally Yim, CFA
MD – Financial Institutions
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
