UPDATE 8-Moody's downgrades China, warns of fading financial strength as debt mounts
* Moody's says reforms won't prevent rise in economy-wide debt
(The following statement was released by the rating agency)
Dec 05 -
Summary analysis -- Bank of China Ltd. ---------------------------- 05-Dec-2012
CREDIT RATING: A/Stable/A-1 Country: China
Primary SIC: Federal reserve
Mult. CUSIP6: 061194
Credit Rating History:
Local currency Foreign currency
29-Nov-2011 A/A-1 A/A-1
22-Nov-2007 A-/A-2 A-/A-2
Ratings Score Snapshot
Issuer Credit Rating A/Stable/A-1
Business Position Strong (+1)
Capital and Earnings Moderate (-1)
Risk Position Moderate (-1)
Funding and Liquidity Above Average
and Strong (+1)
GRE Support +4
Group Support 0
Sovereign Support 0
Additional Factors 0
The stable outlook on BOC primarily reflects the stable outlook on the long-term sovereign credit rating on China. It also reflects our expectation that the bank could maintain its SACP and that the likelihood of extraordinary government support for BOC would remain "very high."
We could raise the rating if we upgrade China and BOC's SACP improves to 'bbb'. An improvement in the bank's SACP to 'a-' could also trigger an upgrade. The SACP could benefit if: (1) BOC's capital is significantly enhanced, leading us to assess the bank's capital and earnings as "adequate;" or (2) BOC maintains a better-than-projected credit loss experience in a reasonably stressful environment, indicating at least an "adequate" risk position.
We could lower the rating on BOC if we downgrade the sovereign or the bank's SACP deteriorates to 'bb+'. Substantially weakened capitalization, leading to our assessment that the bank's capital and earnings are "weak," could cause such deterioration.
The rating on Bank of China (BOC) reflects the bank's 'bbb-' stand-alone credit profile (SACP) and our view that there is a "very high" likelihood that the government of China (AA-/Stable/A-1+; cnAAA/cnA-1+) would provide timely and sufficient extraordinary support if the bank comes under financial distress.
We classify BOC as a government-related entity and have incorporated a four-notch uplift to the rating from the SACP. In accordance with our criteria for government-related entities, our view of a "very high" likelihood of extraordinary government support is based on our assessment of the following BOC characteristics:
-- "Very important" role to the Chinese government. The government tends to treat the banking sector as a lever to realize its economic goals. We believe the major state-owned commercial banks, including BOC, provide core support for the government's projects and economic goals. The banking sector's lending spree in 2009-2010 to help the government's fiscal stimulus scheme supports our view. In addition, Bank of China (Hong Kong) Ltd. (BOCHK; A+/Stable/A-1; cnAAA/cnA-1+), BOC's 66.06%-owned subsidiary, is the only currency-issuing Chinese bank in Hong Kong. BOCHK plays an instrumental role in the internationalization of the renminbi. The Chinese central bank has designated BOCHK as the exclusive clearance bank for offshore renminbi circulation in Hong Kong.
-- "Very strong" link with the government. We believe the government's 67.64% stake in BOC is strategic and long term. The government has publicly reiterated its intention to hold a controlling right in major state-owned commercial banks, including BOC. It also effectively appoints all top managers at the bank.
BOC's SACP reflects the bank's "strong" business position, "moderate" capital and earnings, "moderate" risk position, "above-average" funding, and "strong" liquidity, as our criteria define these terms.
Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for a commercial bank operating only in China is 'bbb-'. BOC mainly operates in China, with the domestic book representing about 81% of its loan portfolio at the end of June 2012. The BICRA score is based on our evaluation of economic risk, where we view China as a moderately resilient developing economy. Significant property price increases and rapid credit expansion over recent years have heightened China's exposure to economic imbalances. The country's high ratio of private sector credit to GDP and weak payment culture heighten credit risk in the economy. In terms of industry risk, market distortions created by prevalent state ownership and administrative control of interest rates challenge the banking sector. Nonetheless, sector-wide profitability has been comparable to other sectors' in the economy. Systemwide funding benefits from a strong customer deposit base and a proactive government role.
BOC's status as one of the largest commercial banks in China, accounting for 9.91% of the sector's total assets at the end of September 2012, support its business position. The bank's operations are more diverse than its domestic peers' in terms of business lines and geographic presence. BOC has a particularly strong franchise in Hong Kong, where it is the second-largest lender through BOCHK and a general insurer through Bank of China Group Insurance Co. Ltd. (BOCGI; local currency A-/Stable/--; cnAA/--). The bank's entrenched operations in Hong Kong and other overseas markets give it a competitive edge over other major domestic players in offering foreign exchange-denominated products and services. We believe these attributes could contribute significantly to BOC's business stability, given the embedded high volatility in the Chinese banking market. The bank's strategy appears to be more market-share driven than that of its major peers, as shown by its aggressive loan growth in 2009-2010. Nonetheless, BOC has been steadily overhauling its risk-management techniques and optimizing operations.
We assess BOC's capital and earnings as "moderate." The bank's risk-adjusted capital (RAC) ratio before adjustments for diversification rose to 6.79% at the end of 2011 from 6.7% a year earlier. The improvement was mainly due to BOC's good financial performance in 2011 and higher profit retention than we expected. BOC's ratio of core earnings to average assets was 1.09% for 2011 and improved further to an annualized 1.16% for the first three quarters of 2012. Nonetheless, we expect the bank's risk-adjusted capital (RAC) ratio to barely improve in the next two years. The bank's credit growth has slowed down significantly and is likely to stay at about 12%-14% in the next two years, which could underpin its capitalization. However, a possible spike in credit losses and a likely contraction in BOC's net interest margin could hit its internal capital generation capacity. The projection does not take into account any possible conversion of BOC's Chinese renminbi (RMB) 40 billion convertible bonds that are due in 2016.
Our assessment of BOC's risk position primarily reflects a possible spike in the bank's credit losses in the next few years due to its aggressive credit growth in the past, particularly in 2009-2010. Notwithstanding BOC's very low credit loss experience in recent years, the bank's aggressive 48.97% loan growth in 2009 exposes it to heightened credit risks in our view. Although BOC's reported nonperforming loan ratio remains very low, at 0.93% as of Sept. 30, 2012, signs of deterioration in loan quality are looming. The bank's loans that are overdue for more than 90 days rose 18.1% in the first half of 2012 to RMB45.34 billion, although these loans accounted for just 0.67% of the bank's loan book at the end of June 2012. We expect BOC's loan quality to come under further pressure in 2013, given continued economic uncertainties in China and abroad. That said, we believe the bank is likely to withstand potential credit deterioration under a moderate economic slowdown scenario because of its good operating profitability and currently reasonable loan-loss reserves.
BOC's good customer deposit base and strong liquidity ratios support our assessment of the bank's funding and liquidity. BOC's stable retail and corporate deposit base contributed to its good gross-loan-to-customer-deposit ratio, at 70.6% at the end of June 2012, according to our calculations. The bank has negligible reliance on wholesale funding despite a seemingly high ratio of short-term wholesale funding to its funding base in comparison to major domestic peers'. Interbank deposits account for the majority of BOC's short-term wholesale funding, reflecting the bank's strong market position in settlement and clearance services--specifically related to foreign exchange at home and to renminbi abroad. BOC's liquidity ratios are stronger than the industry average, with ratios of broad liquid assets to short-term wholesale funding of 2.45x and broad net liquid asset to customer deposits of 24.37% at the end of June 2012, up from 1.84x and 17.87% respectively at the end of 2010.
Related Criteria And Research
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Group Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
* Moody's says reforms won't prevent rise in economy-wide debt
SAO PAULO, May 24 State-controlled Caixa Econômica Federal, Brazil's largest mortgage lender, reported a sharp jump in first-quarter profit on Wednesday as loan delinquencies continued to drop.
May 24 CF Corp, a blank check company founded by veteran dealmaker Chinh Chu, said on Wednesday it would buy U.S. annuities and life insurer Fidelity & Guaranty Life in an all-cash deal valued at about $1.84 billion.