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Fundamental View
AS OF 09 Nov 2022The Bank of China (BCHINA; ratings: A1/A/A) is one of the Big 4 banks in China. Its subsidiary, BOC Hong Kong, is one of the major banks in Hong Kong.
BCHINA’s systemic importance is enhanced by the leading role it plays in China’s international trade and investment and strong government links.
BCHINA’s financial metrics are a little weaker than ICBCAS and CCB due to its larger overseas exposure, but the Big 4 banks have generally been managed more prudently compared to the smaller and more aggressive joint stock banks.
Business Description
AS OF 09 Nov 2022- While its origins date back to China's last imperial dynasty, BCHINA was formally established in 1912 and has played the role of China's international bank for more than a century. Its operations outside mainland China include its 66%-owned subsidiary Bank of China (HK) Ltd.
- After 1949, BCHINA became a state entity but was focused on FX and financing of foreign trade. It was set on a path of commercialisation in 1994 but only became a corporate entity in 2003 prior to its listings in HK and Shanghai in 2006. BCHINA is controlled by the government via a 64% stake held by Central Huijin.
- BCHINA was effectively insolvent in the late 1990s and the removal of NPLs to an AMC in 1999 did not fully deal with its legacy bad loans. In 2003, the bank received another $22.5 bn capital injection, paving the way for BOC's HK listing in 2006.
- BCHINA is a G-SIB with a capital surcharge of 1.5%. BOCHK is a D-SIB in HK and is the holding company for all of BCHINA's Southeast Asian operations excluding Singapore.
Risk & Catalysts
AS OF 09 Nov 2022China’s sovereign ratings (A1/A+/A+) are a key factor behind BCHINA’s credit standing.
BCHINA is managed on commercial terms, but fulfilling the government’s socioeconomic objectives may at times override profitability considerations and require the bank to perform “national service”. We would not regard such actions as credit-negative as they reflect close government links that also underpin the bank’s credit standing.
BCHINA has greater exposure to property developers than the other Big 4 banks (8% of gross loans vs 3-4%), and it also seems to take greater heed to the authorities’ guidance to provide credit support to the property sector as it had the highest property sector corporate loan growth in 1H22. These could impact BCHINA’s asset quality as China’s property sector is still not out of the woods.
Key Metric
AS OF 09 Nov 2022| RMB bn | 9M22 | 9M21 | FY21 | FY20 | FY19 |
|---|---|---|---|---|---|
| PPP ROA | 1.46% | 1.56% | 1.48% | 1.55% | 1.60% |
| Credit Costs | 0.67% | 0.76% | 0.70% | 0.87% | 0.82% |
| Reported ROA | 0.87% | 0.91% | 0.89% | 0.87% | 0.92% |
| Reported ROE | 11.2% | 11.6% | 11.3% | 10.6% | 11.5% |
| Total Equity/Total Assets | 8.3% | 8.2% | 8.3% | 8.4% | 8.1% |
| CET1 Ratio | 11.6% | 11.1% | 11.3% | 11.3% | 11.3% |
| NPL Ratio | 1.31% | 1.29% | 1.33% | 1.46% | 1.36% |
| Loan-Deposit Ratio | 87% | 87% | 87% | 84% | 83% |
CreditSight View Comment
AS OF 28 Nov 2022We maintain our Market perform recommendation on BCHINA. BCHINA is one of the Big 4 banks (the 4th-largest by assets) with a reasonable capital stack and sufficient liquidity. Its NIM and profitability has trailed its more domestically-focused peers, but it is also facing less NIM pressure in the current environment with increasing overseas rates and reducing domestic rates. Its majority government ownership and systemic importance also assures it of strong state support. We view BCHINA as a core portfolio holding, particularly if market conditions are volatile. The bond complex is relatively less attractive when compared to other Asian banks.
Recommendation Reviewed: November 28, 2022
Recommendation Changed: July 16, 2021
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