MOODY'S ASSIGNS Baa1 RATING TO HK$ FLOATING RATE CERTIFICATES OF DEPOSIT OF BANK OF CHINA, HONG KONG BRANCH
New York, 09-30-96 -- Moody's assigned a rating of Baa1 to the HK$2 billion issue of Hong Kong dollar-denominated floating-rate certificates of deposit of Bank of China. According to Moody's, the rating reflects the importance of the bank's business franchises in China and Hong Kong, as well as its weak financial condition, with low profitability and poor asset quality which undermines its reported capital base. The rating also includes the likelihood that the bank will continue to be supported by the substantial resources of China's central government during the current period of financial and economic reform, although the predictability of this support is tempered by the long-term intention of the government to place the state banks onto a commercial basis. Moody's currently rates Bank of China's senior long-term cross-border foreign currency debt Baa1; it rates the bank Baa2/Prime-3 for its long- and short-term non-resident foreign currency deposits. The bank's financial strength rating is D.
Moody's said that Bank of China is, together with the other three principal banks in China, undergoing a radical period of reform and modernisation. Possessing very large domestic businesses, they are responding to the initiatives of the central government promoting their reform and commercialisation. However, at the same time they suffer from serious weaknesses. The size and scope of their operations challenge their managements' implementation of change, although the major franchises that the banks possess are also a source of strength: Bank of China continues to be the leading bank for foreign business, and has for a number of years been the flagship of the People's Republic in international markets. Attempts to modernise the state banks are further impeded by the resistance of China's political, social, and business environment to reform, with the result that the banks continue to suffer from substantial political interference at the central and local level, and are still constrained to make loans that are uneconomic. Moreover, many of the country's state-owned enterprises, a major part of the economy and representing a substantial portion of the state banks' loan books, are financially extremely weak to the extent of requiring ongoing support by injections of state funds, which are partly administered through the banking system.
Although China's major banks continue for the time being to receive substantial support from the central government, Moody's noted that the process of modernisation of the economy may require that this be modified: for example, the resolution of the financial crisis in the state-owned enterprise sector may well involve some cost to the banking sector. Therefore, in the context of the sector's intrinsic financial weakness, and the policy of the government to make the banks more commercially-oriented institutions, Moody's makes a rating distinction between the direct obligations of the People's Republic of China, and the obligations of the major banks, including Bank of China.
Moody's said that the HK$-denominated FRCD programmes of banks' Hong Kong branches are rated at the level of their senior debt which, for lower rated banks, is usually above the level of their foreign currency deposits. This is because, in the opinion of Moody's, these obligations are more likely to be treated as a form of senior debt (given the characteristics of the obligations, their method of trading, and the identities of the holders), and be less likely to suffer a default than simple bank deposits.
In terms of its financial fundamentals, Bank of China benefits from a better asset mix than its three peers: its lending is a lower proportion of its total assets, and it includes a substantial proportion of foreign loans. Lending by its overseas branches, principally its large operation in Hong Kong, as well as New York, benefits from the supervision of the local regulators. Bank of China's operations in the highly profitable market of Hong Kong have grown substantially in recent years -- the bank controls a group of eleven local banks, seven of which are incorporated in China and four in Hong Kong. With this network, over which it is exerting closer control and coordination, Bank of China has a presence which approaches that of the Territory's dominant banking group, the Hongkong and Shanghai Banking Corporation.
Bank of China, headquartered in Beijing, is the second-largest bank in China, and reported total assets at end-1995 of RMB 2,266 billion (approximately US$272 billion).
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