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Announcement:

Moody's Disclosures on Credit Ratings of Bank of China Limited

06 Mar 2012

Hong Kong, March 06, 2012 -- The following release represents Moody's Investors Service's summary credit opinion on Bank of China Limited and includes certain regulatory disclosures regarding its ratings. This release does not constitute any change in Moody's ratings or rating rationale for Bank of China Limited and its affiliates.

Moody's current ratings on Bank of China Limited and its affiliates are:

Senior Unsecured (foreign currency) ratings of A1

Long Term Bank Deposits (foreign currency) ratings of A1

Bank Financial Strength rating of D

Short Term Bank Deposits (foreign currency) ratings of P-1

Bank of China Limited, London Branch

Long Term Deposit Note/CD Program (foreign currency) ratings of (P)A1

Commercial Paper (foreign currency) ratings of P-1

Short Term Deposit Note/CD Program (foreign currency) ratings of (P)P-1

Bank of China Limited, Hong Kong Branch

Long Term Deposit Note/CD Program (domestic currency) ratings of (P)A1

Short Term Deposit Note/CD Program (domestic currency) ratings of (P)P-1

Bank of China, Paris Branch

Short Term Deposit Note/CD Program (domestic currency) ratings of P-1

RATINGS RATIONALE

Moody's assigns Bank of China Ltd (BOC) a bank financial strength rating (BFSR) of D, which translates into a Baseline Credit Assessment (BCA) of Ba2.

The outlook on the BFSR is stable.

The rating balances three main considerations.

First, the bank has an outstanding franchise and extensive nationwide distribution network in Mainland China and Hong Kong. BOC is the fourth-largest banking group in China. Its traditional strength is in the foreign currency business.

Compared with other Chinese banks, it has higher exposure to overseas markets and its global network is much stronger. Its global presence has provided it with greater diversification and operating flexibility.

Second, since cleaning up its legacy non-performing loans (NPL) and undergoing recapitalization prior to its Initial Public Offering (IPO) in 2006, BOC's financial fundamentals have been robust.

NPLs have fallen sharply, while capitalization has remained strong. BoC replenished its capital in the equity market in 2010, following two years of rapid lending growth.

The net interest margin (NIM) has gradually recovered in a rising interest environment since late 2010. Overall profitability remains healthy as a result of good efficiency ratios and rising operating income.

Third, BOC still has a relatively short track record of operating as a listed bank following international standards of corporate governance and risk management practices.

This is the principal reason why its BFSR remains in the D category, despite financial metrics that imply a higher rating. While risk management is improving, it remains an area that will require further investment.

Although there has been a shift towards the centralization of approvals and controls, the sheer size of the bank and its network poses intrinsic control challenges. Finally, the extent of the bank's independence from the government's influence is a complex and evolving issue.

In particular, Moody's is concerned about the risks associated with the rapid lending growth seen in 2009 and 2010 in the Chinese banking sector.

These vintages are vulnerable to a potential slow-down in economic growth due to relaxed underwriting standards in lending to local government financing vehicles, and the risks related to a softening in the real estate market.

Such loans are likely to become a source of NPLs as they season. Rapid lending growth is a classic early warning sign of future credit quality problems.

BOC's loan growth of 49% was much higher than the system average of 32% in 2009, though loan growth slowed significantly to 15% in 2010, below the system average of 20%.

Since the global financial crisis, it has changed its strategy to focus more on the domestic market, and the stimulus policy implemented in 2009 served as a historic opportunity for the bank to gain domestic market share.

In mitigation, the bank has considerable buffers that would provide protection if there is a sharp correction in asset prices. First, a decline from the peak in housing prices of as much as 30% would likely have little negative impact on its mortgage portfolio, given low loan-to-value ratios on most housing loans.

Second, pre-provision profitability is strong, loan-loss reserves have risen, and core capital is solid.

Third, Moody's views positively the regulatory actions aimed at: 1) Cooling the housing market, 2) Proactively reviewing exposures to local government financing vehicles, 3) Encouraging banks to maintain higher capital and reserve levels, and to strengthen balance sheets.

BOC's stand-alone BFSR is D/Ba2, i.e. non-investment grade, reflecting our concern about future volatility in the bank's asset quality. From a ratings perspective, there is considerable cushion if a material downturn in asset quality were to occur.

BOC's foreign currency deposit ratings are A1/Prime-1 with a stable outlook on the long-term deposit rating.

They mainly incorporate three elements: its BFSR of D (which translates into a baseline credit assessment of Ba2), "very high" support assumption from the Chinese government (a component of joint default analysis, referred to as JDA), and the China systemic support indicator of Aa3.

Moody's considers China as a medium support country. BOC is considered to have very high support from the government, given its importance to Chinese economy as the fourth-largest Chinese bank by assets.

The incorporation of systemic support results in a multi-notch uplift in its deposit rating from the Ba2 BCA.

However, due to the significant gap between their stand-alone financial strength and the government's credit standing, any upgrade to the bank's debt and deposit ratings is unlikely in the absence of improvement in its underlying credit fundamentals.

Rating Outlook

The outlook on all the ratings is stable, reflecting the solid positioning of the fundamental ratings for the challenges the bank is likely to face.

The last rating action was taken on September 27, 2010, when Moody's affirmed the ratings and changed the outlook on BOC's foreign currency long-term deposit rating to stable from positive.

The change in outlook reflected our view that the likelihood of an upgrade in the ratings had diminished in view of its current challenges.

What Could Change the Rating - Up

Further positive pressure for the bank's BFSR and deposit rating is dependent on how BOC manages the conflicting demands of maintaining asset quality and growing its businesses in a sustainable manner.

In addition, any positive rating action on the A1 deposit rating would require an upgrade in the government rating. This in itself, however, would not automatically lead to an upgrade to the bank deposit ratings.

To see an improvement in the BFSR, it would be necessary for BOC to maintain strong financial metrics during the next two to three years. This is likely to include an environment of policy tightening, and deterioration in the real estate market and local government finances in some regions.

Specifically, during the next two to three years, Moody's will look for:

1) NPLs to stay below 4% of loans, 2) Net income above 1.5% of average Risk-weighted assets (RWA), and pre-provision profit (PPP) above 2% of average RWA, 3) Core Tier I ratio staying at 8% or higher, 4) Improvements in control and risk management practices as well as infrastructure to at least the levels of its peers, and 5) An ability to maintain solvency against portfolio stress tests at the corresponding rating level.

What Could Change the Rating - Down

Given the multi-notch upgrade of the deposit rating versus the BFSR, any indication that government support is anything other than extremely high would be negative for the deposit rating, though this is viewed as unlikely in the medium term.

In the very long run, there could be some transition risk for the deposit rating as the relationship between the government and major banks evolves, and if there is no sufficient offsetting improvement in the bank's stand-alone financial strength rating.

By contrast, evidence that the recent vintage of loan origination will strain financial strength more than Moody's has assumed will be negative for the rating.

In particular, Moody's would see the following as negative for the BFSR during the next two to three years: 1) NPLs surpassing 7%, or special mention loans over 12% of loans, 2) Net income less than 0.7% of average RWA, or PPP less than 1% of average RWA, and 3) Core Tier 1 ratio falling to 6% or lower.

Furthermore, any signs of a slowdown or reversal in the trend towards improvements in risk management, controls and corporate governance would be negative for the BFSR.

The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in December 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

The Local Market analyst for these ratings is Yi Zhang, 86-10-6319-6562

REGULATORY DISCLOSURES

Although these credit ratings have been issued in a non-EU country which has not been recognized as endorsable at this date, the credit ratings are deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following : parties involved in the ratings and public information.

Moody's considers the quality of information available on the rated entities, obligation or credit satisfactory for the purposes of issuing these rating.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Sonny Hsu, CFA
Vice President - Senior 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.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's Disclosures on Credit Ratings of Bank of China Limited
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

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