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Rating Action:

Moody's downgrades Bank of Communications' ratings

 The document has been translated in other languages

07 Sep 2017

Hong Kong, September 07, 2017 -- Moody's Investors Service has downgraded Bank of Communications Co., Ltd.'s (BoCom) long-term/short-term deposit ratings to A3/P-2 from A2/P-1.

At the same time, Moody's has downgraded BoCom's baseline credit assessment (BCA) and adjusted BCA to ba1 from baa3.

Moody's has also downgraded the bank's Counterparty Risk Assessment (CRA) to A3(cr)/P-2(cr) from A2(cr)/P-1(cr).

These rating actions conclude Moody's review of BoCom's ratings for downgrade initiated on 24 May 2017. Moody's review on BoCom was triggered by the bank's increasing reliance on wholesale funds in recent years and declining profitability.

The outlook on all ratings is stable.

A list of the affected ratings, rating inputs and CRAs can be found at the end of this press release.

RATINGS RATIONALE

The downgrade of BoCom's BCA is driven by its weaker funding profile when compared to other state-owned Chinese banks, as well as its pressured profitability as a result of an environment of increasing market funding costs.

Although Moody's observed some stabilization in the bank's market funding in the first half of 2017, its reliance on such funding remained relatively high. In addition, although its profitability stabilized quarter-over-quarter, it stabilized at a lower level than a year ago. Both metrics have not exhibited sufficient improvement to maintain the bank's BCA at baa3.

The bank's revised BCA of ba1 considers its resilient asset quality and relatively low exposure to shadow banking, as well as its adequate liquid resources and capital levels.

BoCom's deposit franchise is weaker than that of other state-owned Chinese banks, and it maintains a higher presence in the more competitive coastal areas. Market funding accounted for 34% of its tangible assets at end-June 2017, up from 26% at end-2015. Although part of the increase was driven by medium-term lending facilities from People's Bank of China (PBOC) -- representing a stable funding source should PBOC continue to use it to manage medium-term system liquidity -- the bank's market funding remained high when compared to other state-owned banks, even when excluding the PBOC funding.

As a result of its weaker funding profile and higher funding cost, BoCom's profitability was pressured. The average cost for its interest-bearing liabilities increased by 10 basis points year-over-year in the first half of 2017, while that of other state-owned banks decreased. The bank's annualized return on assets (ROA) was 0.91% in the first half of 2017, down 9 basis points year-over-year.

Moody's downgrade of the bank's deposit ratings is driven by the downgrade of its BCA, as Moody's continues to incorporate a four-notch uplift based on an expected very high level of government support in times of need.

BoCom was 41.26% owned by the Chinese central government (A1 stable) via the Ministry of Finance and the National Council for Social Security Fund, and had a 3.0% share of system deposits at end-June 2017.

WHAT COULD CHANGE THE RATING UP

The bank's BCA and deposit ratings would be upgraded if (1) its funding profile improves, with market funding to tangible banking assets declining to below 25%; (2) its profitability, as measured by ROA, improves to above 1.0%; (3) its asset quality, capital and liquid resources ratios remain stable; and/or (4) the growth in leverage in the Chinese economy is arrested and shadow banking risks are contained, resulting in an improved operating environment and a change of China's macro profile.

WHAT COULD CHANGE THE RATING DOWN

The bank's ratings could be downgraded if Moody's assesses that the Chinese government's ability or willingness to support the bank has weakened.

The bank's BCA could experience downward pressure if (1) its operating environment weakens materially, for example if China's economic growth slows significantly, or corporate financial leverage rises rapidly; (2) its reliance on market funds increases rapidly; or (3) its asset quality and profitability weaken materially.

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Bank of Communications Co., Ltd. is a Chinese bank headquartered in Shanghai, with assets totaling RMB8.93 trillion at end-June 2017.

Bank of Communications Co., Ltd. HK Branch operates in Hong Kong.

Azure Orbit International Finance Limited is incorporated in the Cayman Islands, and is indirectly wholly owned by BoCom. It was set up for the purpose of issuing bonds.

Azure Orbit III International Finance Limited is incorporated in the Cayman Islands, and is indirectly wholly owned by BoCom. It was set up for the purpose of issuing bonds.

The Local Market analyst for these ratings is Yulia Wan, +86 (21) 2057-4017.

LIST OF AFFECTED RATINGS

Bank of Communications Co., Ltd.:

• Long-term deposit ratings downgraded to A3 from A2, with stable outlook

• Short-term deposit ratings downgraded to P-2 from P-1

• BCA and adjusted BCA downgraded to ba1 from baa3

• CRA downgraded to A3(cr)/P-2(cr) from A2(cr)/P-1(cr)

• Non-cumulative preferred stock rating downgraded to B1(hyb) from Ba3(hyb)

Bank of Communications Co., Ltd. HK Branch:

• Long-term senior unsecured debt rating downgraded to A3 from A2, with stable outlook

• Senior unsecured MTN rating downgraded to (P)A3 from (P)A2

• Other short-term rating downgraded to (P)P-2 from (P)P-1

• CRA downgraded to A3(cr)/P-2(cr) from A2(cr)/ P-1(cr)

Azure Orbit International Finance Limited:

• Backed senior unsecured debt ratings downgraded to A3 from A2, with stable outlook

Azure Orbit III International Finance Limited:

• Backed senior unsecured debt ratings downgraded to A3 from A2, with stable outlook

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.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.

David Yin
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
Client Service: 852 3551 3077

Minyan Liu
Associate Managing Director
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

No Related Data.
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