The trends on all long-term credit ratings have been changed to Stable from Negative. At the same time, DBRS Morningstar confirmed the short-term credit ratings on the Bank, including its Short-Term Issuer Rating, at R-1 (low). The trends on all short-term credit ratings remain Stable. The Support Assessment (SA) for BOCC is SA1, reflecting the expectation of timely support from its parent,
KEY CREDIT RATING CONSIDERATIONS
The downgrade of BOCC's long-term credit ratings is driven by the downgrade to the credit ratings of the PRC made by DBRS Morningstar on
The credit ratings of BOCC, a wholly owned subsidiary of BOC, reflect its important strategic position as an extension of its Parent's global platform, providing banking services to corporations and individuals of Chinese origin in
CREDIT RATING DRIVERS
Given BOCC's strategic importance to the Parent, the credit ratings would be upgraded if the PRC's sovereign credit ratings were upgraded.
Conversely, the credit ratings would be downgraded following a downgrade of the PRC's sovereign credit rating. Furthermore, the credit ratings would be downgraded should there be a significant reduction in the ownership stake of the Chinese government in the Parent or if there is a reduction in BOCC's strategic importance to the Parent.
CREDIT RATING RATIONALE
Franchise Strength
BOCC derives its franchise strength from its position as a financial intermediary facilitating transactional flows between the PRC and
Earnings Power
BOCC experienced good earnings growth in F2022 with net income increasing 7.3% year over year (YOY) to
Risk Profile
Asset quality has historically been sound given that BOCC maintains a strong risk management framework and conservative underwriting standards. Gross impaired loans as a percentage of gross loans increased in F2022 from the prior year; however, the current impairment level remains manageable and in line with peers. Net write-offs were negligible for the year. DBRS Morningstar remains cautious about the Bank's significant exposures to commercial real estate and construction loans, which formed about one-third of gross loans at the end of F2022 and could result in higher asset impairment and losses in a sustained economic downturn. DBRS Morningstar expects BOCC's credit quality metrics to modestly deteriorate in F2023 amid a more challenging macroeconomic environment.
Funding and Liquidity
DBRS Morningstar assesses BOCC's funding position as stable and its liquidity position as robust. Furthermore, funding sources are generally well aligned with the Bank's lending activities. BOCC is exposed to some concentration risk within its funding profile given its reliance on corporate deposits, some of which could be large or non-relationship-based deposits. The Bank's proportion of retail deposits declined in F2022, and it has become more reliant on funding from the BOC group. BOCC can readily source emergency liquidity from the Parent's branches in
Capitalisation
DBRS Morningstar considers BOCC's capital cushion, including a CET1 ratio of 23.3% at
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on the PRC are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the PRC are discussed separately at https://www.dbrsmorningstar.com/issuers/20329.
Environmental (E) Factors
There were no additional Environmental factor(s) that had a relevant or significant effect on the credit analysis.
Social (S) Factors
There were no additional Social factor(s) that had a relevant or significant effect on the credit analysis.
Governance (G) Factors
There were no additional Governance factor(s) that had a relevant or significant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (
Notes:
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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