DBRS Assigns A (low) Long-Term Issuer Rating to Bank of China (Canada); Stable Trend

DBRS Limited (DBRS) has today assigned a Long-Term Issuer Rating of A (low) and a Short-Term Issuer Rating of R-1 (low) to Bank of China (Canada) (BOCC or the Bank), both with Stable trends. BOCC’s Long-Term Issuer Rating is based on a Support Assessment (SA) of SA1, reflecting the expectation of timely support from its parent, Bank of China (BOC or the Parent). BOC is a global systemically important bank (G-SIB), which is 67.6% owned by the People’s Republic of China (PRC; rated A (high) with a Stable trend by DBRS).

The ratings of BOCC, a wholly owned subsidiary of BOC, reflect its important role serving as an extension of its Parent’s global platform providing banking and remittance services to Chinese corporates and individuals outside of the PRC. BOCC’s strategic importance is also demonstrated through the Bank’s close links with the Parent’s management and reporting systems. DBRS believes that the resource-rich, business-friendly and politically stable Canadian market is attractive to both Chinese corporates looking to source raw materials or diversify their global holdings, as well as Chinese immigrants and students. In DBRS’s opinion, BOCC benefits from a growing base of Chinese nationals and businesses and is an important determinant of the Bank’s franchise strength. Given the international scope of BOC, its systemic importance and majority ownership by the PRC, DBRS believes BOC will likely in turn be supported by the PRC. As such, DBRS has assigned an SA1 support assessment to BOCC, implying strong and predicable support from the BOC. The two notch rating differential between the PRC and BOCC includes one notch for lack of full ownership of BOC by the PRC, as well as one notch for BOCC being a fully owned foreign subsidiary in a low cross-border-risk country.

The earnings profile for BOCC benefits from a healthy mix of both interest- and fee-based income in DBRS’s opinion. Interest income is driven by direct lending and participation in syndicated loans, while fee-based income is sourced mainly from trade finance, remittances and loan commitment services. However, DBRS assesses that business concentration within Ontario, specifically in the potentially riskier commercial real estate sector, could expose BOCC to higher provisioning requirements and earnings volatility. DBRS views the Bank’s cost controls as adequate and in line with peers.

While current asset quality metrics are pristine, DBRS notes that recent rapid loan growth in a low interest rate environment will likely result in modest deterioration once the loan portfolio seasons. Lending is concentrated across the Greater Toronto Area (GTA), specifically within the commercial real estate sector. DBRS believes this exposes BOCC to a slowdown in the Ontario economy. DBRS notes that BOCC’s commercial loan exposure is primarily to non-investment-grade borrowers. Nonetheless, following a recent capital injection from the Parent, BOCC can now participate in larger loans in the investment-grade space, which will improve the overall risk profile.

DBRS assesses BOCC’s funding position as stable and liquidity as strong. The majority of funding is sourced from business and retail deposits, which have been stable, while there is very limited reliance on wholesale funding. In DBRS’s opinion, BOCC’s asset book is well aligned with funding sources. Additional, liquidity can be readily sourced from Parent branches in New York and London, which helps support the SA1 designation

DBRS’s considers BOCC’s capital cushion as sufficient in light of its largely collateralized loan exposure and good capacity to generate internal equity. Additionally, BOCC has the ability to access capital from the Parent, which injected equity capital in BOCC in 2016.

RATING DRIVERS
Given that the ratings are based on an SA that is driven by the relationship to BOC, a G-SIB that is 67.6% owned by the PRC, ratings could be positively impacted by an upgrade of PRC’s sovereign rating. Conversely, ratings could come under pressure should there be a reduction in the ownership stake by the Chinese government in BOC, a reduction in BOCC’s strategic importance to the Parent or a downgrade of the PRC’s sovereign rating.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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.dbrs.com.

The applicable methodology is the Global Methodology for Rating Banks and Banking Organizations (May 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Sohail Ahmer
Rating Committee Chair: Lisa Kwasnowski

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.