DBRS Confirms Bank of China (Canada) at A (low), Negative Trend

DBRS Limited (DBRS) confirmed the ratings of Bank of China (Canada) (BOCC or the Bank), including BOCC’s Long-Term Issuer Rating at A (low) with a Negative trend and its Short-Term Issuer Rating at R-1 (low) with a Stable trend. DBRS also confirmed the Bank’s Support Assessment (SA) at SA1, reflecting the expectation of timely support from its parent, Bank of China (BOC or the Parent).

KEY RATING CONSIDERATIONS
BOC is a Global Systemically Important Bank (G-SIB), which is 68% owned by the People’s Republic of China (PRC; rated A (high)/R-1 (middle) with Negative trends by DBRS). The two-notch rating differential between BOCC and the PRC includes one notch for the PRC’s less-than-100% ownership of BOC, as well as one notch for BOCC’s status as a fully owned foreign subsidiary in a low-cross-border-risk country. Given the SA1 designation, DBRS would likely move BOCC’s ratings in tandem with the PRC’s ratings.

The 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 Chinese corporate and retail clients outside the PRC. BOCC’s strategic importance to its Parent is also demonstrated through the Bank’s close links with the Parent’s management and reporting systems. Given the international scope of BOC and its global systemic importance, as well the fact that it is majority owned by the PRC, DBRS expects the Parent to receive timely, systemic support from the PRC.

RATING DRIVERS
Given BOCC’s strategic importance to the Parent, a G-SIB that is 68% owned by the PRC, the ratings could be positively affected by an upgrade in the PRC’s sovereign ratings. Conversely, ratings could come under pressure should there be a significant reduction in the ownership stake of the Chinese government in the Parent, a reduction in BOCC’s strategic importance to the Parent or a downgrade of the PRC’s sovereign rating.

RATING RATIONALE
BOCC derives its franchise strength from its position as a financial intermediary facilitating transactional flows between China and Canada, both for corporate and retail banking clients. Furthermore, BOCC’s franchise also benefits from access to its Parent’s global network. In DBRS’s assessment, although BOCC remains well positioned to strengthen its franchise, the deterioration in the relationship between China and Canada could dampen growth prospects over the intermediate term.

BOCC exhibits a good earnings profile driven by relatively stable sources of income, a significant portion of which represents fee-based income. Operating efficiency is top tier compared with BOCC’s peers and the level of provision for credit losses (PCL) remains manageable. The Bank reported net income of $46.3 million in 2018, an increase of 47% from $31.4 million in the prior year. DBRS notes that BOCC has significant exposure to commercial real estate lending. Consequently, a sustained slowdown in economic activity could result in heightened levels of PCL and reduced profitability.

Although BOCC maintains a robust risk-management framework and conservative underwriting standards, DBRS recognizes that the Bank’s loan portfolio is relatively untested, and a more comprehensive view of asset quality would be apparent once the loan portfolio ages through an economic cycle. In 2018, asset quality metrics remained strong with little or no loan impairment. However, BOCC has significant exposures to commercial real estate loans and construction loans, which DBRS views as riskier in the event of a downturn

DBRS 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. On balance, about a fifth of the Bank’s funding comes from relatively granular retail deposits, and BOCC can also access deposits from related entities within the BOC group, which somewhat mitigates the concentration risk. In addition, emergency liquidity can be readily sourced from the Parent’s branches in New York and London, which helps support the SA1 designation.

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

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on dbrs.com under Methodologies and Criteria.

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

For more information on this credit or on this industry, visit www.dbrs.com.

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