DBRS Morningstar Confirms Bank of China (Canada), Changes Trends on Long-Term Ratings

DBRS Limited (DBRS Morningstar) confirmed Bank of China (Canada)’s (BOCC or the Bank) long-term ratings at A (low) and short-term ratings at R-1 (low). The trends on BOCC’s long-term ratings were revised to Stable from Negative, while the trends on the short-term ratings remained Stable. The Support Assessment (SA) for BOCC is SA1, reflecting the expectation of timely support from its parent, Bank of China (BOC or the Parent), which is 68% owned by the People’s Republic of China (PRC; rated A (high) with a Stable trend by DBRS Morningstar).

KEY RATING CONSIDERATIONS
The change in the trend to Stable on BOCC’s long-term ratings is driven by the trend change on the ratings of the PRC by DBRS Morningstar on November 13, 2020. 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 BOCC’s SA1 designation, DBRS Morningstar would likely move the Bank’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 of 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 as being majority owned by the PRC, DBRS Morningstar expects the Parent to receive timely, systemic support from the PRC.

RATING DRIVERS
Given BOCC’s strategic importance to the Parent, a Global Systemically Important Bank that is 68% owned by the PRC, the ratings would be upgraded if the PRC’s sovereign ratings were upgraded. Conversely, ratings would be downgraded following a downgrade of the PRC’s sovereign rating. Furthermore, ratings would come under pressure 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.

RATING RATIONALE
BOCC derives its franchise strength from its position as a financial intermediary facilitating transactional flows between the PRC and Canada, both for corporate and retail banking clients. The Bank exhibits a good earnings profile driven by relatively stable sources of revenue, a significant portion of which represents fee-based revenue. BOCC maintains a robust risk management framework and conservative underwriting standards. Although the Bank's significant exposures to commercial real estate loans and construction loans could result in higher asset impairment and losses given the current economic environment, payment deferral on loans represented only a small proportion of gross loans and compared favourably with similar sized Canadian financial institutions. BOCC’s funding position is stable and its liquidity position remains robust. Furthermore, funding sources are generally well aligned with the Bank’s lending activities. DBRS Morningstar considers BOCC’s capital cushion to be sufficient in light of its largely collateralized loan exposures and the Bank’s strong capacity to generate internal equity.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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