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China Bohai Bank Co., Ltd. -- Moody's assigns first-time Baa3/P-3 ratings to China Bohai Bank; outlook stable

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Rating Action: Moody's assigns first-time Baa3/P-3 ratings to China Bohai Bank; outlook stable

Global Credit Research - 11 Jan 2021

Hong Kong, January 11, 2021 -- Moody's Investors Service has assigned Baa3 long-term and Prime-3 short-term local currency and foreign currency deposit ratings to China Bohai Bank Co., Ltd. (China Bohai Bank).

Moody's has also assigned a Baseline Credit Assessment (BCA) of ba3 and adjusted BCA of ba3, long-term and short-term Counterparty Risk Assessments (CR Assessments) of Baa3(cr) and Prime-3(cr); and long-term and short-term Counterparty Risk Ratings (CRRs) of Baa3 and Prime-3.

The ratings outlook is stable.

This is the first time that Moody's has assigned ratings to China Bohai Bank.

RATINGS RATIONALE

China Bohai Bank's Baa3 long-term deposit rating incorporates its standalone BCA of ba3, and a three-notch uplift based on Moody's assessment of a very high level of support from the Government of China (A1 stable) in times of need.

Headquartered in Tianjin, China Bohai Bank was established in December 2005 and is one of 12 joint-stock commercial banks (JSCBs) in China, a group of banks with nationwide presence. China Bohai Bank maintains a presence across 23 provinces, autonomous regions and municipalities in China.

China Bohai Bank's BCA of ba3 reflects its moderate and improving capitalization and the challenges that the bank faces in its asset quality and liquidity.

Moody's expects China Bohai Bank will be able to maintain its Common Equity Tier 1 (CET-1) ratio above 8.0% for the next 12 to 18 months as it slows down its loan growth and continues its internal capital generation. China Bohai Bank has strengthened its capitalization through capital raising of HKD15.9 billion from its initial public offering (IPO) on the Hong Kong Stock Exchange in July 2020. Prior to the IPO, the bank's reported CET-1 ratio was relatively low and was at 7.85% at the end of June 2020 due to rapid loan growth.

Moody's expects the bank's profitability will be challenged given that the asset quality will remain pressured by the uneven recovery in China's economy. The bank's reported return on average assets improved to 0.85% in the first half of 2020 on an annualized basis from 0.76% in 2019, benefiting from interest income growth.

China Bohai Bank has higher exposure to online consumer loans and real estate sector loans relative to peers. Given recent stricter scrutiny on these loans, Moody's expect that China Bohai Bank would have to reduce its exposure to these loans which may lead to negative pressure on its profitability and asset quality during the transition.

The bank will be exposed to unseasoned risks from rapid loan growth in previous years. China Bohai Bank's non-performing loan (NPL) and special-mention loan ratios registered 1.78% and 2.97%, respectively, at the end of June 2020, flat with 1.78% and 2.93% at the end of 2019. The NPL ratios have been relatively stable but have been slightly higher than the other JSCBs.

Market funds form an important part of China Bohai Bank's funding, which indicates relatively weak liquidity. In addition, the bank's dependence on wholesale funding and the gap between its market funding and liquid assets could pressure its liquidity management in times of market turbulence.

The assignment of new ratings to China Bohai Bank also takes into account its governance as part of Moody's environmental, social and governance (ESG) considerations. Moody's does not have particular governance concerns for China Bohai Bank, and does not apply corporate behavior adjustment to the bank's ratings. The bank has set a comprehensive corporate governance framework. Since establishment, the board of directors consists of directors appointed by both its state-owned shareholders, including China COSCO Shipping Corporation Limited, China Baowu Steel Group Corporation Limited (A3 stable) and State Development & Investment Corp., Ltd. (A2 stable), and foreign shareholder, Standard Chartered Bank (Hong Kong) Limited (deposits A1, BCA a3).

Moody's assessment of a very high level of government support for China Bohai Bank is underpinned by (1) the bank's status as the only national JSCB incorporated in Tianjin; (2) its strong government ownership, as reflected in its 50.44% stake held by various central state-owned and Tianjin government-owned entities; (3) it being regulated by the China Banking and Insurance Regulatory Commission at the national level as a JSCB, despite its moderate market share. In addition, China Bohai Bank, as Tianjin's largest state-owned financial institution, is a flagship company under the government's plan to further develop and strengthen Tianjin's financial services industry, which signifies its systemic importance. Moody's also expects China Bohai Bank to be designated as a domestic systemically important bank given its size and interconnectedness with the Chinese economy.

China Bohai Bank's ba3 Adjusted BCA does not incorporate any affiliate support.

China Bohai Bank's rating is based on China's Moderate+ Banking System Macro Profile. China does not have an operational resolution regime. Therefore, Moody's applies a basic Loss Given Failure approach in rating China Bohai Bank and assumes a very high level of support from the Chinese government in times of need. The Preliminary Rating Assessment on China Bohai Bank's deposits is at the same level as the bank's adjusted BCA. As a result, the counterparty risk ratings and counterparty risk assessments both incorporate a three-notch rating uplift.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

There could be upward pressure on China Bohai Bank's deposit rating should the Chinese government's capability, as reflected in the Chinese government's senior unsecured rating, to support the bank strengthens, or its BCA is upgraded. The bank's BCA could be upgraded if its reliance on market funds declines, with the ratio of market funds / tangible banking assets consistently lower than liquid banking assets / tangible banking assets; capitalization further improves, with CET-1 ratio consistently higher than 10.0%; or its profitability improves, with return on average assets consistently higher than 0.9%.

Moody's could downgrade China Bohai Bank's ratings if its operating environment weakens materially, for example if China's economic recovery is worse than expected; the state-owned shareholding declines materially; its importance in Tianjin's financial sector declines; or its BCA is downgraded.

China Bohai Bank's BCA could be downgraded if its asset quality weakens significantly, with NPL ratio consistently above 3.0%; its liquidity position weakens significantly, with the ratio of market funds / tangible banking assets consistently higher than liquid banking assets / tangible banking assets.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Tianjin, China Bohai Bank Co., Ltd. reported total assets of RMB1,324.6 billion at 30 September 2020.

The local market analyst for these ratings is Yan Li, +86 (106) 319-6561 .

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

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At least one ESG consideration was material to the credit rating action(s) announced and described above.

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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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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.

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