Fitch Ratings assigns expected ‘A/stable’ rating to Macau-issued notes

Fitch Ratings has assigned an expected rating of “A/stable” to the Bank of China’s (BOC) proposed senior unsecured notes to be issued by its Macau branch under its $40 billion medium-term note (MTN) program.

The BOC plans to issue various notes denominated in U.S. dollars, euros and Chinese yuan with fixed and floating rates, and the proposed notes will be traded on the Hong Kong Stock Exchange.

According to a statement issued yesterday by Fitch Ratings, the final rating is contingent upon the receipt of final documents conforming to information already received.

Fitch first rated BOC’s MTN program ‘A’/’F1’ on December 9, 2013, with the most recent affirmation on January 18, 2019. The program’s size was increased to $40 billion, from $30 billion, in April 2018 to meet the bank’s funding needs, which will be used for commercial purposes.

The strong rating was helped in part by the guarantee underpinning the BOC by the Chinese government. As the Macau branch of the BOC is part of the same legal entity as its mother company, Fitch Ratings said that the proposed notes have been rated with a view to the “agency’s expectations of an extremely high probability of support from the Chinese sovereign (A+/Stable) in the event of stress.”

With this in mind, “any change to the proposed notes’ rating will be correlated directly with changes in BOC’s Issuer Default Rating, which will in turn reflect any shift in the perceived willingness or ability of the government to support the bank in a full and timely manner.”

Also in yesterday’s statement, Fitch Ratings said that Bank of China holds an environmental, social and governance (ESG) relevance score of 4 for financial transparency risk due to under-reporting of NPLs and risk-weighted assets stemming from the use of off-balance-sheet transactions.

“This negatively affects the bank’s credit profile and is relevant to the rating in conjunction with other factors,” Fitch Ratings noted.

The bank is also given an ESG relevance score of 4 for governance structure risk, as there is potential for significant state influence given the lack of independence from the Chinese government. DB