Fitch Ratings has affirmed Hong Kong-based BOCOM International Holdings Company Limited's (BOCOM International) Long-Term Issuer Default Rating (IDR) at 'A' with a Stable Outlook and Shareholder Support Rating (SSR) at 'a'.
Fitch has also affirmed BOCOM International's Short-Term IDR at 'F1+'.
In addition, Fitch has affirmed the 'A' ratings on BOCOM International's wholly owned subsidiary BOCOM International Blossom Limited's USD500 million medium-term note programme and USD500 million senior unsecured notes due 2026 under the programme. The programme and the notes are unconditionally and irrevocably guaranteed by BOCOM International.
BOCOM International is 73.1%-owned by Bank of Communications Co., Ltd. (BOCOM, A/Stable/bb+), one of China's largest state-owned banks. BOCOM International is BOCOM's integrated platform for securities and related financial services, performing securities brokerage and margin financing, corporate finance and underwriting, investment and loans, asset management and advisory businesses, principally in Hong Kong.
Key Rating Drivers
Support-Driven IDRs: The Long-Term IDR is driven by Fitch's expectation of extraordinary support to be forthcoming from BOCOM in case of need, considering the strong linkage between the two entities. Fitch also expects potential support to come from the Chinese government (A+/Stable), the ultimate shareholder of the bank, which would flow through BOCOM to BOCOM International. The Stable Outlook reflects Fitch's expectation that the likelihood of extraordinary support will remain unchanged in the medium term.
The Short-Term IDR is mapped to 'F1+' based on shareholder support from BOCOM, instead of to 'F1' from the Long-Term IDR. Fitch views BOCOM's propensity to provide support as more certain in the near-term and does not expect any significant impediment to the prompt flow of funds to BOCOM International. As such, BOCOM International's Short-Term IDR is in line with that of the parent.
Slow Capital Market Recovery in Hong Kong: Hong Kong, as China's main offshore financial centre, witnessed a drop in capital raising activity in 2022. IPO fund raising and new issuance of G3 bonds saw annual declines of 68% and 54%, respectively. Corporate refinancing demand should return, but we expect the capital market recovery to be slow, as China's stuttering economy, still high US-dollar interest rates and ongoing Chinese property and local government debt overhang will continue to dampen capital market sentiment and investor appetite.
Core Subsidiary with Business Alignment: We regard BOCOM International as a core subsidiary of the parent, based on its role and the substantial reputation risk to BOCOM should BOCOM International default. BOCOM International is the group's only entity that carries out securities and related financial services, which are an integral part of BOCOM's one-stop, universal banking model. The subsidiary also has a high level of management and operational integration with the group, and carries BOCOM's name and logo. Therefore, we equalise BOCOM International's ratings with those of BOCOM.
Moderate Financial Profile: We assess BOCOM International's Standalone Credit Profile at below its support-driven IDR, given its limited standalone franchise strength, concentrated business model, reliance on wholesale funding and risk exposure from its large investment portfolio, which accounted for 70% of total assets at end-1H23. However, this is counterbalanced by its linkage with and funding support from its parent. We expect leverage to stay high in the medium term, but for BOCOM to infuse capital to help BOCOM International meet regulatory requirements and business needs, if needed.
BOCOM International's profitability, as measured by operating profit/average equity, plunged to -60% in 2022 (2021: 5%), due to net losses arising from its investment portfolio amid unfavourable market conditions. Its capital position also weakened, with a large write-down of its total equity base, and its net adjusted leverage rose to 9.2x at end-2022 (2021: 4.4x). The company narrowed its losses in 1H23 to -30% of average equity on better market conditions and improved proprietary trading performance. Nonetheless, we expect its earnings profile and balance sheet strength to remain volatile.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of BOCOM would be likely to affect the ratings on BOCOM International to the same extent. Negative rating action could also be triggered by weakened linkage with the parent, which could be evidenced from a significant dilution of BOCOM's stake or a reduction of BOCOM International's role in carrying out BOCOM's securities and related financial services.
Any indication of BOCOM lowering its funding support for BOCOM International, such as a substantial reduction in its access to group credit facilities or signs of BOCOM not supporting BOCOM International if the subsidiary runs into liquidity or refinancing issues, would also put downward pressure on the ratings.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of BOCOM would be likely to affect the ratings on BOCOM International to the same extent.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
SENIOR UNSECURED DEBT
The ratings on the programme and the notes under the programme are in line with BOCOM International's Long-Term IDR, as they constitute its direct, unconditional, unsubordinated and unsecured obligations and at all times rank at least pari passu with all its other present and future unsecured and unsubordinated obligations.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
SENIOR UNSECURED DEBT
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of the IDRs of BOCOM or BOCOM International would lead to negative rating action on the ratings of the programme and the notes under the programme.
Any change in Fitch's view on the effectiveness of the deed of guarantee given by BOCOM International may also result in a downgrade to the programme and the notes.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the programme and the notes would follow a similar rating action on BOCOM International's Long-Term IDR. However, we believe this is improbable in the short term, because BOCOM International's rating is equalised with that of BOCOM. This means an upgrade is unlikely to occur without a similar rating action for BOCOM.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
The rating on BOCOM International is directly linked to the rating on BOCOM.
ESG Considerations
BOCOM International has an ESG Relevance Score of '4' for Financial Transparency, which reflects the lack of transparency of its investment portfolio. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores
BOCOM INTERNATIONAL HOLDINGS COMPANY LIMITED 
