Bank of China overseas expansion supporting its credit profile
(17 August 2015 – China) Moody's Investors Service says that Bank of China (BOC) will remain positioned ahead of its domestic peers in terms of its ability to derive a sustained level of assets and profit contributions from geographic diversification, supporting in turn its credit profile.
"BOC's experience is long established, and it has successfully carved out niche segments overseas, thus reducing the downside risks generally associated with expansion into new markets," said Christine Kuo, a Moody's senior vice president.
"Furthermore, BOC's track record of managing foreign operations strongly positions it to capture profitable external opportunities, including those related to the Chinese government's (Aa3 stable) Belt and Road initiative," said Kuo.
Moody's conclusions were contained in its just-released report on Bank of China, China - FAQ: Credit Implications of Bank of China's Overseas Operations.
Moody's report highlights that compared with other domestic banks, BOC commands by a significant margin leading positions in the international payments and cross-border businesses.
This characteristic has allowed the bank to earn fee-based foreign income to augment its domestic income, and to follow client cash flows to minimise credit risk.
In addition, its extensive foreign network has enabled it to adopt an organic growth strategy, instead of pursuing riskier acquisitions.
To support the Belt and Road initiative, BOC will need to expand and operate in markets with higher country risk than its current footprint.
Moody's expects the bank to remain focused on the servicing of Chinese companies operating in these markets, an approach that will help mitigate some counterparty risk concerns.
In addition, because the Belt and Road initiative is state-sponsored, it will likely add to the potential support that related projects will receive from other leading institutions with strong credit profiles.
These entities include government-owned insurers, multinational organizations and other banks, and their participation will decrease BOC's own risk exposure, said the rating agency.
Moody's expects BOC to grow its offshore business at around 20 percent in the next several years, compared with less than 10 percent for its domestic business.
Such a trend will imply a continued increase in the share of overseas assets, to around 40 percent of total assets by end-2018 from 30 percent as of end-2014.