Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Bank of Communications Financial Leasing Co., Ltd. (Bocom Leasing) and its overseas platforms at 'A'.
The Outlooks are Stable. Fitch Rating has also affirmed their Short- Term IDRs at 'F1+'.
Fitch has affirmed the Shareholder Support Ratings (SSRs) of Bocom Leasing and its overseas platforms at 'a'. The ratings on the medium-term note (MTN) programmes and senior unsecured notes issued by Bocom Leasing's overseas platforms and SPVs have also been affirmed at 'A'.
Bocom Leasing, a wholly owned subsidiary of Bank of Communications Co., Ltd. (BOCOM; A/Stable), is China's second-largest financial-leasing company by managed assets. BOCOM was the country's sixth-largest state-owned commercial bank by total assets as of end-2022.
Key Rating Drivers
Support-Driven IDR: Bocom Leasing's IDR is underpinned by a very high probability of support from BOCOM. The equalisation of the rating reflects Bocom Leasing's role as a core subsidiary that provides complementary leasing services to the parent's customers as well as the high level of integration with the parent. This also considers the parent's legal obligation to provide liquidity and capital support when needed, which is stated in the subsidiary's articles of association and required by the National Administration of Financial Regulation.
The Stable Outlook reflects our expectation Bocom Leasing's role in the group and the operational linkages with its parent will not change substantially. The Outlook is consistent with the Stable Outlook on BOCOM's ratings and China's sovereign rating.
Sovereign Support Flows Through Parent: BOCOM's IDR is driven by support from the China sovereign (A+/Stable). We believe the support will flow through BOCOM to Bocom Leasing in times of stress as a default by Bocom Leasing could cause huge reputational damage to BOCOM. Still, the required support could be immaterial relative to the size of the parent, as Bocom Leasing's assets accounted for less than 3% of the parent's total assets at end-2022.
Core Subsidiary: BOCOM exercises strong control over Bocom Leasing's key personnel, strategies and financial plans. There is a high level of integration between BOCOM and Bocom Leasing in terms of business strategy, operations and risk management practices. Bocom Leasing also benefits from the parent's wide customer base and network to develop its own business.
Moderate Financial Profile: Fitch assesses Bocom Leasing's standalone credit profile as weaker than the support-driven IDR, considering its higher leverage, lower profitability and greater reliance on short-term wholesale funding than international peers, although these are balanced by ordinary funding and capital support from the parent, as well as stable reported asset quality and adequate collateral protection.
Growth and Leverage Moderating: Bocom Leasing's reported strong asset growth of 12.6% yoy in 2022 was partially due to the depreciation of the Chinese yuan relative to the US dollar as the overseas business, mainly in ship and aircraft leasing, accounted for about 46% of its total portfolio. Nonetheless, its debt-to-tangible equity ratio fell slightly to 7.3x by end-2022 from 7.5x at end-2021, supported by internal capital generation with a return on average equity of 10%.
Adequate Funding Profile: Bocom Leasing's funding profile has benefitted from the perceived parental support, which facilitates the stable funding access from leading state banks and the interbank market. The company has consistently maintained its unencumbered assets to cover more than 1x of unsecured debt in the past few years.
Highly Integrated Overseas Operation: The ratings on Bocom Leasing Management Hong Kong Company Limited (Bocom Leasing Management HK) and Bocom Leasing Development Hong Kong Company Limited (Bocom Leasing Development HK) are aligned with that of Bocom Leasing as they are two highly integrated overseas platforms of Bocom Leasing.
All of their key operational and funding decisions are centralised at Bocom Leasing. Their ratings reflect our assessment of a very high probability of support from BOCOM as their ultimate parent through Bocom Leasing as they are viewed as integral parts of Bocom Leasing.
SSRs: Bocom Leasing's and its overseas platforms' SSRs are aligned with their IDRs, indicating the minimum level to which their IDRs could fall if Fitch does not change our view on potential support from their parent. The 'a' SSRs indicate a very high probability of support being forthcoming as Bocom Leasing and its overseas platforms are considered core subsidiaries of their parent bank.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The IDRs and SRRs of Bocom Leasing and its overseas platforms are underpinned by support from BOCOM. Therefore, any change in BOCOM's ratings will affect their ratings by at least the same magnitude. A change could stem from a shift in the perceived willingness or ability of China's government to support BOCOM in a full and timely manner, or a change in China's sovereign rating.
Any sign of a weakening in the linkage between Bocom Leasing and its parent, or a decline in the perceived level of support from its parent, could lead to a rating downgrade for Bocom Leasing and its overseas platforms. This would include a meaningful reduction in the parent's shareholdings or the parent losing its status and strong control as the majority shareholder, changes in the regulatory obligation in Bocom Leasing's articles of association for the parent to provide capital and liquidity support, or a significant change in its role and relevance or evolution of strategies that make it deviate significantly from BOCOM's overall strategy or government policies.
Any restructuring that affects the role of the overseas platforms of Bocom Leasing in the group, or additional regulatory restrictions that limit Bocom Leasing from providing timely and adequate support to these overseas platforms, may also lead to negative rating action.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Positive rating action on Bocom Leasing and its overseas platforms is unlikely unless there is a positive change in Fitch's view of the ratings on the sovereign and BOCOM.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The ratings on the MTN programme and senior unsecured notes issued by Bocom Leasing Management HK are in line with its Long-Term IDR. The rating on the MTN programme reflects the rating we expect to assign to senior notes issued under the programme. The programme and the notes also benefit from a keepwell and asset-purchase deed provided by Bocom Leasing.
The senior unsecured notes issued under the MTN programme of Azure Nova International Finance Limited represent direct, general, unconditional and unsecured obligations of Bocom Leasing by virtue of the deed of guarantee given by Bocom Leasing to the MTN programme. The programme's ratings reflect the ratings assigned to senior notes issued under the programme and are in line with Bocom Leasing's Long-Term IDR of 'A'. Azure Nova is an offshore SPV wholly owned by Bocom Leasing through Bocom Leasing Development HK.
The MTN programme and the senior unsecured notes issued by Azure Orbit IV International Finance Limited are unconditionally and irrevocably guaranteed by Bocom Leasing Management HK with the benefit of a keepwell and asset-purchase deed provided by Bocom Leasing and Bocom Leasing International Finance Limited (Hong Kong), an offshore financing and investment platform wholly owned by BOCOM but under the management control of Bocom Leasing. The ratings on the MTN programme and the senior notes issued under the programme are in line with Bocom Leasing Management HK's IDR of 'A'. Azure Orbit IV is an offshore SPV under Bocom Leasing Management HK.
The deed of asset purchase serves as an important mechanism to allow Bocom Leasing to provide foreign-currency liquidity to Bocom Leasing Management HK and Azure Orbit IV and demonstrates a strong propensity for Bocom Leasing to support its overseas platform and SPV, if required.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The ratings on the MTN programmes and notes are directly correlated with any significant change in the willingness or ability of Bocom Leasing and BOCOM to support their overseas platforms, including a change in their ratings.
Any change that severely weakens the recovery prospects of the bonds issued or guaranteed by the overseas platforms, or any change in regulation that causes Bocom Leasing to encounter practical difficulties in exercising the keepwell and asset-purchase deeds or to provide support to its overseas platforms will likely lead to rating downgrades.
Positive rating action on the MTN programmes and notes issued by its overseas platforms and SPVs is unlikely unless there is a positive change in Fitch's view of the ratings on the sovereign and BOCOM.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
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 ratings of BOCOM Leasing, BOCOM Leasing Management HK and BOCOM Leasing Development HK are linked to the ratings of their ultimate parent, BOCOM.
ESG Considerations
Bocom Leasing has an ESG Relevance Score of '4' for Financial Transparency due to the limited asset quality transparency of China's leasing sector in general, 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 https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
BANK OF COMMUNICATIONS CO., LTD. 
