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 Short-Term IDR at 'F1+'.

Fitch has also assigned a Shareholder Support Rating (SSR) of 'a' to BOCOM International, in line with our updated Non-Bank Financial Institutions Criteria, dated 31 January 2022. At the same time, Fitch has affirmed '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 the integrated platform for securities and related financial services for Bank of Communications Co., Ltd. (BOCOM, A/Stable/bb+), one of China's top state-owned banks. BOCOM owns 73.1% of BOCOM International, which performs securities brokerage and margin financing, corporate finance and underwriting, investment and loans, asset management and advisory businesses, principally in Hong Kong.

Key Rating Drivers

BOCOM International's Long-Term IDR is driven by Fitch's belief that extraordinary support from BOCOM would be forthcoming in the event of stress due to the strong ties between the two entities, and that, ultimately, potential support from the Chinese government (A+/Stable) would flow through BOCOM to BOCOM International. Fitch considers BOCOM International to be a core subsidiary of the parent due to its role and the substantial reputation risk to BOCOM should BOCOM International default. In addition, BOCOM International carries BOCOM's name and logo, and has a high level of management and operation integration with the group. As such, BOCOM International's ratings are equalised with those of BOCOM.

BOCOM International has a core role in the group, as it is the only entity that carries out securities and related financial services, which form an important part of BOCOM's one-stop, universal banking model.

The Stable Outlook reflects our expectation that the possibility of extraordinary support from BOCOM will remain unchanged.

BOCOM International's Short-Term IDR is mapped to 'F1+', instead of 'F1', from the Long-Term IDR due to shareholder support from BOCOM. The Short-Term IDR is in line with that of parent, as Fitch regards BOCOM's propensity to provide support as more certain in the near term. Fitch does not expect any significant impediments to the prompt flow of funds from BOCOM to BOCOM International.

BOCOM International's standalone credit profile is significantly below that of the IDR, given its limited standalone franchise strength, limited business diversity and risk exposures, particularly to market risks arising from its large investment portfolio, which was equivalent to around 73% of its total assets at end-2021, and reliance on wholesale funding. However, this is counterbalanced by its linkage with and funding support from its parent.

BOCOM International's profitability, as measured by operating profit/average equity, dropped to 4.6% in 2021, from 12.9% in 2020, due to losses arising from bond investments to the troubled real-estate sector. This exposure has been closely monitored by BOCOM International and we consider related risks to be manageable. The company has increased its leverage as a result of its expanded investment book; net adjusted leverage stood at 4.8x, offering a moderate capital buffer against market shocks.

ESG - Governance: BOCOM International has an ESG Relevance Score of '4' for Financial Transparency, as we consider the disclosure of risks from its investment portfolio as less transparent, which has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.

We have revised BOCOM International's ESG Relevance Score for Governance Structure to '3', from '4', to be in line with that of BOCOM, given the positive regulatory developments on financial reform and governance standards in recent years.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on BOCOM would likely affect the ratings on BOCOM International to the same extent.

A downgrade could also be triggered by weakening linkage with BOCOM, which could result 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 group credit facilities for BOCOM International or signs of 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:

Positive rating action on BOCOM would be likely to affect the ratings on BOCOM International to the same extent.

OTHER DEBT AND ISSUER 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.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of the IDRs on 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:

A rating upgrade on 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.

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 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, which has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

We have revised BOCOM International's ESG Relevance Score for Governance Structure to '3', from '4', to be in line with that of BOCOM, given the positive regulatory developments on financial reform and governance standards in recent years.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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