Bank of China shifts attention back to mainland for growth: S&P 

Traction from its wealth management business will support profits.

It’s back to the basics for Bank of China (BOC), one of China’s biggest lenders, as it is expected to pivot its focus back to its domestic business for growth amidst global uncertainties arising from new COVID strains and the Russia-Ukraine war.

The bank should see ample support thanks to accommodative economic policies in China and with its wealth management business expected to gain further traction in 2022, according to S&P Global Ratings.

“Stimulative economic policies at home will help BOC expand its mainland loans this year. This will likely offset renewed pressure on net interest margin (NIM) after China cut interest rates to support its economy,” S&P said in a report.

The bank's net interest income rose 2.2% in 2021 on the back of a 10.5% loan growth that negated a NIM contraction of 10 basis points (bp). 

Further traction in the bank's wealth management business will also support its revenue growth. Revenue from this segment reportedly grew 6.7% in 2021, propped up by a 7.8% growth in fee value thanks to the healthy growth of BOC’s fund distribution and custody businesses.

BOC’s nonperforming asset ratio will also steadily decline over the next 24 months, according to S&P. The bank’s Non-performing loans (NPLs) remained low at 1.33% in 2021, broadly stable from the mid-2021 level of 1.3%. 

However, BOC still faces pressure from loans extended to the local real estate sector. Its mainland real estate NPL ratio was 5.05%, rising from 4.91% as of June 2021, and remains an area of stress for BOC, S&P warned. 

On the upside, the overseas NPL ratio improved, falling to 0.58% at end-2021, from 0.72% in mid-2021. This was lower than BOC's mainland NPL ratio of 1.49%, supporting its overall asset quality.

Credit costs could also remain elevated over the next 24 months, after ticking up to 0.66% in 2021 from 0.65% in the first half of last year. 

“Property deleveraging in China, potential spillover effects from the Russia-Ukraine conflict, and the ongoing pandemic are reasons for prudence,” S&P warned, but noted that BOC's NPL coverage ratio was 187% as of end-2021, up from 184% in mid-2021.

“Although NIM pressure and credit cost could weigh on profitability, the pressures should be manageable, given BOC's strong business franchise and diversified exposure,” it added. 

Capitalization is also likely to remain adequate, as BOC keeps its modest risk appetite.