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Investing.com -- Moody's Ratings has affirmed BOCOM International Holdings Company Limited's (BOCOM International) Baa1 long-term issuer ratings for both foreign and local currency, along with P-2 short-term issuer ratings. The ratings agency has, however, revised the company's outlook from stable to negative.
This change in outlook is due to BOCOM International's deteriorating capital position, following three consecutive years of net losses. The company's substantial proprietary investments, primarily in bonds and unlisted equity investment, contribute to its high investment risk. These factors are expected to result in weak profitability over the next 12 to 18 months, dependent on the performance of a volatile market environment. This situation presents challenges to the company's capital management and puts downward pressure on its standalone assessment of B1.
As of the end of 2024, BOCOM International's financial assets at fair value, and loans and advances, made up 66% of the company's total assets. The company has reduced its property-related debt investments and loans, as well as unlisted equity investments, over the past three years. However, the remaining property exposure and unlisted investments are still substantial compared to its shareholders' equity.
In 2024, BOCOM International reported a net loss of HKD1.2 billion, following net losses of HKD1.5 billion in 2023 and HKD3.0 billion in 2022. This led to a significant decrease in its shareholders' equity to HKD0.9 billion at the end of 2024 from HKD1.8 billion at the end of 2023. As a result, its leverage rose to 16.9x at the end of 2024 from 10.1x at the end of 2023.
The affirmation of BOCOM International's Baa1/P-2 ratings is based on the expectation that the company will maintain sufficient liquidity, supported by sizable credit facilities from various banks, including its parent bank, Bank of Communications Co., Ltd. (BOCOM, A2 stable, baa3 Baseline Credit Assessment). The company's capitalization is anticipated to remain weak over the next 12-18 months, barring any equity capital injection from the parent bank.
BOCOM International's Baa1 long-term issuer rating includes its standalone assessment of B1, a three-notch uplift based on the assumption of a very high level of support from BOCOM, and a three-notch uplift based on the assumption of a very high level of indirect support from the Chinese government via its parent in times of stress.
The possibility of an upgrade of BOCOM International's ratings is unlikely due to the negative outlook. However, the outlook could return to stable if the company reduces its investment risk and significantly improves its shareholders' equity and profitability, while maintaining a good liquidity and funding profile.
A downgrade could occur if the willingness and capacity of BOCOM or the Chinese government to support the company weaken, or if the company's standalone assessment is lowered. The standalone assessment could be lowered if there is no improvement in its shareholders' equity and profitability, its liquidity and funding profiles weaken considerably, or it encounters significant risk management failures.
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