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Fitch Rates Mainland China's 1st Basel III Tier 2 Offshore Issue from BOCOM
September 18, 2014 / 10:53 AM / 3 years ago

Fitch Rates Mainland China's 1st Basel III Tier 2 Offshore Issue from BOCOM

(The following statement was released by the rating agency) HONG KONG/SHANGHAI/SINGAPORE, September 18 (Fitch) Fitch Ratings has assigned Bank of Communications' (BOCOM; A/Stable) upcoming Basel III-compliant Tier 2 subordinated notes an expected 'BBB+(EXP)' rating. This is the first offshore issue of a Basel III-compliant Tier 2 instrument by a mainland Chinese entity. The subordinated notes constitute direct, unsecured and subordinated obligations of the bank and will be denominated in US dollars and euros. BOCOM will use the proceeds to strengthen its capitalisation for business growth and for general corporate purposes. The bank will have the option, upon obtaining consent of the China Banking Regulatory Commission (CBRC), to redeem the US dollar tranche in full at the end of the fifth year or the euro tranche in full at the end of the seventh year. When there is a change in CBRC capital regulations such that the notes will no longer qualify as Tier 2 capital, the bank will also have the option to redeem the notes in full upon obtaining consent of the CBRC. The notes include a non-viability trigger event for capital recognition under the CBRC's Capital Management Rules for Commercial Banks (Trial). If a non-viability event occurs, the principal amount and any unpaid interest of the notes will be written off in full permanently. The notes will be included in BOCOM's Tier 2 capital.The final rating of the notes is contingent on the receipt of the final documents conforming to information already received. KEY RATING DRIVERS Fitch rates the notes two notches below BOCOM's IDR of 'A' to reflect their high loss severity relative to senior unsecured instruments given their subordination and full write-down feature. A non-viability event occurs when the CBRC decides a write-off is necessary or a relevant authority decides a public-sector injection of capital or equivalent support is necessary to maintain the bank's viability. If a non-viability event occurs, the notes will be mandatorily written down in full. For the purposes of rating these notes, the IDR is considered the point that best reflects the risk of BOCOM triggering a non-viability event given its quasi-policy roles to support domestic growth and central government ownership. Fitch believes the authorities will pre-emptively intervene to shore up capital and liquidity to more sustainable levels - or take some other form of remedial action - should they consider that prolonged deterioration, if unaddressed, could eventually lead to the bank becoming non-viable. Since there are no other going-concern loss absorption features, Fitch believes the risk of non-performance on the notes is adequately reflected in the anchor rating with no additional incremental notching required. Under Fitch's methodology the instrument does not qualify for any equity credit. RATING SENSITIVITIES Any changes to the rating on the subordinated notes will be directly correlated to changes in BOCOM's IDR. In addition, BOCOM's IDR is sensitive to any shift in the Chinese government's propensity or ability to support BOCOM in a timely manner. The other ratings of BOCOM are unaffected by this action, and are as follows: Long-Term Foreign-Currency IDR at 'A'; Stable Outlook Short-Term Foreign-Currency IDR at 'F1' Support Rating at '1' Support Rating Floor at 'A' Viability Rating at 'bb-' Contact: Primary Analyst Jonathan Cornish Managing Director +852 2263 9909 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Benjamin Lin Associate Director +8621 5097 3189 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable criteria, "Global Financial Institutions Rating Criteria" dated 31 January 2014, "Assessing and Rating Bank Subordinated and Hybrid Securities" dated 31 January 2014, and "Rating FI Subsidiaries and Holding Companies" dated 10 August 2012, are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Rating FI Subsidiaries and Holding Companies here China Banks: Applying Fitch’s Criteria on Basel III Capital Instruments here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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