Moody's confirms BOC HONG KONG Aa3/P-1 deposit rating with a stable outlook

The rating agency Moody's has confirmed the Aa3 long-term foreign and local currency deposit ratings of BOC Hong Kong (02388.HK), as well as the P-1 short-term foreign and local currency deposit ratings.

At the same time, Moody's confirmed the bank's baseline credit assessment (BCA) and adjusted BCA at a2, long-term and short-term counterparty risk assessments at Aa2(cr)/P-1(cr), and long-term and short-term foreign and local currency counterparty risk ratings at Aa3/P-1. The senior unsecured foreign currency medium-term note program is rated (P) Aa3, the subordinated foreign currency medium-term note program is rated (P) A3, and the foreign currency commercial paper rating is P-1.

The outlook for the bank's long-term deposit rating remains stable.

Moody's stated that the confirmation of BOC Hong Kong's ratings and assessments, along with the stable outlook, reflects Moody's expectation that the bank will maintain its good financial condition over the next 12 to 18 months, supported by its improved capital levels and profitability, as well as a robust funding structure and strong liquidity. These credit strengths help offset the pressures from its exposure to the real estate sector in mainland China (A1 negative) and the Hong Kong Special Administrative Region (Hong Kong, Aa3 stable), which will continue to pose challenges to its asset quality. At the same time, Moody's believes that the moderate level of support provided by the Hong Kong government during this period will remain unchanged.

Moody's expects BOC Hong Kong's profitability to remain good over the next 12 to 18 months, primarily supported by fee income and funding business income. The bank's lower funding costs, good operational efficiency, and lower credit costs all contribute to its strong profitability. The bank's net income/tangible assets ratio is expected to remain roughly stable at 1.2% in the first half of 2025, similar to the level in the first half of 2024.

BOC Hong Kong has consistently maintained a strong capital adequacy level. Moody's expects the bank to maintain a solid capital position over the next 12 to 18 months, with its good profitability helping to generate internal capital to support business growth. Due to strong profit retention in the first three quarters of 2025, and changes in the calculation of risk-weighted assets related to credit risk and operational risk due to the final reforms of the Basel III framework effective January 1, 2025, risk-weighted assets are expected to decrease, with the common equity tier 1 capital ratio significantly increasing from 20.0% at the end of 2024 to 24.3% at the end of September 2025.

Moody's expects BOC Hong Kong to maintain its good funding and strong liquidity over the next 12 to 18 months, thanks to its strong deposit-raising ability through a wide branch network. The bank also holds a large amount of liquid assets, enabling it to withstand significant market fluctuations. As of the end of June 2025, BOC Hong Kong's high-quality liquid assets accounted for 33% of its tangible banking assets. Its average liquidity coverage ratio for the second quarter of 2025 was 185%, well above the regulatory minimum requirement of 100% Moody's expects that the asset quality of BOC Hong Kong will remain robust and stable over the next 12 to 18 months. The bank's asset quality indicators outperform those of its peers due to its consistently good loan approval standards. The bank's non-performing loan ratio is expected to slightly decrease from 1.05% at the end of December 2024 to 1.02% at the end of June 2025. The borrowers of BOC Hong Kong are primarily large enterprises, which typically have strong financial conditions and low balance sheet leverage. However, due to the bank's risk exposure to the real estate sector in Hong Kong and mainland China, there remains tail risk to asset quality.

BOC Hong Kong is of strategic importance to its ultimate parent company, Bank of China (03988.HK) (A1 negative, BCA baa1). Moody's assumes that the bank will receive a very high degree of affiliate support from its parent company when needed. However, given that the parent company's baa1 BCA is lower than BOC Hong Kong's BCA, Moody's has not incorporated any affiliate support uplift in the bank's adjusted BCA, thus maintaining its adjusted BCA at a2