Moody’s Investors Services has downgraded China’s fifth biggest lender in terms of assets to junk status, due to the rise wholesale funding costs amidst a concerted deleveraging campaign.
Moody’s adjusted its baseline credit assessment for Bank of Communications to Ba1 from Baa3, putting the lender firmly beneath the threshold between investment grade and junk.
In downgrading BoCom to junk status, Moody’s cited the impact on profitability of the rise in rates on the interbank market that medium-sized lenders are increasingly tapping as a key source of funds.
“The downgrade of BoCom’s BCA is driven by its weaker funding profile when compared to other state-owned Chinese banks, as well as its pressured profitability as a result of an environment of increasing market funding costs,” said Moody’s.
Shanghai-headquartered BoCom is often categorised as one of China’s leading state-owned banks alongside the “big four” of the Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China.
BoCom is far smaller in size than China’s big four banks, however, and as a medium-sized lender has made increasing use of the interbank money market as a source of funds in recent years, as retail customers turn away from low-interest bank deposits in search of more lucrative alternatives.
China’s ongoing deleveraging campaign has also pushed interbank lending rates higher and increased the cost of wholesale funding, while capital obtained from other financial institutions via the money market tends to be more fickle and restive than traditional bank deposits, which in turn exacerbates liquidity risk.