Bank of Shanghai to have sound asset quality, profitability at 0.7%: Moody’s

The bank’s net income/tangible assets fell to 0.74% in 2022 due to a decline in net interest income and fee income. 

The expectation for the Bank of Shanghai (BOSC) is seen to have sound asset quality in the next year or so, Moody’s said in a report.

Moody's observed the bank has focused on economically advanced regions and clients with good credit profiles, sufficient liquid resources, and a high likelihood of government support when necessary.

However, the bank's profitability has weakened, and its capitalisation is modest, which partially offsets these strengths, the credit ratings agency said.

Moody's also predicts that BOSC will maintain a healthy asset quality in the next 12-18 months. 

The formation of new nonperforming loans (NPL) has decreased, thanks to the bank's efforts to reduce exposure to risky assets. 

Nevertheless, Moody's expects BOSC to improve NPL recognition to narrow the gap between its NPL ratio and the stage 3 loan ratio. As of 31 December 2022, these ratios stood at 1.25% and 1.70%, respectively. 

BOSC has reduced its loans to the corporate real estate sector from a peak of 15.9% in 2019 to 9.9% of gross loans as of yearend 2022. 

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Moody's believes that the bank's stringent client selection process and high loan loss reserves will provide some mitigating factors. Although the provision coverage ratio decreased from 301% as of end-2021, to 292% as of end-2022, it remains high.

Moody's projects that BOSC's profitability, as measured by net income/tangible assets, will remain around 0.7% in the next 12-18 months. 

The bank's net income/tangible assets decreased from 0.79% in 2021 to 0.74% in 2022 due to a decline in net interest income and fee income. 

Despite the bank facing challenges such as declining asset yields and increased credit costs on loans in the context of China's uneven economic recovery, Moody's expects the pressure on profitability to be partially alleviated by reduced credit costs related to non-loan assets and lower funding costs in the banking system.

Additionally, other expectations over the course of 12-18 months are for capital position to remain modest, with a Common Equity Tier 1 (CET1) capital ratio of approximately 9%; liquidity profile is expected to remain stable during the same period and; the bank is to maintain sufficient liquid resources to cover its market funds.