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Bank of Communications Additional Discussion Report: Risk Monitoring Framework

Bank of Communications Additional Discussion Report: Risk Monitoring Framework

1. Purpose and Treatment

This report provides a supplementary summary of the discussion on Bank of Communications Co., Ltd. (BOCOM), based on the existing issuer_summary. The discussion here does not represent a new investment decision or a definitive credit view. Its purpose is to preserve separately the hypotheses raised in the discussion, issues already confirmed in the existing report, and unverified items that should be checked against primary sources going forward.

The existing issuer_summary presents BOCOM as a major Chinese state-owned bank supported by the MOF as a major shareholder, D-SIB / G-SIB designations, a large deposit and asset base, and the 2025 A-share capital increase. At the same time, the report’s starting point is that BOCOM’s NIM remains in the low-1.2% range and ROA in the 0.6% range, making it necessary to monitor property, retail, personal business loans, wholesale and retail trade, policy-driven lending, TLAC, Tier 2, preference shares, and overseas branch and subsidiary debt separately.

2. Analytical Read-Through from the Discussion

The central issue across the discussion was the practical distinction that “BOCOM’s senior issuer credit may remain relatively stable on expectations of government support, but under weak profitability, subordinated / loss-absorbing instruments and overseas issuer layers may price in deterioration earlier.” This is consistent with the conclusion of the existing issuer_summary. The discussion, however, translated that distinction into more granular early-warning indicators.

The foundations already confirmed in the existing report are as follows. BOCOM’s FY2025 NIM was 1.20%, ROA was 0.63%, and ROE was 8.38%; in 1Q2026, NIM remained only 1.23% and annualised ROA 0.66%. The 2025 A-share capital increase improved the core Tier 1 ratio from 10.24% at end-2024 to 11.43% at end-2025, but it declined to 11.25% at end-1Q2026. The NPL ratio has not deteriorated significantly, at 1.28% at end-2025 and 1.30% at end-1Q2026, but the underlying breakdown shows weaknesses, including a 4.20% NPL ratio for the property sector, a 2.68% credit-card NPL ratio, a 5.09% card delinquency ratio, a 1.94% NPL ratio for personal business loans, and a 2.77% NPL ratio for the wholesale and retail sector.

The discussion’s argument, based on these existing facts, was that emphasis should be placed not on a “standalone increase in NPLs”, but on a phase in which multiple credit costs and policy-driven RWA growth simultaneously erode internal capital generation under low NIM. In particular, if the issue is confined to property NPLs, senior credit is still likely to be viewed as stable given expectations of government support. However, once property, retail, personal business loans, wholesale and retail trade, and policy-driven low-return assets begin to pressure PPOP, CET1 internal generation, and TLAC buffers at the same time, the view on subordinated instruments should become more cautious earlier than the view on senior debt.

There are also many unverified items. BOCOM-specific LGFV lending, modified loans, rollovers, whitelist financing, TLAC ratio, TLAC maturity ladder, foreign-currency LCR, spread differentials by overseas issuer, and rating-notch sensitivity for each subordinated instrument have not been additionally verified against primary sources in this work. The following discussion should therefore be read with a clear distinction between “analytical hypotheses based on confirmed facts” and “candidate issues to be verified going forward”.

3. Summary of Q&A Content

3.1 Asset-Quality Deterioration Triggers under Weak Profitability

The first question was which trigger should be watched first in a BOCOM credit-deterioration scenario: property, retail, personal business / SME loans, or deposit costs. The purpose of the question was to identify, separately from government support expectations that underpin senior credit, the sequence in which credit costs could erode earnings and capital buffers under low NIM and low ROA.

The key response was that while property-sector exposure is likely to be a visible early signal, the more important warning line for investment analysis is not property alone, but the point at which credit costs spread to retail, personal business loans, and wholesale and retail trade, making them difficult to absorb through PPOP while NIM remains low. The property-sector NPL ratio is already high at 4.20% in the existing report, and is therefore an area to check first. However, given BOCOM’s weak profitability, cards, consumer loans, personal business loans, and wholesale and retail exposures would also have a large impact on profit absorption capacity if they deteriorated simultaneously.

The follow-up question asked at what stage one should continue to view “senior issuer credit as still stable on government support expectations” while raising the level of caution on subordinated instruments such as TLAC / Tier 2 / preference shares. The response identified the dividing line as a combination of factors rather than a mere increase in property NPLs: (1) property-related provisions eroding PPOP over multiple periods, (2) contagion to retail, personal business loans, and wholesale / retail trade, (3) persistently weak NIM preventing growth in pre-provision profit buffers, and (4) the CET1 ratio and internal capital generation beginning to consume the improvement achieved by the 2025 capital increase. The discussion also noted that rating agencies’ reassessment of subordinated-instrument notching and capital treatment would be an important confirmation signal, but waiting for that signal may be too late.

The credit-analysis implication is that BOCOM’s risk should not be simplified as that of a “property bank”. The weaknesses already confirmed in the existing report — property, cards, personal business loans, and wholesale and retail trade — need to be linked to low NIM and CET1 internal generation. For senior bonds, the MOF as major shareholder, D-SIB / G-SIB status, and the deposit base can be emphasised. For subordinated instruments, however, the thinness of loss-absorption capacity caused by weak profitability will become relevant earlier.

3.2 Policy-Driven RWA Growth after the 2025 A-Share Capital Increase

The second question was whether BOCOM would use the capital headroom created by the 2025 A-share capital increase for credit defence, or for policy-driven lending, growth investments, and balance-sheet expansion. The purpose of the question was to avoid treating the capital increase simply as a credit-supportive factor, and instead to read BOCOM as a bank where government support expectations and policy burdens coexist.

The response treated the 2025 A-share capital increase as, formally, a replenishment of core Tier 1 capital and therefore a short-term credit-supportive factor. At the same time, additional checks during the discussion suggested a direction of expanding support for national-strategy and real-economy sectors such as technology finance, inclusive finance, SMEs, agriculture-related sectors, and manufacturing. In particular, the discussion touched on economic capital relief and differentiated NPL tolerance thresholds for technology finance. However, it remains unverified whether these actually loosen BOCOM’s credit risk management or merely clarify management parameters for policy sectors.

The follow-up question asked at what stage lending expansion into policy-priority areas would begin to dilute the benefit of the capital increase. The key response was that the warning line is not an increase in policy lending per se, but the point at which policy-driven RWA growth exceeds internal capital generation and begins to consume one or more of the CET1 improvement, profitability improvement, or credit discipline. Specifically, lending growth to priority sectors, RWA growth, CET1 trends, NPLs / delinquencies / credit costs in priority sectors, and changes in the operation of economic capital relief should be monitored as a set.

The credit-analysis implication is that BOCOM’s 2025 A-share capital increase should be viewed from both sides: “defensive capital” and “capacity for policy-driven RWA growth”. The existing report confirms that the 2025 capital increase improved the core Tier 1 ratio, but that the ratio declined in 1Q2026. This does not immediately imply deterioration, but as long as loan growth continues, the balance between endogenous capital accumulation and RWA growth needs to be monitored.

3.3 NIM Stability Scenario and Sensitivity to Interest Rates and Deposit Costs

The third question was how quickly changes in China’s policy rates, market rates, and funding costs could affect internal capital generation and subordinated instruments under BOCOM’s low-NIM environment. The purpose of the question was to assess whether changes in NIM and deposit costs, which can be masked by support expectations in senior credit, can be used as early-warning indicators for TLAC / Tier 2 / AT1 / preference shares.

The response noted that BOCOM-specific interest-rate sensitivity, the reset speed of deposits and loans, cost sensitivity by deposit composition, and interest-rate sensitivity priced into subordinated-instrument market prices remain unverified. At the same time, the deposit composition confirmed in the existing report shows that, at end-1Q2026, deposits consisted of 54.57% corporate deposits, 43.86% personal deposits, 30.29% demand deposits, and 68.14% time deposits. A high time-deposit ratio can pressure NIM. Under low NIM, once the decline in deposit costs has run its course, a combination of falling asset yields and rising credit costs could mean that capital generation is not protected even if NIM is flat.

The follow-up question asked under what conditions the premise that “NIM stabilises due to lower deposit costs” would break down. The response was that the risk should be viewed not simply as an interest-rate-increase risk, but as a scenario combining lower asset yields, a floor in deposit-cost reductions, policy-driven low-margin lending, and rising credit costs. Early-warning indicators are not limited to the NIM level itself, but include remaining room for deposit-cost reduction, loan-yield decline, PPOP versus credit costs, and the pace of internal CET1 generation.

The credit-analysis implication is that even if BOCOM’s NIM appears stable in the low-1.2% range, that should not immediately be read as an improvement in credit quality. If NIM stability depends on deposit-cost repricing while asset yields and RWA efficiency remain weak, low profitability remains. Senior credit benefits from support expectations, but for subordinated instruments, a slowdown in internal capital generation has a more direct effect.

3.4 Less Visible Accumulation of LGFV, Local-Government, and Property-Support Assets

The fourth question was the extent to which BOCOM is taking on risk as a policy vehicle in relation to China’s local-government debt issues, LGFV restructuring, and property-sector support. The purpose of the question was to test the possibility that policy support, while suppressing the crystallisation of NPLs in the short term, may leave behind low-yielding, long-dated, and recovery-uncertain assets over the medium term, weighing on profitability and capital efficiency.

The response noted that BOCOM’s role as a provider of policy-driven credit is directionally important, but that BOCOM-specific LGFV loan balances, modified loans linked to local-government debt restructuring, balances of property whitelist financing, and the scale of liquidity support for troubled projects have not been confirmed. This is an important distinction. The discussion raised the hypothesis that China’s large state-owned banks could become vehicles for local-government debt restructuring and support for property-project completion, but it did not reach a BOCOM-specific quantitative conclusion.

The follow-up question asked how to detect substantive credit risk or profitability deterioration while the NPL ratio remains stable. The response was that watch-list loans, delinquencies, modified loans, rollovers, lower loan yields, weaker RWA efficiency, and regional concentration should be monitored rather than the NPL ratio alone. In particular, if the NPL ratio is flat but yields decline, maturities lengthen, and PPOP versus credit costs deteriorates for local-government-related, LGFV, and property-project loans, then apparent asset-quality stability should be treated as risk deferral rather than credit improvement.

The credit-analysis implication is that BOCOM’s policy role should be read not only as support for senior credit, but also as a potential driver of lower capital efficiency. The MOF’s position as major shareholder and BOCOM’s D-SIB / G-SIB status are positive for senior credit, but the same status can also make BOCOM more likely to absorb policy-driven low-return assets. For subordinated instruments, the accumulation of low-return, long-dated assets that have not become NPLs is an important issue because it erodes internal capital generation and loss-absorption capacity.

3.5 TLAC, Capital Instruments, Foreign-Currency Funding, and Overseas Issuer Layers

The fifth question was the extent to which TLAC requirements as a G-SIB, foreign-currency funding, and market access including overseas branch and subsidiary debt could amplify credit risk under stress. The purpose of the question was to test the possibility that deterioration in BOCOM’s market access would first appear not as deposit outflows, but as worse issuance terms for TLAC-eligible debt, Tier 2, AT1, preference shares, foreign-currency bonds, and overseas issuers.

The response noted that, because BOCOM is a G-SIB and needs to issue TLAC and capital instruments on an ongoing basis, early-warning indicators should focus more on issuance costs, tenors, investor demand for loss-absorbing instruments, and spread separation in overseas branch and subsidiary bonds than on ordinary deposit liquidity. In the discussion, completion announcements for Tier 2 Capital Notes, TLAC Non-Capital Bonds, and Undated AT1 Capital Bonds were said to have been confirmed during April to May 2026. However, because this additional_discussion has not additionally re-retrieved the text of those announcements, these are treated as externally confirmed information from the discussion, not as confirmed facts already reflected in the source_registry.

The follow-up question asked at what stage a mere widening of issuance spreads should be seen as a warning phase affecting TLAC headroom, capital policy, and rating pressure on subordinated instruments. The response was that a temporary widening of issuance spreads would still represent a cost-increase phase, but where it is combined with lower subscription ratios, shorter tenors, a more concentrated investor base, reduced capacity to address the TLAC-eligible maturity ladder, spread widening for overseas branch and subsidiary bonds in foreign-currency / offshore markets, weaker CET1 and internal capital generation, and tighter subordinated-instrument notching or capital treatment, it should be viewed as the beginning of constraints on maintaining loss-absorbing buffers.

The credit-analysis implication is that BOCOM parent-bank senior bonds, non-capital TLAC, Tier 2, AT1 / preference shares, overseas branch bonds, and subsidiary bonds should not be treated as the same credit. The existing issuer_summary also emphasises the need to analyse branches, subsidiaries, and capital instruments separately. The discussion extended this distinction into early-warning indicators for market access, concluding that TLAC ratio, buffers versus minimum requirements, maturity ladder, subscription ratios, coupons, investor distribution, ability to issue in the USD / CNH markets, foreign-currency LCR, and rating-agency notching changes should be monitored as a set.

4. Distinction between Issues Confirmed in the Existing Report and Discussion Hypotheses

The issues confirmed in the existing report are that BOCOM is a systemically important major Chinese state-owned bank; its senior issuer credit is supported by the MOF as a major shareholder, D-SIB / G-SIB designations, the deposit base, capital reinforcement, and liquidity above regulatory requirements; but its NIM and ROA are low, and property, retail, personal business loans, wholesale and retail trade, TLAC, and branch / subsidiary debt need to be monitored. The 2025 A-share capital increase, the improvement in the core Tier 1 ratio, the modest decline at end-1Q2026, and NPL breakdowns for property, cards, personal business loans and other categories have also been confirmed in the existing report.

The discussion hypotheses are early-warning lines connecting those facts. Specifically: (1) deterioration across property, retail, personal business loans, wholesale and retail trade, and low NIM, rather than property alone, is more likely to affect subordinated instruments; (2) the 2025 capital increase may have been credit-supportive while also creating capacity for policy-driven RWA growth; (3) NIM stability may be unable to protect internal capital generation once deposit-cost reductions have run their course; (4) LGFV and property-support risks may appear as low-return, long-dated, modified assets before a sharp rise in NPLs; and (5) deterioration in market access may appear first in issuance terms for TLAC, Tier 2, AT1, and overseas issuer bonds before parent-bank senior bonds.

The unverified items are the most important remaining tasks from the discussion. BOCOM-specific TLAC compliance ratio, buffer versus minimum TLAC requirements, maturity ladder, issuance terms, foreign-currency LCR, foreign-currency loans and deposits, guarantee / support structures by overseas branch and subsidiary, balances of LGFV / local-government / property-support assets, modified / restructured loans, regional concentration, and loan yields / credit costs by policy-priority sector have not been confirmed. Without confirming these, analysis should not proceed to specific investment conclusions or relative-value judgements on subordinated instruments.

5. Monitoring Items and Next Checks

In the next checks, the first step is to review NIM, net interest income, PPOP, credit impairment, NPLs, watch-list loans, delinquencies, modified loans, allowance coverage, CET1, RWA growth, and sector-by-sector loan growth in the FY2026 interim results or the next regular disclosure. In particular, credit costs in property, cards, personal business loans, wholesale and retail trade, SMEs, and policy-priority sectors should be assessed not only through the headline NPL ratio but also as a burden on PPOP.

For capital policy, the key question is whether the CET1 improvement after the 2025 A-share capital increase is being maintained, or whether it is being consumed by policy-driven RWA growth. Lending growth to priority sectors, RWA growth, CET1 trends, and sector-specific credit costs are core indicators for assessing the credit-supportive effect of the capital increase.

For LGFV, local-government, and property support, changes within performing loans that have not become NPLs should be monitored. Watch-list loans, delinquencies, modifications, rollovers, low-yielding long-dated assets, regional concentration, and the nature of whitelist financing and completion-support financing should be checked. BOCOM-specific scale has not been confirmed, and this is a high-priority item for the next update.

For TLAC, capital instruments, and market access, TLAC ratio, buffer versus minimum requirements, TLAC / Tier 2 / AT1 maturity ladder, issuance announcements, subscription ratios, investor distribution, coupons, tenors, and Fitch / S&P / Moody's comments on subordinated-instrument ratings should be checked. In foreign-currency and offshore markets, the spread separation between parent-bank senior bonds and overseas branch / subsidiary bonds, ability to issue in the USD / CNH markets, foreign-currency LCR / NSFR, and guarantee relationships by issuer should be checked.

The following six items are candidates for transfer to issuer_notes.md. In line with the user’s instruction, issuer_notes.md itself has not been updated this time.

6. Unverified Items

This additional_discussion has not re-retrieved or re-verified the external Web checks included in the discussion. Therefore, 2026 completion announcements for Tier 2, TLAC non-capital bonds, and AT1 issuance, rating-agency comments, and Reuters or other references to the TLAC shortfall and issuance-market conditions for Chinese G-SIBs as a whole are treated as externally confirmed information within the discussion. If they are to be incorporated into the source_registry, BOCOM official IR materials, rating-agency releases, and regulatory materials need to be checked again.

BOCOM-specific LGFV, local-government, and property-support exposures are unverified. LGFV loan balances, modified loans, rollovers, regional concentration, whitelist financing, completion-support financing, loan yields, RWA efficiency, and allowance adequacy need to be verified against primary sources going forward.

BOCOM-specific TLAC ratio, buffer versus minimum requirements, maturity ladder for TLAC-eligible debt, foreign-currency LCR / NSFR, foreign-currency loan-to-deposit ratio, debt balances and guarantee relationships by overseas branch and subsidiary, spread differentials versus parent-bank senior bonds, and subordinated-instrument notching sensitivity are also unverified. For any investment decision on individual securities, the final terms, prospectus, issuer, governing law, loss-absorption clauses, and the presence or absence of guarantees / keepwells need to be checked separately.

7. Reference Context Reviewed