Bank of China boosts Aussie firepower

George Lekakis Branches of Foreign Bank
Photo by Yoshi Canopus CC BY SA 3-0
Photo by Yoshi Canopus CC BY SA 3-0

Bank of China’s Australian subsidiary is planning to deepen its presence in the local banking market after receiving a A$330 million capital injection from its Beijing-based parent.

According to disclosures in financial accounts filed to ASIC, the Bank of China more than quadrupled the capital base of the Australian arm to $459 million in December last year.
The capital base - which includes contributed equity, retained profits and reserves - stood at only $111 million at the end of 2017.

The enhanced financial commitment to the subsidiary will likely underpin an escalation of its lending activity, which is already outpacing most other APRA-regulated lenders.

Bank of China Australia Limited grew its loan book in 2018 by 10.3 per cent to $1.69 billion, while the average expansion in loan assets at major banks such as ANZ and CBA was less than 3 per cent.

BOCAL is the vehicle through which the Bank of China conducts most of its retail banking operations in Australia.

Its strong loan growth propelled the subsidiary to a full year net profit of $17.43 million – more than double the 2017 bottom line of $8.6 million.

BOCAL is chaired by former Keating Government minister Professor Stephen Martin and the management team is headed by a veteran Bank of China executive, Xixu Sun.

Directors of the local subsidiary indicated in the 2018 financial report that the capital injection would be used to drive further loan growth.

“The increase in capital will provide the bank with a greater capacity to achieve its business growth aspirations whilst meeting APRA’s capital requirements over the coming years,” the board stated in the report.

Another indication of BOCAL’s increased presence has been the dramatic improvement in its retail deposits base.

In the 14-months to the end of February BOCAL expanded its total Australian deposits by $356 million or 32.5 per cent, mostly through local retail customers. This indicates that all new lending done in 2018 was deposit-funded.

The renewed campaign for deposits could boost the company’s interest margins this year because it appears that the rate at which retail liabilities are expanding is comfortably outpacing the increase in interest being paid out to customers.

Note 6 of the accounts show that BOCAL paid out total interest of $34.1 million to local depositors in 2018 – a rise of $4.8 million or 16 per cent.

Given the massive capital injection made by the parent it is not difficult to envisage a moment in the near future where BOCAL will start to build its brand in the mainstream of the Australian market.

APRA’s macro-prudential interventions are likely to hasten that repositioning.

Since 2017, BOCAL has been forced to rein in lending to non-resident Chinese borrowers.
No more than 20 per cent of all mortgage lending executed through BOCAL’s 12 retail branches can be made to non-Australian residents.

This cap has forced BOCAL to focus primarily on the domestic owner-occupier market and to compete directly with leading homegrown brands for borrowers.

BOCAL’s balance sheet does not include Bank of China’s substantial corporate and government banking activities in Australia, which are reported through the foreign branch entity.

According to the latest APRA data, the branch entity is now the 14th largest overall deposit taker in Australia with $13.5 billion in its vaults.

It ranks as the 13th largest aggregate lender with loan assets of $17.9 billion at the end of February.

Mystery surrounds the financial performance of the Bank of China’s branch entity because its annual accounts are not publicly available.