Running Head: The Bank of China

THE BANK OF CHINA

CASE STUDY ANALYSIS

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DATE: 22-03-2021
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The Bank of China

Table of Contents

Introduction of Bank........................................................................................................................5
Altman’s Z score for the Years........................................................................................................5
Credit Rating for the Years..............................................................................................................6
Net Liquidity Statement...................................................................................................................8
Financing Gap & Financing Requirement.....................................................................................12
Interest Rate Risk Exposure...........................................................................................................14
Market to Book Ratio....................................................................................................................15
Liquidity Coverage Ratio..............................................................................................................16
Value at Risk Metrics....................................................................................................................16
Global Financial Crisis..................................................................................................................17
Steps to become responsible / transparent and Social & Environmental Consideration:..............18
Sarbanes-Oxley Act.......................................................................................................................19
Works Cited...................................................................................................................................20
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The Bank of China

List of Tables

Table 1: Altman Z Score (2016-2020).............................................................................................5

Table 2: Credit Ratings (2016-2020)...............................................................................................5
Table 3: Credit Rating Comparison with Deutsche Bank...............................................................7
Table 4: Liquidity Risk Ratio (2015-2020)...................................................................................11
Table 5: Financing Gap (2015-2020)............................................................................................12
Table 6: Financing Requirement (2015-2020)..............................................................................13
Table 7: Interest Rate Risk Exposure (2015-2019).......................................................................14
Table 8: Market to Book Ratio (2015-2019).................................................................................15
Table 9: Liquidity Coverage Ratio (2015-2020)...........................................................................15
Table 10: Value At Risk Metric - 1 (2015-2017)..........................................................................16
Table 11: Value At Risk Metric - I1 (2018-2019).........................................................................17
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The Bank of China

List of Figures

Figure 1: Net Liquidity Statement (2019).......................................................................................9

Figure 2: Net Liquidity Statement (2018).......................................................................................9
Figure 3: Net Liquidity Statement (2017).....................................................................................10
Figure 4: Net Liquidity Statement (2016).....................................................................................10
Figure 5: Net Liquidity Statement (2015).....................................................................................11
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The Bank of China
Introduction of Bank

After the sanction of Dr. Sun Yat-sen, in Feburary 1912 the Bank of China was established.

Bank of China Ltd. (BOC) is considered one of the most internationalized and diversified banks

around China. The bank provides the services in more than 57 countries that include China’s

mainland, Macau and Hong Kong, etc. The bank mainly deals in personal banking, corporate

banking, and the financial market also. Bank of China also operates in businesses like investment

banking via their fully-owned subsidiary named Bank of China International Holdings Limited.

Bank of China also covers securities, direct investment, aircraft leasing, funds, insurance, and

others to provide services to its wide range of customers (Daily, 2021).

Throughout the history, Bank of China has a mission of “pursuing excellence”. The bank has

made its brand image which is highly recognized by their customer and within the market, by

working on innovative ideas and keeping its people first (China, 2021).

Altman’s Z score for the Years

Kenton (2020) defined Altman Z-score as a way to predict the likelihood of bankruptcy. It can be

calculated with the help of five financial ratios available in the company's annual report. A score

of 1.8 depicts that the company might face the problem of bankruptcy. A score of 3 depicts that

the company has a solid position in term of finance in the market. People used the Altman Z-

score to find out whether to invest in the stock or not. If the value is near 03, investors are more

likely to purchase the stock and if the value is closer to 1.8 then the investor considers selling the

stock.

Formula used to calculate Altman Z-score is given below

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Whereas:
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The Bank of China
A Means Working Capital divided by Total Assets

B Means Retained Earnings divided by Total Assets

C Means Earnings before Interest divided by Tax / Total Assets

D Means Market Value of Equity divided by Total Liabilities

E Means Sales divided by Total assets

2020 201
2019 2018 2016
7

Altman Z 3.90
3.899 4.183 4.32 4.66
Score

Table 1: Altman Z Score (2016-2020)

Credit Rating for the Years

Credit rating is defined as a view regarding the ability of a company or group to fulfill the

financial obligations given by a credit agency. It represents the likelihood of a risk carried by a

debt instrument in form of a loan or bond insurance. There are three major agencies for credit

rating:

2020 201 201

2018 2016
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S & P Global Rating A A A A

Mood’s Investor
A1 A1 A1 A1
Service

Fitch Rating A A A A A

Table 2: Credit Ratings (2016-2020)

1. S&P Global Ratings: A

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The Bank of China
S & P is a CRA which is based in America and its division publishes financial analysis based

on commodities, stocks, and bonds. According to the rating, the Bank of China has a strong

capacity to meet its financial commitment. But according to the credit rating agency, a company

with an “A” rating is somewhat more liable to any change in circumstances and economic

conditions than a company with a high rating.

2. Moody’s Investor Service: A1

Moody’s is another credit rating agency that provides financial research on bonds issued by

the entities. Moody’s Investor Service rated the Bank of China as an upper-medium grade and

low credit Risk Company. It means the Bank of China has a low default risk which is the low

likelihood in any credit event. The company has a strong capacity to meet its contractual cash

flow obligations.

3. Fitch Rating: A

Fitch rating is another American credit rating agency and one of the big three credit agencies

other than S & P and Moody’s. in 1975, it is designated by the US Securities and Exchange

Commission. According to the Fitch Rating, The Bank of China is a quality company and faces a

bit higher risk than high-rated companies. In this case, the bank can face the risk and it can affect

their finance in some changes in the economic situation.

Moody’s Investor
S & P Global Rating Fitch Rating
Service
Year
Bank of Deutsche Bank of Deutsche Bank of Deutsche

China Bank China Bank China Bank

2020 A+ BBB+ Aa3 A3 A BBB-

2019 A BBB+ A1 A3 A BBB

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The Bank of China
2018 A A- A1 A3 A BBB+

2017 A A- A1 A3 A A-

2016 A BBB+ A1 A3 A A

Table 3: Credit Rating Comparison with Deutsche Bank

S & P Global Rating:

As compare to Deutsche Bank, the Bank of China has a better position. In this scenario,

Deutsche Bank has an adequate capacity to meet its financial commitment. Because in case of an

economic change or any changing circumstances can harm Deutsche Bank as compared to Bank

of China.

Moody’s Investor Service:

Moody’s rated Deutsche Bank and Bank of China with the same upper-medium grade. Both the

bank has low credit risk in case of any change happens in economic conditions.

Fitch Rating:

Fitch-rated the Deutsche Bank as a medium-class company to a high-class company. According

to this rating, Deutsche Bank is satisfactory at some moment and reliable at some moment.

According to the comparison by three credit rating agencies, the Bank of China has a more

satisfactory and reliable rating as compared to the Deutsche Bank. Tracking changes in the

financial and microeconomic condition, the Bank of China, made controlled, structural

adjustments and mitigated credit risks during that period. With the help of this, it optimizes the

bank’s credit structure, increased credit assets quality, and improves the credit risk management

policies. In the year 2019, the 48.49% of the Bank of China’s credit exposure is the result of

advances and loans to the customer while 20.31% shows debt securities investment.

Net Liquidity Statement

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The Bank of China
Eleonora Kontuš (2019) defined liquidity as the composition of the firm’s current assets and

current liabilities. The firm can measure its level of liquidity by measuring the amount of cash

available, the amount and number of assets that can easily convertible to cash, the status of the

firm to make

or lose the

money,

how much

time a firm is

taking to

repay its debt,

and the

ability

to raise more money by borrowing money and issuing the securities (Nelson J. Lacey, 2011).

1. Net Liquidity Statement (2019)

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The Bank of China

Figure 1: Net Liquidity Statement (2019)

2. Net Liquidity Statement (2018)

Figure 2: Net Liquidity Statement (2018)

3. Net Liquidity Statement (2017)

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The Bank of China

Figure 3: Net
Liquidity
Statement (2017)

4. Net Liquidity Statement (2016)

Figure 4: Net
Liquidity Statement (2016)

5. Net Liquidity Statement (2015)

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The Bank of China

Figure 5: Net Liquidity Statement (2015)

Liquidity Risk Management

2020 2019 2018 2017 2016 2015

58.71 47.09 45.60 48.65

Liquidity Ratio NA 54.56%
% % % %

Table 4: Liquidity Risk Ratio (2015-2020)

In 2015, the liquidity ratio of BOC was 48.56% which is in 2016 decrease to 45.60%. in 2017 the

liquidity ratio increase from 45.60% to 47.09% and increased in 2018 to 58.7% which in 2019

decrease again.

Financing Gap & Financing Requirement

Another measure used to measure the liquidity risk of any company or business, the financing

gap is used. The financing gap is defined as

Financing Gap means Average Loans minus Average Deposits

Positive value of the financing gap in any business means the bank needs to fund it running

down its cash, assets or they can borrow money in the market.
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The Bank of China
An increase in the financing gap can depict the liquidity problems for a bank because that means

the increase in deposit withdraws and loans due to increasing commitment exercise of loans.

If the company did not go for the liquidity of an asset then the company needs to borrow money

from the market, as it will impact the creditworthiness of the bank also.

The bank of china’s deposits and loans are divided into two categories. Here in the calculation, a

sum of both the category is used to calculate the financing gap for The Bank of China:

1. Deposits:

a. Personal Deposits

b. Corporate Deposits

2. Loans

a. Personal Loans

b. Corporate Loans

Years Average Loans Average Deposits Financing Gap

(RMB) (RMB) (AL-AD)

(RMB)

2015 9135860 11442531 -2306671

2016 9973362 12553999 -2580637

2017 10896558 13215002 -2318444

2018 11787683 14354883 -2567200

2019 13034189 15291117 -2256928

2020 (Third 10977598 12738608 -1761010

Quarter)

Table 5: Financing Gap (2015-2020)

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The Bank of China
Financing requirement = Financing Gap + Liquid Assets

Years Financing Gap Liquid Assets Financing

(AL-AD) (RMB) Requirement

(RMB) (FA-LA)

2015 -2,306,671 3,254,171 947500

2016 -2,580,637 3,232,892 652255

2017 -2,318,444 3,312,174 993730

2018 -2,567,200 3,976,211 1409011

2019 -2,256,928 3,962,370 1705442

2020 (Third -1,761,010 4,237,046 2476036

Quarter)

Table 6: Financing Requirement (2015-2020)

Discussion:

Financing Gap: in 2015, the average loan taken by the Bank of Punjab was 9,135,860 (RMB)

and the average deposit amount was 11,442,531 (RMB). As of the end of 2016, total deposits in

the banks totaled RMB 12,553,999 an increase of RMB 1,111,468 from the previous end year.

While in the end of the year 2017, the total deposit in the bank was RMB 13,215,002, an increase

of RMB 661,003. At the end of the year 2018, the total deposit in the bank was 143548883, with

an increase of RMB 936,234. While at the end of the year 2019, the total deposit in the bank was

15291117, with an increase of RMB 936, 234.

According to the table and the calculation, the financing gap of The Bank of China is negative,

which means the bank does not need to fund the bank by running down its cash or assets or they

need to borrow the money for smooth running of the operations.

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The Bank of China
Interest Rate Risk Exposure
Interest rate risk is defined as a decrease in the investment income or increase in loan interest

that is caused by the change in the market interest rate that results in the overall profit of the

company.

Average High Low

2015 6.98 13.32 3.44

2016 10.24 16.45 6.59

2017 14.54 17.58 9.61

2018 17.26 23.85 12,24

2019 18.70 23..50 13.24

Table 7: Interest Rate Risk Exposure (2015-2019)

Market to Book Ratio

The M to B Ratio which is also known as P to B Ratio which is used to measure the company's

value in current market as compare to its book value. Market value can be stated as the

outstanding shares of stock price. We can say that book value of any company is the amount that

is left when company converts their all assets with cash and pay their liabilities. The book value

means the net or total assets of the business and it originated from the balance sheet statement.

We can say that, market to book ratio is used to do comparison of company’s net assets which

are present from the sale price of its stock (Institute, 2021).

M to B Ratio Formula = Market Capitalization divided by Net Book Value

Market Capitalization Net Book Value Market to Book Ratio

(RMB) (RMB)

2015 1,087,567 182,031 5.97

2016 982,349 194,897 5.04

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The Bank of China
2017 1,105,158 205,614 5.37

2018 1,008,516 227,394 4.43

2019 1,027,166 244,540 4.20

Table 8: Market to Book Ratio (2015-2019)

Interpreting the Ratio

While interpreting the result, the value of the ratio less than the 1 means undervalue stock which

depicts the bad investment. The value of the ration greater than q means the stock are overvalued

which depicts good performance. Different analysts have different option regarding the

interpretation of the result; few of them take this in opposite way. In this situation, use of other

method with market to book ratio or other than market to book ratio can be helpful for the

company.

The undervalued or low ratio also depicts that there is some issue with the company. It also

states that the investor is paying much more for the product if in any situation company gets

bankrupt. The ratio helps the company or the business to determine the assets they hold is

valuable to the stock price market or not. To get the better result comparison between two

companies in same sector will be helpful or beneficial.

Liquidity Coverage Ratio

2020 2019 2018 2017 2016 2015

Liquidity

Coverage 137.36% 136.36% 139.66 % 117.41% 117.17% 119.3 %

Ratio

Table 9: Liquidity Coverage Ratio (2015-2020)

Since 2017, the bank of china measured the Liquidity Coverage Ration on daily basis. According

to the third quarter of the year 2020, the Bank measured the ratio with 92-day LCR, which is
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The Bank of China
standing at 137.36 %. In 2019, the bank measured the ration with 92-day LCR, which is standing

at 136.36%, in 2018 it was 139.66%, in 2017 it was 117.41% and in 2016 it was 117.17%. The

Liquidity Coverage Ratio (LCR) represents an increase in the percentage and the reason of this is

the increase in the liquid assets (HQLA).

Value at Risk Metrics

Unit (USD 2015 2016 2017

Million) Average High Low Average High Low Average High Low

Interest Rate 6.98 13.32 3.44 10.24 16.45 6.59 14.54 17.58 9.61

Risk

Foreign 3.86 8.41 1.81 5.24 9.75 2.62 10.67 17.70 6.12

Exchange Risk

Volatility Risk 0.30 0.81 0.09 0.69 1.55 2.29 0.35 1.21 0.11

Commodity 0.71 1.32 0.06 0.93 1.56 0.01 1.25 3.92 0.14

Risk

Total 7.91 14.41 4.09 10.31 17.45 6.75 17.44 23.89 12.43

Table 10: Value At Risk Metric - 1 (2015-2017)

Unit (USD 2018 2019

Million) Average High Low Average High Low

Interest Rate 17.26 23.85 12,24 18.70 23..50 13.24

Risk

Foreign 10.19 17.66 4.99 18.00 26.09 9.80

Exchange Risk

Volatility Risk 0.38 0.71 0.11 0.44 2.27 0.17

Commodity 1.14 5.55 0.13 1.77 6.26 0.75

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The Bank of China
Risk

Total 19.87 26.28 13.92 23.03 29.56 17.11

Table 11: Value At Risk Metric - I1 (2018-2019)

Global Financial Crisis

The government of Chinese changed its policy quickly when (GBL) global financial crisis

became apparent. In 2008, the government started to implement the policy at large at the same

time the bank of china also piloted its monetary policy. In November 2018, the Chinese

government introduced the amount of 4 trillion yuan stimulus packages. Due to the crisis, the

government decided to reduce the tax in form of value-added tax reform and tax cuts in the

purchase. In such a scenario, the BOC changed their monetary policy that became the reason for

the increase in credit and money supply. Due to the adoption of a large fiscal policy, the BOC

monetary policy should be more accommodating. Non-market interference was the result of an

increase in credit and money supply to some extent. If the bank was allowed to take decisions

based on economic factors, then the credit and money supply would not have gone so fast. This

means less problem or tension to think about the possibility of the non-performing loan ratio.

Steps to become responsible / transparent and Social & Environmental

Consideration:
1. During the outbreak of coronavirus, the Bank of China deploys the Central Committee

(CPC) and state council that coordinate and provide a preventive measure to control the

pandemic situation and provide financial support against the coronavirus fight. Bank of

China donated the material and the amount / money and materials to front-line persons,

granted loans to many enterprises dealing in pandemic prevention and control. The Bank

also lent the money to multiple small and medium level enterprises or individuals

businesses at less interest rate. With that Bank of China worked for the safety and health
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The Bank of China
of their employees working domestic and overseas by providing medical supplies. All

these practices showed commitment toward the betterment and safety of the community

(China, 2020)

2. The second step BOC took a step in helping the people of four countries with poverty

relief. With that, the bank also helped the villages of around 1,034 across the country, and

around 380,000 people in needy areas (China, 2020)

3. BOC also worked for in-depth and systematic change through digital transformation. The

main task was to reshape the service and business procedure of the bank with the digital

mindset and injects digital genes like artificial intelligence, big data with the outcome of

becoming an open, innovative, intelligent digital bank (China, 2020).

Sarbanes-Oxley Act
The U.S. created a law named as Sarbanes-Oxley Act in 2002 to protect the investor from

fraudulent activity in financial practices in public traded companies. back in 2002, Sarbanes-

Oxley forced several accounting, data retention, and reporting orders against many corporate

scandals and increase of the dot-com bubbles to make sure that business practices at large

companies remain above.

As discussed above, the Sarbanes-Oxley act exists due to the scandals that arise around the

millennium. Many traded companies, for example, Eron and WorldComv used fraudulent or

illegal techniques that hide their business losses from their stockholders and they kept the stock

price high by using the artificial method. With the help of these techniques, board members and

executives enriched themselves, cashed out, and leave the investor in a difficult position.

To prevent these kinds of activities from happening again, the Sarbanes-Oxley Act was imposed.

The main purpose of the law was to improve the company's behavior by making sure that

companies are producing the right and accurate financial data about their company and can show
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The Bank of China
and available their financial data to the investors in time. With that, it is also trying to make sure

that the amount of data available in the IT department or server has to be kept accurate and safe

from internal and external threats and available to the auditor at any short time (Fruhlinger,

2020).

Implementation of the Sarbanes-Oxley Act 2002, a new vision of corporate social responsibility

and accountability has evolved or been born. As viewed the concept of the Sarbanes-Oxley was

modelled after FDICIA (Federal Deposit Insurance Corporation Improvement Act) that endorsed

after the loan and saving crisis of the 1990s. The act was passed due to the increase in the

financial and accounting scandals as discussed above with examples like Enron and Worldcom.

The Act was formed to develop a more uniform or accurate system of accountability. In

Sarbanes-Oxley, the creation of the “PCAOB (Public Company Accounting Oversight Board)”

was one of the significant provisions to protect the interest of the investor and public by

overseeing the companies audit because the broad arc of the Sarbanes-Oxley wasfound and

associated with every public company including banks and other financial institutions. After the

implementation of the Act, the FED issued a letter to the banks and bank holding companies

explaining the basic guidelines of the Act and confirming the applicability of the act. It was

making sure that each bank will create an audit committee whose members consist of completely

independent directors whose main duties are to supervise responsibility for the compensation and

appointment of the outside auditors of the bank's (Journal, 2006)

Banking plays an important role in the Sarbanes-Oxley Law, as it puts the responsibility of the

bank to maintain and establish a proper internal control structure for their financial statements.

Section 404 of the Act involves control testing, extensive documentation process, and most

important report tested by the external auditors on company process and assessment. Under
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The Bank of China
Section 404, it is stated that every member of the bank is considered as part of the financial

reporting infrastructure. For example, the interest rate integrity is based on the factors that are a

place for authorization and initiation of the loan by the collection of interest income, entries in

the ledger, and final reporting in the financial statement. Overall the standard required for the

submission get high and will require a bank to provide evidence with detailed documentation that

shows the procedure is understood and risk is managed and controlled.

Works Cited

China, T.B.o., 2020. Corporate Social Responsibility Report of The Bank of China Limited.
Bejing: The Bank of China Limited.
China, B.o., 2021. Bank of China. [Online] Available at:
https://www.boc.cn/en/aboutboc/ab1/200809/t20080901_1601737.html.
Daily, B., 2021. BanksDaily.com. [Online] Available at: https://m.banksdaily.com/info/bank-
china.
Eleonora Kontuš, D.M., 2019. Management of liquidity and liquid assets in small and medium
enterprises. , Economic Research-Ekonomska Istraživanja, 32.
Frankenfield, J., 2019. Investopedia. [Online] Available at:
https://www.investopedia.com/terms/f/funding-gap.asp#:~:text=A%20funding%20gap%20is
%20the,debt%20offerings%20and%20bank%20loans.
Fruhlinger, J., 2020. CSO. [Online] Available at: https://www.csoonline.com/.
Institute, C.F., 2021. Corporate Finance Institute. [Online] Available at:
https://corporatefinanceinstitute.com.
Journal, C.C.B., 2006. Corporate Counsel Business Journal. [Online] Available at:
https://ccbjournal.com/.
Kenton, W., 2020. Investopedia. [Online] Available at:
https://www.investopedia.com/terms/a/altman.asp.
Nelson J. Lacey, D.R.C., 2011. Modern Corporate Finance: Theory & Practice. Hayden Neil
Publishing.
Terry S Maness, J.T.Z., 2005. Short-term financial management. Mason, Ohio : South-
Western/Thomson Learning.