S&P Global Ratings upgraded its outlooks on Bank of Communications Co. Ltd. and unit Bank of Communications Financial Leasing Co. Ltd. to stable from negative as it expects Bank of Communications' improved capitalization to provide a stronger buffer against the negative economic risk trend in China.

The stable outlook on the parent bank also reflects the agency's view that the lender can keep its resilient capitalization, financial performance and asset quality in line with its major peers in the next two years.

At the same time, the rating agency affirmed the two banks' A- long-term and A-2 short-term issuer credit ratings. The banks' "cnA-1" short-term Greater China regional scale ratings were affirmed, while their long-term Greater China regional scale ratings were raised to "cnAA" from "cnAA-," in line with the change in outlook.

S&P added that while Bank of Communications' profitability will likely weaken in the next two years due to narrowing net interest margin and increasing credit costs, the bank will be able to maintain a tight control on credit risk. Its issuance of preference shares and slower credit expansion will also help with capitalization despite ongoing profitability and asset quality pressures.

S&P could lower the bank's ratings if it lowers its assessment on the lender's stand-alone credit profile and on China's sovereign rating. S&P could also upgrade the bank's ratings if it sees the bank having a more important role to the Chinese government, resulting in a very high likelihood of government support in times of distress.

The ratings and outlook on Bank of Communications Financial Leasing will move in tandem with those on its parent because it is a core subsidiary of the bank.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.