Management committed on mixed share reform; Buy
Bank of Communications (BoCom) reported a flat 3Q15 NPAT of Rmb14.7bn,which was 2% below our estimates due mainly to higher OpEx growth of 20%yoy and higher credit costs of 89bps (3Q14: 73bps). Nevertheless, its totaloperation revenue came in stronger than expected at 11% yoy due to resilientNIM (down 4bps qoq) and strong non-interest income growth of 34% yoy. Its9M15 results recorded at Rmb52bn (up 5.8% yoy), accounting for 82.5% of ourfull-year forecasts. During the post-results conference call held today,management team remained committed to push forward the mixed ownershipreform, which focuses on strengthening corporate governance, introducingprivate capital, establishing market-driven incentive mechanism and formingspecial business units. Buy rating maintained.
3Q15 – running the numbers
Its net interest income grew by 5% yoy, driven by AIEA growth of 15.6% yoyand offset by NIM compression of 22bps yoy (down 4bps qoq) in 3Q15. ItsNIM compression was mainly due to faster repricing of assets than liabilities,according to management. Management sees further downward pressure atNIM in 2016E due to mortgage repricing. With fee income growth of 10.4%yoy and gains of Rmb2.4bn from investment activities (3Q14: Rmb1.1bn), itsnon-interest income grew 33.5% yoy, leading to operating revenue growth of11% yoy. With growth of 20% yoy in OpEx, CIR rose by 3.4% yoy to 45.2% in3Q15. Its core tier-1 ratio, tier-1 ratio and total CAR increased by 11bps, 43bpsand 18bps qoq to 10.97%, 11.29% and 13.3% as of Sept 2015.
Rising NPL formation, but SML and overdue loans moderated
We estimate that the bank had written-off or disposed NPLs of Rmb6.3bn in3Q15, resulting in an accelerating NPL formation rate of 97bps (vs.59bps/53bps in 1Q15/2Q15). By region, more NPLs came from Tianjin andCentral China, while Eastern China showed stable asset quality trends,according to management. Management guided that inflection point of assetquality has not been seen yet. However, we note some moderating signs: 1)special mention loans (SML) down by 4% qoq to 3.11% of total loans; 2)overdue ratio remained largely unchanged at 3% of total loans. Despite highercredit costs of 89bps, its NPL coverage ratio dropped to 165% (down 5pptqoq) and gross coverage ratio rose to 2.35% (up 4bps qoq) as of Sept 2015.
Recent business developments
1) Loan disbursement: Total loans grew by 8.6% YTD, driven by transportationand storage (up 13.8% YTD), mortgage (10.4%) and credit card receivables(16.3%); 2) strong growth in wealth management business, with total AUM up38% YTD to Rmb1.4tr (19% of total assets) and wealth management feeincome up 47% yoy (25% of total fee income); 3) receivable investmentbalance rose by 11% qoq, but exposure stayed low at 4% of total assets.