In line results, with 30% dividend payout maintained; reiterating Buy
Bank of Communications (BoCom) released FY15 results with net profit ofRmb66.5bn, up 1.0% yoy and in line with our forecast. The bank deliveredPPOP growth of 7.4% yoy, as a result of net interest income growth of 7.0%yoy and fee income growth of 18.3% yoy, offset by a higher credit of 76bps(2014: 61bps). For 4Q15, the bank reported net profit of Rmb14.5bn, up 1.1%yoy. The key positive is that the bank declared a stable dividend payout ratio of30%. Two key messages from today’s analyst briefing: 1) mixed ownershipreform on track; and 2) asset quality may continue to deteriorate modestly, butoverall risks are controllable. We maintain our Buy rating.
Key trends of FY15 and 4Q15 results
Mixed ownership reform on track. Management highlighted solid progressmade in two areas: 1) organizational structure, with six newly establishedspecial business units delivering decent PPOP growth of 38% yoy; and 2)internal incentive mechanism, as the bank has linked performance withremuneration of senior managers more closely than before. Moreover,BoCom is applying for a pilot run of a staff share scheme.
Improving asset allocation. The bank allocated 43% of new loans in 2015to household borrowers and scaled back exposure to riskier sectors; e.g., ittrimmed the proportions of the manufacturing and trade finance sectors by1.5ppt and 0.7ppt yoy to 16.7% and 9.0% of total loans in 2015.
Dividend payout for 2015 was kept at 30%, equivalent to a yield of c.7%.
NIM dropped by 14bps yoy to 2.22% in 2015. For 4Q15, NIM was recordedat 2.14%, down 9bps yoy and 6bps qoq. Loan growth dropped slightly by0.1% in 4Q15 but was up 8.5% yoy with an elevated LDR of 83.0%.
Net fee income saw decent growth of 18.3% yoy, mainly driven by agencyservices (+94% yoy) and wealth management (+51% yoy).
Asset quality continued to deteriorate in 4Q15, with total NPLs up 6.3%qoq to account for 1.51% of total loans (3Q15: 1.42%). We estimated itsgross NPL formation rate in 2H15 was 103bps (1H15: 52bps). The overdueloans beyond 90 days rose by 29% hoh in 2H15 to account for 2.46% ofloans. For the loans overdue more than 90 days that were not classified asNPLs, management explained it was mainly due to rising overdue personalloans and ongoing restructuring for some loans. NPL coverage droppedfurther to 155.6% (3Q15: 165.3%) with a flat gross coverage ratio of 2.35%.
OpEx grew by 8.7% yoy for the full year if excluding impact from insurancebusiness, in line with revenue growth. Cost ratio was flat as well for 4Q15.
Capital position remained stable with CET-1, tier-1, and total CAR up 17bps,17bps, and 19bps qoq to 11.14%, 11.46%, and 13.49%, respectively.