Flat earnings; stable operating trends; Buy on attractive valuation
Bank of Communications (BoCom) reported 1Q16 net profit of Rmb19bn, up0.5% yoy. The set of results should present no surprise to the market, whichwas driven by PPOP growth of 5.1% yoy, offset by higher credit cost of 72bps(1Q15: 62bps). Positives include resilient fee income, cost efficiency, and stableasset quality. Negatives include NIM compression due to falling asset yield.
Key trends of 1Q16 results
NIM dropped by 13bps qoq to 2.01% in 1Q16 (down 28bps yoy) onmortgage re-pricing (16.2% of total loans). Management expected a furtherdowntrend in NIM in coming quarters given asset yield compression andlower risk appetite.
Customer loan grew by 8.3% yoy (+4.5% qoq) in 4Q15, slower than the12.1% yoy growth of deposits, resulting in an elevated LDR of 84%.
Net fee income grew by 9.1% yoy in 1Q, mainly driven by agency services(+140% yoy) and custodian services (+50% yoy). In particular,bankassurance accounted for 85% of total agency service fees. The banklooked for double-digit fee income growth in 2016. 1Q16 WMP balancewas Rmb1.6tr, up 10.5% qoq.
Asset quality seemingly stabilized in 1Q16, with NPL formation moderatingto 74bps (2H15: 103bps) by incorporating Rmb3.2bn NPL write-offs. NPLratio nudged up by 3bps qoq to 1.54% with SML ratio staying at around3% in the first quarter (4Q15: 3.17%). However, there were still only 60%of overdue loans beyond 90 days being classified as NPLs. Managementexplained that part of the remaining 40% was from lending to SOEs withlocal government support. In addition, over 90% of the bank’s SMLs werebacked by collateral and guarantees.
Credit cost was 72bps in 1Q15 (2015: 73bps), leading to NPL coverage of151% (2015: 156%) and gross coverage of 2.33% (2015: 2.35%).
OpEx grew by 0.9% yoy if excluding insurance business impact, versusrevenue growth of 2.4%. Cost ratio improved to 35.4% (1Q15: 35.9%)
Capital position remained stable, with CET-1, tier-1, and total CAR down6bps, 7bps, and 27bps qoq to 11.08%, 11.39%, and 13.22%, respectively.
VAT reform may have a slightly negative impact on bank earnings,according to management, with a worst-case net profit impact of 3%.
Valuation and risks
We value the bank using a three-stage Gordon Growth Model (PV= (ROEg)/(COE-g)), with our target price based on 2016E book value. Risks: weakerasset quality in Eastern China, where its loan book is mostly concentrated.