1Q16 NPAT grew 0.5% YoY to RMB19.1 bn, in line with ourforecasts
Robust growth in fee income and insurance income propellednon-interest income to grow 51.3% YoY in 1Q16, which accountedfor 39.4% of total operating income
Despite dual increase in NPL balance and NPL ratio, we estimategross NPL formation eased to 0.77% in 1Q16 from 1.16% in 4Q15
Operating income beat as stronger non-interest incomemore than offset declining interest income in 1Q16
PPOP grew 5.1% YoY in 1Q16 to RMB31.5 bn, underpinned by swiftnon-interest income growth of 51.3% YoY, which more than offset a YoYdecline of 2.8% in net interest income. Credit cost stayed high at 0.72%in 1Q16, dragging NPAT growth to merely 0.5% YoY for the quarter.
Positives: 1) Driven by fee income from agent service (RMB1.8 bn,+c.100% YoY) and management service (RMB3.4 bn, +c.50% YoY) in1Q16, total fee income grew 9.1% YoY to RMB10.8 bn in 1Q, accountingfor 19.2% of total operating income; 2) ROE recovered to 14.36% in1Q16 from 13.43% in FY15; 3) gross NPL formation was estimated tomoderate to 0.77% in 1Q16 from 1.16% in 4Q15; and 4) overdue loansdeclined 1.4% QoQ to RMB11.2 bn in 1Q16, showing tentative signs ofmoderation in asset quality deterioration in the months ahead.
Negatives: 1) NIM contracted 15bps QoQ to 2.01% in 1Q16 primarilydue to repricing of mortgage loans and lower yield from debt securitiesinvestments in the quarter (-32bps YoY and -5bps QoQ); 2) net interestincome declined 2.8% YoY in 1Q16 given a compression of 28bps YoY inNIM, but it was partly averted by volume growth; and 3) NPL balanceadded 6.8% QoQ in 1Q16, while NPL ratio increased mildly by 3bps QoQto 1.54% after RMB3.2 bn NPL write-off in the quarter.
Catalysts & valuation
Further progress in mixed-ownership reform, mixed business operation,smaller-than-expected NIM compression and improving profitability couldserve as positive catalysts for share price.
Trading at 0.60x FY16E P/B and 5.22x FY16E P/E with FY16E dividendyield of 5.36%, BOCOM’s valuation is attractive compared to its historicalaverage P/B of 1.25x. Maintain BUY.