Flat earnings, as largely expected
Bank of Communications (BoCom) reported 2Q16 results, with net profit ofRmb18.6bn, up 1.3% yoy. The bank grew its PPoP by 7% yoy, driven byresilient NIM (+1bps qoq after adjusting for VAT impact) and subsidiaries’contribution. Credit cost rose to 81bps in 2Q16 (+9bps qoq/+15bps yoy)although NPL formation slowed down. Notably, retail segment PBT grew by78% yoy in 1H16 to account for 26% of the group total (vs. 15% in 1H15). Thebank plans to list its HK brokerage arm (BoCom International), which mayboost the bank’s market cap by around 1%, on our estimates.
Stronger retail segment
For 1H16, the retail segment saw robust growth, with PPoP up 49% yoy drivenby decent fee income (+36% yoy) and better costs (flat yoy). The bank also setaside lower credit costs for retail loans (46bps vs. 65bps in 1H15) on strongretail asset quality. The retail loan balance grew by 15% yoy (mortgage: 21%yoy), compared with only 4% for corporate loans.
Slower NPL formation, but “the peak not yet reached”
BoCom’s NPL formation rate slowed to 76bps in 1H16 (2H15: 103bps), on ourestimates. As a result, the NPL ratio inched up only 3bps hoh to 1.54% at end-June. Nevertheless, during the briefing today management maintained acautious stance on asset quality trends and mentioned that the bank isprepared for another one-to-three-year downcycle.
Limited impact from listing HK brokerage arm
The bank also proposed pursuing an IPO for its wholly owned HK brokeragesubsidiary, BoCom International, on HKEx, without giving a specific timetable.We view the spin-off as a milestone in the bank’s universal operationdevelopment. However, given the relatively small size (HK$9bn assets), thelisting may boost BoCom’s market cap by only around 1%. Here we assume1.7x P/B, similar to Haitong International and Guotai Junan International.2Q16 – other operational trends
NPL coverage was 150.5% as of 2Q16, still above the 150% requirement.
Fee income growth softened to 7.2% yoy (1Q16: 9.1% yoy). The WMPbalance rose by 5% in the first half to Rmb1.5trn at end-June.
Excluding insurance costs, the bank’s operating expenses dropped by 5%yoy in 1H16. With 2% yoy revenue growth in 1H16 (adjusted for insurancecosts), the bank’s CIR improved by 2ppts yoy to 34%.
Capital ratios were stable, with CET1 and CAR at 10.92% and 13.18%. Dueto asset allocation to low-risk-weight assets (mortgages and municipalbonds), the RWA/assets ratio dropped to 61.6% from 65.5% in 1Q16.
In terms of asset allocation, the bank increased municipal bond purchases,accounting for over 30% of new assets in 1H16. Management guided thatthe bank will maintain ~7% market share in buying municipal bonds.