Positives: stabilizing NIM, less NPL, better retail; negatives: fees, deposits
Bank of Communications reported in-line 2Q17 results, with net profit ofRmb19.7bn, up 6% yoy, the fastest growth since 3Q14, driven by lower creditcosts and offset by a 4% yoy decline in PPoP. We note signs of bottoming-outin key operation trends. Asset quality improved, with lower NPL formation(56bps vs. 76bps in 1H16). NIM stabilized at 1.57% after a drop in pastquarters and mgmt.’s guidance of an improvement. Retail banking’s PBT grew9% yoy, making up 31% of group PBT. These trends differentiated BoCom fromother joint-stock banks (JSBs) that are still subject to earnings/capital pressure.We foresee BoCom recording stronger PPoP growth in 2H17; Buy.
Key operating trends:
NIM stabilized qoq at 1.57%. This is contrary to continued shrinkage ofNIM at other JSBs (e.g., PAB down 15bps qoq). During the briefing,management guided for an improvement in the coming quarters, mainlydue to better loan yield and stabilized funding cost. Deposit growthremained weak (up 4% yoy), but the structure improved with a risingportion of retail deposits.
Asset quality improved with a lower NPL formation rate (56bps vs. 76bpsin 1H16). BoCom’s NPL ratio and overdue loan ratio declined in 1H17,down 1bps and 30bps hoh, respectively. The bank strengthened its NPLclassification, as evidenced by the narrowing gap between overdue loansbeyond 90 days and NPLs (126% vs. 139% in 2H16). As a result, the bankset aside lower credit cost of 66bps in 2Q17 vs. 70bps in 1Q17 and 81bpsin 2Q16. The NPL coverage ratio improved to 151.0% (150.3% in 1Q17).Management remained confident of maintaining stable asset quality trends.
Retail banking recorded notable growth of 9% yoy in profit before tax,contributing 31% for the group. The key driver was credit card business,with credit card receivables up 21% yoy and credit card fees up 38% yoy.
Net fee income dropped by 2% yoy in 2Q17, dragged by agency servicefees (down 36% yoy in 1H17), investment banking (down 17%) and a highbase effect. We expect fee income growth to rebound in 2H17 given alower base.
CET-1 down by 30bps qoq to 10.62% in 2Q17. However, adding back theRmb20bn dividend payment, CET-1 would be up 7bps qoq to 10.99%.Total CAR stood at 13.86%, up 22bps qoq.
A differentiated joint-stock bank
BoCom has underperformed its peers YTD, as the market perceived it asvulnerable to financial deleveraging, similar to other JSBs. However, webelieve its strong capital, less shadow banking exposure (5% assets) andstabilizing NIM should make it better positioned in tighter regulations.