2Q15’s NPAT was 1% y-o-y, the same as 1Q15, and in-linewith our expectations
Better-than-expected credit costs (-2bp q-o-q & +2bp y-o-y)offset a weaker-than-expected NIM performance (-8bp q-o-qand -11bp y-o-y )
Maintain Buy rating; cut BOC-H target price by 3% toHKD6.60 (from HKD6.80) on a lower CNY/HKD assumption;BOC-A target price remains RMB5.50
1H15 NPAT was RMB90.7bn, up 1% y-o-y, with 2Q15 1% y-o-y the same as 1Q15’s1% y-o-y. 1H15 comprised 54% of our FY15e NPAT (1H14 was 53% of FY14).
What we liked: (i) 2Q15 credit costs (P&L provisioning expense/ average loans) actuallyfell 2bp q-o-q (though it still rose 2bp y-o-y) to 0.62%; (ii) NPL ratio only rose 8bp q-o-q in2Q15 to 1.41% vs. 1Q15’s 14bp q-o-q rise (i.e. h-o-h rise of 22bp). Adjusting for writeoffs,this ratio would have risen 44bp h-o-h to 1.62%. The overdue loan ratio rose 48bp h-o-h to1.97% (overdue <90D loans +13bp to 0.82%), with the special mention loan ratio actuallydown 7bp h-o-h to 2.3%; and (iii) fee income growth of 11% y-o-y in 2Q15 was a sharpturnaround from 1Q15’s 16% y-o-y fall. 1H15’s fee income still fell 4%. Fastest growingareas were agency commissions (up 33% y-o-y and comprising 27% of total fees) and creditcards (up 19% y-o-y and comprising 22% of total fees), while the weakest growing areaswere settlement and clearing fees (-26% y-o-y and comprising 12% of total fees) andconsultancy and advisory fees (-58% y-o-y and comprising 6% of total fees).
What we disliked: (i) 2Q15’s net interest margin (NIM) fell by 8bp q-o-q to 2.14% vs.1Q15’s flat q-o-q performance. 1H15 NIM 7bp h-o-h fall vs. FY14 was primarily due tolower domestic RMB loan yields (-7bp) & higher RMB deposit costs (-4bp).
Other points of interest: (i) The provisioning coverage ratio continued to fall, down 10pptq-o-q to 157%, while the loan loss reserve (LLR) ratio was stable q-o-q at 2.21%; (ii) Tier 1ratio fell 23bp q-o-q to 11.62%, with the core Tier 1 ratio falling 23bp q-o-q to 10.63% dueto the payment of 2014’s final dividend; (iii) 2Q15’s loans grew 6% y-o-y vs. 1Q15’s 8%y-o-y, while 2Q15’s deposits grew 3% y-o-y vs. 1Q15’s 5% y-o-y; (iv) cost to income ratiowas flat y-o-y at 37% in 1H15; (v) demand deposit mix fell 0.1ppt h-o-h to 44.0% in 2Q15.
Buy rating on BOC-H with a TP of HKD6.60 (cut 3% from HKD6.80 on a lowerCNYHKD FX assumption); we maintain Buy and TP of RMB5.50 on BOC-A: We use adiscounted Gordon Growth model to value BOC. See pg. 2 for valuation & risks.