3Q15 NPAT reported at RMB40.8bn, down 1.5% YoY as the stablePPOP growth of 3.3% YoY was more than offset by higher-thanexpectedcredit cost hiked (+6bps QoQ to 0.73%) in 3Q15
Non-interest income growth accelerated to 17.1% YoY in 3Q frommerely 1.1% in 2Q driven by strong rebound in trading gains
Asset quality deterioration showed early signs of moderationwith easing increase in NPL balance/ratio/gross NPL formation
Positives: 1) Fee incomes held up well to grow 7.5% YoY in 3Q15,leading to an improvement in 9M15 fee income growth to -0.8% YoY from-4.0% in 1H15; 2) non-interest income grew rapidly by 17.1% YoY in 3Q,reversing the -3.5% YoY growth in 1H15 to 2.1% YoY in 9M15, thanks tostrong growth of 276.6% YoY in gains on investment securities (whichwas due to the increase of gains from the purchase and sale of debtsecurities available for sale); 3) PPOP growth remained stable at 3.3%YoY in 3Q15 with 9M15 growth picking up to 2.3% YoY from 1.8% in1H15; 4) asset quality seems to stabilize with moderating increase in NPLbalance (+3.2% QoQ in 3Q vs +7.1% in 2Q) and NPL ratio (+2bps QoQto 1.43% vs +8bps QoQ in 2Q) as well as easing gross NPL formation(0.83% in 3Q15 vs 0.97% in 2Q).
Negatives: 1) NIM contracted by 8bps QoQ to 2.06% in 3Q15, well inline with our expectation; 2) deposit growth remained sluggish at 0.1%QoQ vs -0.2% in 2Q while loan growth slightly quickened to 1.6% QoQ in3Q from 1.1% in 2Q, resulting in a higher LDR of 78.24% in 3Q; 3) creditcost hiked 6bps QoQ to 0.73% in order to maintain its coverage ratioabove minimum regulatory requirement, higher than expected.Overall, we think BOC’s 3Q15 results are largely in line with expectations.Revenue growth improved yet bottom line growth dragged by highercredit cost in 3Q15. We believe the Bank should continue to benefit fromits larger overseas exposure and thus in better position to withstand theheadwinds from interest rate liberalization and asset quality deterioration.Catalysts and valuation
A more resilient NIM thanks to better-than-expected global economy andfurther loosening of monetary policy could be positive catalysts. Tradingat 0.68x FY15E P/B and 5.07x FY15E P/E, we believe the valuation isattractive compared to the historical average of 0.95x P/B and sectoraverage of 0.78x P/B. Maintain BUY as our top pick with TP of HK$5.98.