We now expect NPAT to grow 0.2%/-0.6%/3.2% YoY inFY15/16/17E following the earnings revisions of 0.1%/-2.0%/-7.2%,largely based on our revised assumptions of NIM, credit cost andNPL ratio. Our earnings forecasts are largely in line with consensus
4Q15E NPAT should slightly dip by 0.1% YoY to RMB38 bn due tonarrowing NIM and dividend paid for preference share for the firsttime, which more than offset the swift growth in non-interest incomeand an ease in credit cost. Asset quality should unavoidablydeteriorate in domestic market, but large overseas exposure shouldpartially shield the bank from the prolonged slowdown in China
Rolling over to FY16E with revised TP of HKD4.72 based ontarget PB of 0.86x applied to our estimated FY16E BVPS ofRMB4.95. Top BUY stock under our coverage as we believe thatBOC should prove to be more resilient than peers amid the currentoperating environment thanks to its larger overseas exposure
Revised earnings forecasts throughout FY17E in view oftwin headwinds from domestic market
We revised FY15/16/17E NPAT by 0.1%/-2.0%/-7.2% to project YoYgrowth of 0.2%/-0.6%/3.2%. Impacted by the consecutive rate cuts andinterest rate liberalization, we now expect NIM to compress 14/8/6bpsYoY to 2.11%/2.03%/1.97% in FY15/16/17E, relatively smaller than thosefor H-share peers. Less pressure on asset quality is expected ascompared to other H-share peers given the Bank’s largest overseasexposure. We cut FY15/16/17E NPL ratio by 12/20/21bps to1.57%/1.80%/1.93%, and hence we revised down credit cost by 5/9/3bpsto 0.68%/0.68%/0.66%.
4Q15E NPAT likely dips 0.6% YoY to RMB38 bn, mainly ascribed to aYoY decline of 6.1% in net interest income owning to narrowing NIM. Wethink brisk YoY growth of 72.0% in non-interest income and an ease incredit cost to 0.60% should partly offset the decline in net interestincome, but asset quality should further deteriorate in domestic marketwith dual increase in NPL balance and NPL ratio.
Catalysts & valuation: rolling over to FY16E
We revised down our sustainable ROE assumption to 10.27% (previously12.57%) to reflect the increasing pressure on asset quality coupled withnarrowing margin due to rate cut and interest rate liberalization. Wederived our revised TP of HKD4.72 (previously HKD5.98) based on arevised target P/B of 0.92x (previously 1.12x) applied to our estimatedFY16E BVPS of RMB4.95 and RMB/HKD exchange rate of 0.90 for endof FY16E. Trading at 0.57x FY16E P/B and 4.81x FY16E P/E, we think itsvaluation is attractive compared to its historical average P/B of 0.95x.Reiterate BUY.