1Q16 NPAT reported at RMB46.6 bn, up 1.7% YoY, slightly aheadof our and market expectations
NIM contracted less than expected by 9bps QoQ to 1.97% in 1Q16thanks to its larger overseas exposure
Pressure on asset quality remained as gross NPL formation wasestimated to rise to 0.82% in 1Q16 from 0.61% in 4Q15; coverageratio dropped 4.23pp QoQ to 149.07% in 1Q16 due to hefty NPLdisposals, which should be only temporary in our view and the ratioshould be lifted to above 150% in the coming quarter
1Q16 results slightly beat on higher non-interest incomeand lower operating expenses
PPOP increased more than expected by 3.8% YoY in 1Q16, mainly dueto stronger-than-expected non-interest income (+8.1% YoY) and lowerthan-expected operating expenses (-2.4% YoY). Credit cost lifted to0.69% (+6bps QoQ), dragging NPAT growth to 1.7% YoY in 1Q16.Positives: 1) Fee income growth rebounded to 5.6% YoY in 1Q16 from1.3% in FY15; 2) non-interest income grew briskly by 8.1% YoY in 1Q,accounting for 35.4% of total operating income in the quarter,underpinned by 269.5% YoY in net gains on financial investments (mainlyfrom disposal of debt securities available for sale) and the rebound in feeincome growth in 1Q; 3) CIR decreased 1.41pp YoY to 36.10% in 1Q16due to better cost control; 4) NPL ratio reported flattish at 1.43% in 1Q16as overseas asset quality remained benign; and 5) capital position furtherstrengthened with core T1 CAR/ T1 CAR/ total CAR up0.15pp/0.13pp/0.01pp QoQ to 11.25%/12.20%/14.07% in 1Q16.
Negatives: 1) NPL balance added 3.8% QoQ in 1Q16 with gross NPLformation climbing to 0.82% in 1Q16 from 0.61% in 4Q15; 2) credit costlifted 6bps QoQ to 0.69% in 1Q16 given lingering pressure on assetquality; and 3) coverage ratio dropped 4.23pp QoQ to 149.07% in 1Q16due to hefty NPL disposals, slightly below the minimum requirement of150%, but we see this as temporary and the Bank should lift the ratioabove 150% in the coming quarter.
Catalysts & valuation
A more resilient NIM thanks to better-than-expected global economy andsupportive fiscal and monetary policy could be positive catalysts. Tradingat 0.58x FY16E P/B and 4.92x FY16E P/E with FY16E dividend yield of6.10%, BOC’s valuation is very attractive compared to the historicalaverage of 0.96x P/B and sector average of 0.69x P/B. BOC remains ourtop BUY stock within sector coverage with TP of HK$4.72.