What surprised us
BOC reported 1Q16 NPAT of Rmb47bn (+2% yoy) or 29% of GH FY16E.Balance sheet and revenue expansion remained muted while 1Q ROA/ROEdeclined modestly to 1.15%/15.2%.
Key highlights: 1) 1Q net interest income was -2% yoy on the back to NIMcontraction to 1.98% annualized by our estimate (vs. FY16 forecast of1.99%) and below-average asset/loan growth at 6%/8% yoy. Domestic RMBloan and deposit growth was stronger than the rest of the group. 2) PPOPgrew by 4% yoy thanks to non-interest income growth and cost control.
Non-interest income contributed to 35% of revenue vs. 31% in 2015.PPOP/asset margin was down 8bp to 1.86%. 3) Core/total tier-1 CARimproved by 15bps/13bps qoq to 11.25%/12.20%, at relatively comfortablelevel. 4) We estimate annualized NPL formation rate was largely stable at0.67% vs. 0.71% in 2H15, while reported NPL ratio stayed flat at 1.43%. NPLcoverage ratio went down slightly to 149% from 153% at YE15 whileLLR/loans dropped to 2.14%. We think a modest decline in the coverageratio during FY16 is likely; reflecting counter-cyclical regulation. Credit costwas at 67bps in 1Q vs. our FY16E forecast of 97bps.
What to do with the stock
While BOC’s strong overseas business franchise differentiates it vs. peers,we keep our Neutral/Sell ratings on H/A shares given its below-averagePPOP margin and NPL cushion. Our estimates and 12-month RIM-basedtarget prices of HK$3.25/Rmb3.1 are unchanged. Key risks: Better-/Worsethanexpected NPLs.