Stable results with coverage dipping below 150% requirement
Bank of China (BOC) released its 1Q16 results with a net profit of Rmb46.6bn,up 1.7% yoy. The bank recorded 3.8% yoy PPOP growth due to cost efficiencyand gains from investment activities (+270% yoy), offset by a one-timemortgage repricing. The bank’s NPL coverage ratio dipped to 149%, lower thanthe 150% regulatory requirement. This might imply that the regulator hasalready loosened such a requirement. In our view, a lower coveragerequirement should help reduce banks’ risk-taking activities, encourage earlierNPL recognition, maintain sound capital positions and lower dividend cut risks.(Good news or bad news? China is likely to lower the coverage requirement.)
Key trends of 1Q16 results
PPOP growth of 3.8% yoy was a result of non-interest income growth of8.1% yoy (net fee income: 5.6% yoy) and a net interest income drop of1.8% yoy, which was further offset by higher provisions (+15.7% yoy).
NIM declined by 25bps yoy (down 8bps qoq) to 1.97% in 1Q16, which maybe attributable to mortgage re-pricing (the majority of mortgage loans arere-priced on 1 January each year). Mortgages accounted for 19.5% ofBOC’s domestic loan book or 11% of total assets at end-2015.
Total loans grew by 3.7% qoq (+7.6% yoy) with RMB loans up 4.2% qoq.With total deposits up 4.3% qoq (RMB deposits up 4.9% qoq), LDR dippedslightly to 77.4% in 1Q16 (4Q15: 77.9%)
Asset quality continued mild deterioration with the gross NPL formationrate in 1Q16 up to 82bps from 71bps in 2H15. With a credit cost of 69bpscharged in 1Q16 (+5bps yoy), NPL coverage dropped to 149% (4Q15:153%). The gross coverage ratio was down to 2.14% (4Q15: 2.20%).
Capital further strengthened with CET-1, Tier-1 and total CAR rising by15bps, 13bps and 1bps qoq to 11.25%, 12.20% and 14.07% respectively.The liquidity coverage ratio stayed largely flat qoq at 119.42% in 1Q16.
Valuation and risks
Given the current valuation of 0.6x 2016E P/B, we maintain a Buy rating on thebank. We value the bank using a three-stage Gordon Growth Model (PV=(ROE-g)/(COE-g)), with our target price based on 2016E book value. Keydownside risks: slower export growth, a slower-than-expected pace of RMBinternationalization and overseas M&A.