Bank of China – China
Share Price HK$3.08
Target Price HK$3.64
2011: Better-than-expected earnings but unlikely to repeat
Earnings slightly above estimates. Bank of China (BOC) reported 2011 net profit of Rmb124b, up 19% yoy, beating consensus by a slight 2.2%. With a strong push from subsidiary Bank of China Hong Kong (BOCHK), BOC booked a higher-than-expected net interest margin (NIM). Together with lower provision charge, the bank delivered decent earnings growth for 2011.
BOCHK contributed to a larger-than-expected NIM expansion. BOC’s NIM increased 5bp yoy to 2.12% for 2011. We estimate a qoq expansion of 11bp to 2.19% for 4Q11, higher than ICBC’s and CCB’s 4Q11 NIM expansion. The major driver for such a surprise came from BOCHK, which had a strong 23bp hoh increase in NIM. Looking at BOC’s domestic funding structure, we believe the bank’s lower-thanpeers demand deposit portion will continue to put pressure on its funding costs.
Mild rebound in NPL for 4Q11. The bank booked a non-performing loan (NPL) ratio of 1.00% as at end-11, down 10bp yoy, but rebounded by a mild 1bp qoq from 0.99% in 3Q11. NPL balance also rose slightly by 0.7% qoq to Rmb63b in 4Q11. Despite a rise in NPL levels, 4Q11 credit cost was 0.16%, a substantial decline from 9M11’s 0.38%. As a result of the lower loan provision charge, coverage ratio fell to 220.8%, a small 2.3pt decrease qoq. Having said that, we believe the rebound in NPL is reasonable given BOC’s low base.
Tier-1 ratio in line with large-cap peers’. BOC reported tier-1 ratio of 10.07% as at end-11, +15bp qoq, mainly due to slower qoq loan growth of 1.5% during the quarter. Its tier-1 ratio was in the mid-range of largecap peers of 9.50% to 10.97%. However, we expect BOC to have higher capital pressure than peers due to its lower return on equity, which implies lower internally generated capital.
Reduced foreign exposure in investment portfolio. Due to increasing macro concerns in Europe and other developed countries in 2011, BOC took a prudent investment strategy of increasing renminbi-denominated investment durations while reducing its foreign currency-denominated bonds. As a result, the bank’s foreign currency-denominated investment securities dropped 4.8% yoy to Rmb532b, or 4.5% of total assets as at end-11.
Solid earnings growth may not be sustainable in 2012. We expect pressure from different areas for BOC. Note that: a) increased cost of funding pressure due to its lower demand deposit mix may drag NIM lower in 2012, b) BOCHK likely to see earnings decline in 2012 as 2011 earnings were lifted by provision write-back on Lehman minibonds, and c) BOC’s net fee income growth trend was one of the weakest among peers. In addition, BOC’s lower ROE may also restrict the growth of risk assets in order to preserve capital, which will translate to lower earnings.
We fine-tune our 2012 and 2013 net profit estimates slightly by -1%, factoring in slightly lower net fee income growth, as reflected in 2011 results.
Risks are worse-than-expected NPL formation and unexpected rate cut or asymmetric rate change.
Maintain HOLD due to its lower ROE and higher overseas exposure, which is deemed to have higher risks but lower returns. We leave our target price unchanged at HK$3.64, implying 1.02x 2012F P/B. Entry price is HK$2.85.
Source/Extract/Excerpts/来源/转贴/摘录: UOB Kay Hian research