Largest exposure outside China
BOC has the most stable NIM in the sector and should do well when US rates rise. We are held back by the fact that the bank’s large non-China exposure means it is likely to benefit less than its peers in a China economic recovery.
BOC is a Hold under our new rating structure, from Neutral previously. Catalysts for unlocking value include greater clarity on the pace and impact of China’s economic reforms, improving macro data and possible positive surprises in asset quality. We maintain our GGM-based HK$3.79 target price (0.81x FY14 P/BV).
1) BOC is the most-geared Chinese bank to the international rate cycle. With 19% of its loan book coming from outside China, BOC should benefit from higher rates. This benefit should be magnified by its high international LDR (79%), primarily funded by low-cost price-inelastic deposits (66% of its international deposits). 2) BOC delivers a low but very stable NIM. Its NIM is the lowest in the sector (2.15% in FY12) but is also the most stable. In addition, it has the largest proportions of rate-liberalised assets and liabilities in the sector (35% and 42% respectively), which suggest that it should be more immune to deposit-rate liberalisation than its peers. 3) BOC’s asset quality is among the best in the sector. Its NPLs are up only modestly in spite of macro headwinds, while it continues to deliver one of the best performances in the sector in loan-impairment charges (23bp in 3Q13). 4) BOC has the lowest asset profitability in the sector: it is the least-profitable large state-owned bank (3Q13 ROA of 1.18% and ROE of 18.1%), suggesting a limit to potential multiple expansion and a lower-than-peers cash earnings cushion. 5) Funding is relatively stretched: the bank runs a 75.0% (3Q13) LDR, well above that of the other state-owned banks, except BOCOM.
BOC is trading at 0.8x FY14 P/BV for a 16.2% ROE and 5.2x FY14 P/E for 8.3% EPS growth. Its dividend yield is 6.4%.