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Morningstar | BOC’s 1Q Revenue Growth in Line With Peers, Credit Quality Remained Stable

With the 12% and 4% growths in total revenue and net profits from the year-ago quarter, narrow-moat Bank of China’s, or BOC’s, first-quarter results were in line to deliver our estimated net profit growth of 4.5% for the full year. We retain our fair value estimate of CNY 4.00 for A-shares and HKD 4.40 for H-shares as results were largely in line.

Revenue growth accelerated from 4% in 2018, thanks to a 7% growth in net interest income versus 6% in the year-ago period and rebound in fee income growth to 6% versus a negative 2% growth in the year-ago quarter. Together with a 117 basis point reduction in cost/income ratio to 25%, this translated to an accelerating growth in preprovision operating profits to 13% from 6% in 2018. The results highlighted a pickup in domestic loan growth to 5% from 2018 in response to increasing credit demands from home mortgage, SME, infrastructure and public utilities sectors. This boosted a relatively high net interest income growth compared with big four peers while net interest margin, or NIM, faced greater pressure. We estimate NIM fell by 13 basis point from the previous quarter and down 3 basis point to 1.89% against the year-ago period. We suspect this was attributable to lower average loan pricing and higher proportion of lower-yield bank discount bills which witnessed strong growth in the first quarter.

Trading at 15% discount to our fair value estimate, H-shares remain undervalued as current stock prices merely imply a 0.6 forward price/book value, or around 14% implied bad debt ratio. Despite a weaker 2018 growth compared with big four peers, we believe its solid deposit base, leading position in the cross-border banking and first-mover advantage in international platform, should bode well for the long run. In particular, we expect the bank will become one of the largest beneficiaries from rising integration of Guangdong-Hong Kong-Macao Greater Bay Area, thanks to its leading position in Hong Kong and Macao.

Credit quality remained strong and stable. Bad debt ratio was flat at 1.42% from 2018, and bad debt formation rate saw significant decline to 0.6% from 0.9% in 2018. Both ratios are lower than peers. Bad debt balance slightly rebounded by 4% to CNY 173 billion and the trend was in line with peers. With provision coverage improving to 185%, we expect full-year credit costs will increase to above 0.9%.