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Morningstar | BOC's 3Q Revenue Growth Remained Weaker than Peers'. See Updated Analyst Note from 31 Oct 2018

Despite a modest growth improvement in revenue and net profits to 3.3% and 5.3%, respectively, for the first three quarters, narrow-moat Bank of China's, or BOC's, third-quarter results remained weaker than peers'. Growth in preprovision operating profits, or PPOP, picked up to 4.3% while it remained lower than the 8% to 10% range of large peers including CCB and BOCOM. BOC’s accelerated growth was primarily attributable to surge in investment returns while net interest income and fee income growths failed to improve as we expected, we suspect this was due to weakening business confidence in trade-related sector which the bank has relatively high exposure. Thus we reduced our near-term revenue growth assumptions and lowered our fair value estimate to CNY 4.0 from CNY 4.4 per share for A shares, and HKD 4.4 from HKD 4.9 for H shares. Trading at 24% discount to our new fair value estimate, its H shares remained undervalued as current stock prices imply a 0.6 forward price/book value, or around 14% implied bad debt ratio. We believe the market is overly concerned about its credit quality and the bank’s ongoing business restructuring. A strong deposit base should support our five-year ROE forecast at an average of 12% and such strong profitability is able to absorb loan risks gradually.

BOC’s balance sheet saw faster-than-peer expansion, with total assets increasing 7.5% from 2017. Benefiting from the PBOC’s liquidity injection to boost bank lending, BOC’s loan grew 7.4% and financial investment grew 8.5% from 2017. Net interest margin increased one basis point to 1.89% but was not adequate to offset a lower year-on-year growth in interest-earning assets, leading to slower net interest income growth at 0.6% in the past quarter. Fee income growth declined 2% from the year-ago period, indicating it was more negatively impacted by the new asset management rules when compared with the 2% to 3% growth for CCB and BOCOM.

Credit quality was stable, with bad debt ratio flat at 1.43% from mid-2018. Bad debt formation ratio rebounded slightly to 0.43% while staying lower than the 0.8% in the year-ago period. Credit costs improved one basis point to 0.65% and provision coverage rose to 169%. Bad debt classification is prudent as evidenced by the bad debt to loans overdue more than 90 days ratio, which is standing at 124% by mid-2018. We expect credit costs will remained at current high level for the next three years.