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Morningstar | Bocom’s 1Q Faster-than-Peer Revenue Growth on NIM Expansion

With a 4.9% growth in net profits, no-moat Bank of Communications' results reflected strong top line growth momentum continuing in the first quarter, thanks to higher net interest margin, or NIM, against the year-ago period and improvement in operating efficiency as revenue growth picked up. Although we believe Bocom’s better-than-peer results since 2018 were primarily driven by NIM expansion as it benefited the most from recent interest rate cycle. We also saw the strengthening of its retail banking business and steady credit quality. We increased our China A-share fair value estimate to CNY 6 from CNY 5.90 per share on time value of money, and H-share fair value estimate to HKD 7 from HKD 6.60 per share on time value of money and change in exchange rate since our last update. The bank is fairly valued and its shares are trading at 0.6 times 2019 price/book. The bank is trading at lower than peer valuation level given its weaker deposit base. We expect the business restructuring will speed up after the new management came on board in mid-2018. The bank’s strategic focuses on credit card and asset management business are making good progress in 2018, and we expect it will support a continuing mild improvement in fee income in 2019.

Total revenue grew 26.5% from the year-ago period, highest level among Chinese banks we cover. This was led by the 19% and 11% growth in net interest income and fee income respectively. Thanks to continuous operational improvement over the past few quarters, Bocom’s ROE saw a year-on-year increase by seven basis point to 13% while capital adequacy ratio improved to 14.23%. ROA remained flat from the year-ago period. Such performance was better compared with most banks with year-on-year declines.

Credit quality looked stable, with bad debt ratio slightly falling 2 basis points to 1.47% from 2018. While bad debt balance increased 3% to CNY 74.7 billion from 2018, the change was in line with seasonal pattern as banks typically saw increase in bad debts in the first quarter due to the week-long Chinese New Year. With credit costs climbing to 0.86%, provision coverage remained stable at 173.5%. According to management, bad debt formation ratio fell to 1.2% from 1.6% in 2018, indicating credit quality has improved back to 2017’s level. However, we saw signs of weakening quality of credit card loans which accounted for about 10% of total loans in 2018. In light of growing risks in China’s credit card loans, management has proactively slowed down growth in credit card loan balance in the first quarter and strengthen risk control. We expect related risks are manageable.