20161026-美银美林-中国银行-03988.HK-Sequential_revenue_growth_remained_negative_12页_751kb

Summary of BOC Financial Performance and Valuation

Core Content

The document provides an analysis of Bank of China (BOC) financial performance and valuation for the third quarter of 2016 (3Q16) and the first nine months of 2016 (9M16), with projections for future years. It outlines the performance of BOC and its subsidiary, BoCHK, and highlights key financial metrics, valuation ratios, and investment rationale.

Main Points

Financial Performance

• Net Profit: BOC's 9M16 net profit rose by 9.9% YoY to RMB151.6bn, while profit to equity shareholders (after AT1 dividend) increased by 1.3% YoY.
• Sequential Decline: The growth was largely driven by a one-off gain from the disposal of NCB in 2Q16. Sequentially, net interest income and fee income continued to decline QoQ.
• Credit Cost: Credit cost dropped to 61bp in 3Q16, helping to boost the bottom line, although it is expected to rise in the coming two years.
• Asset Quality: NPL size increased only 2.6% QoQ and 12% YTD, with net annualized formation at 15bp in 3Q16. NPL ratio rose to 1.48%, while NPL coverage remained broadly flat at 156%.

Valuation Metrics

• P/E Ratio: For 9M16, the P/E ratio was 5.6x, with a decline in the 3Q16 quarter.
• Dividend Yield: The dividend yield for 9M16 was 5.36% for H-shares and 4.84% for A-shares.
• Price/Book: The Price/Book ratio for 9M16 was 0.688x for H-shares and 0.76x for A-shares.
• RoE / PB: The RoE / PB ratio was 18.66x for 9M16, indicating a strong return on equity relative to book value.
• Price / Pre-Provision Profit: The Price / Pre-Provision Profit ratio was 2.89x for 9M16, reflecting the valuation of the bank's earnings.

Investment Rationale

• Rating: BOC is rated as Underperform due to unattractive valuation and lack of consistent growth strategy.
• Valuation Concerns: BOC trades at a narrow discount to CCB, with lower PPROA, ROE, and Tier 1 ratio compared to its peers.
• Earnings Growth: Earnings growth has been inconsistent over the past few years, and the bank is expected to see a rebound in credit costs and NPL formation.

Key Information

Financial Highlights

• Net Interest Income: Declined 0.5% QoQ to RMB74,947mn in 3Q16, with a YoY decline of 6.7%.
• Net Fee Income: Continued to decline by 6.5% QoQ to RMB20,659mn in 3Q16, with a YoY decline of 4.2%.
• Non-Interest Income: Total non-interest income rose by 28.1% YoY to RMB140,474mn in 9M16, but the QoQ trend was weak.
• Operating Profit: Decreased by 1.1% YoY to RMB229,533mn in 9M16, with a QoQ decline of 2.8%.
• Provisions Expense: Increased by 45.9% YoY to RMB81,526mn in 9M16, reflecting a rise in credit risk.
• Pre-Provision Profit: Increased by 11.1% YoY to RMB246,118mn in 9M16, driven by one-off gains and lower tax rates.
• Net Profit: Increased by 9.9% YoY to RMB151,558mn in 9M16, but attributed to one-off gains and lower tax rates.

Balance Sheet Highlights

• Total Assets: RMB17,857,503mn in 9M16, with a YoY growth of 7.1%.
• Gross Advances: RMB9,876bn in 9M16, with a YoY increase of 9.3%.
• Deposits: RMB12,974bn in 9M16, with a YoY growth of 12.3%.
• Capital Adequacy: Capital adequacy ratio remained comfortable at 14.12%, with a Tier 1 ratio of 12.21%.
• Equity/Assets Ratio: Stabilized at 7.2% in 9M16, with a slight increase in the 3Q16 quarter.
• Gearing: Gearing remained at 14.3x in 9M16, indicating a stable leverage ratio.

Valuation Table (Dec)

Valuation Ratios (Dec)

Key Financial Ratios

Asset Quality Metrics

Investment Outlook

• Rating: The stock is rated as Underperform.
• Valuation: The valuation is unattractive, with a narrow discount to CCB.
• Growth Strategy: BOC's growth strategy has lacked consistency, leading to weaker performance compared to peers.
• Potential Gains: The disposal of Chiyu Bank could lead to another one-off gain in 2H16 or 2017, though the contribution is expected to be smaller than the NCB sale.

Conclusion

BOC's financial performance in 9M16 showed a slight improvement in net profit, primarily due to one-off gains and a lower tax rate. However, sequential revenue growth was negative, with net interest income and fee income continuing to decline. The bank's asset quality remained stable, with a sharp drop in credit cost in 3Q16, but this is expected to rebound. The valuation of BOC is considered unattractive, and the investment rating remains Underperform due to weaker profitability and inconsistent growth strategy.