20141029-美银美林-A_weak_quarter_on_B_S_shrinkage___higher_provisions_12页_583kb

Summary of BoComm Financial Performance and Valuation (3Q14)

Core Content

This document provides an analysis of Bank of Communications (BoComm) financial performance and valuation as of 3Q14. It highlights the bank's weak quarter due to shrinkage in balance sheet and higher provisions, as well as its financial metrics, investment thesis, and valuation data.

Main Points

• Financial Performance:

  • BoComm reported a 5.8% YoY increase in net profit to RMB51.5bn for 9M14, but core earnings grew by 9.0% YoY.
  • The rise in provisions (up 24% YoY) led to a weaker bottom line.
  • ROE at 15.7% is likely to be the weakest among peers.
  • The bank is the best performing large cap bank YTD, due to its low valuation (0.6x P/B), mixed ownership reform, and diminishing differentiation among large banks.

• Deposit and Loan Trends:

  • Deposits dropped by 5.9% QoQ and 1.0% YTD, much lower than the sector average of +8.7% YTD.
  • Time deposits and retail demand deposits fell by 10.6% and 8.4% QoQ respectively, while corporate demand deposits increased by 3.8% QoQ.
  • Loan growth was down to 1.3% QoQ, and the management expects FY loan growth to be less than 10%.
  • LDR surged to a record level of 84.5%, indicating a high loan-to-deposit ratio and concerns over deposit stability.

• Profitability and Costs:

  • Net interest income increased by 4.9% QoQ but declined slightly YoY.
  • Net fee income dropped by 10% QoQ, similar to the trend at CCB.
  • NIM declined by 2bp QoQ to 2.42%, due to looser liquidity and lower loan pricing.
  • Operating expenses grew by 7.4% QoQ, with the cost/income ratio rising to 41.8%.
  • Pre-provision profit rose by 9.9% YoY, but provisions expense increased significantly by 40.6% YoY.

• Asset Quality:

  • NPLs rose 5.5% QoQ, with net formation at 25bp in 3Q14.
  • Write-offs increased from RMB4.04bn (24bp) in 1H14 to RMB2.75bn (32bp) in 3Q14.
  • Credit cost rose from ~60bp in 1H14 to 73bp.
  • NPL coverage remained low at 201.3%, while the loan reserve ratio increased to 2.36%.

• Valuation Metrics:

  • P/B ratio at 0.611x for 2014E, with a trend of decline over the years.
  • Pre-exceptional PE at 5.41x for 2014E, with a similar trend.
  • ROE at 15.7% for 3Q14, which is relatively low compared to peers.
  • Price Objective for H Share is HK$6.10 and for A Share is CNY4.65.

Key Information

• Investment Rating: Underperform for both H and A shares.
• Valuation: BoComm has an inexpensive valuation, but no positive catalysts are expected.
• Financial Metrics:
  • Net Interest Income: RMB138,523mn for 2014E.
  • Net Fee Income: RMB31,162mn for 2014E.
  • Total Non-Interest Income: RMB40,903mn for 2014E.
  • Total Operating Income: RMB179,425mn for 2014E.
  • Operating Expenses: RMB72,875mn for 2014E.
  • Pre-Provision Profit: RMB106,550mn for 2014E.
  • Provisions Expense: RMB25,883mn for 2014E.
  • Operating Profit: RMB80,667mn for 2014E.
  • Net Profit Attributable to Shareholders: RMB62,754mn for 2014E.
  • EPS: 0.845 for 2014E.
• Balance Sheet Metrics:
  • Total Assets: RMB6,656,538mn for 2014E.
  • Average Interest Earning Assets: RMB5,823,976mn for 2014E.
  • Weighted Risk Assets: RMB4,798,304mn for 2014E.
  • Total Gross Customer Loans: RMB3,635,773mn for 2014E.
  • Total Customer Deposits: RMB4,644,463mn for 2014E.
  • Tier 1 Capital: RMB460,142mn for 2014E.
  • Tangible Equity: RMB463,007mn for 2014E.
• Liquidity and Leverage:
  • Assets shrank by 1.1% QoQ.
  • Asset/equity leverage declined to 13.6x.
  • ROE dropped to 13.2% for 3Q14.
  • Operating expenses grew by 9.2% YoY.

Investment Thesis

• BoComm is rated as Underperform.
• The bank had the lowest earnings growth and core profitability among H-share banks.
• High capital consumption and low NPL coverage are concerns.
• Despite the low valuation, the stock is expected to underperform the sector due to the lack of positive catalysts.

Conclusion

The report outlines BoComm's financial performance and valuation for 3Q14, highlighting the weak quarter due to shrinkage in the balance sheet and higher provisions. While the bank has a low valuation, the lack of positive catalysts and concerns over asset quality and profitability lead to a cautious investment outlook.