Bank of China Earnings: Revenue Growth Again Leads Peers; Provision Coverage Strengthens

No-moat Bank of China’s 601988 first-quarter results were mixed, with decent revenue growth of 11.6% year on year but net profit disappointing at 0.5% growth. The positive is that net interest margin, or NIM, continued to outperform peers as BOC benefits from its higher exposure to overseas banking. Revenue growth was partly driven by fair value gains of financial assets and the 7% year-on-year growth in net interest income, partially offset by a 0.8% decline in fee income. The flat bottom line also reflects expanded loan loss provisioning to boost provision coverage ratio by 14 percentage points to 202.56% from end-2022, despite the signs of improving credit quality. In contrast to the shrinking provisioning of peers, BOC’s credit impairment charge increased 11% year on year. Nonperforming loan balance increased a benign 1%, leading to a 14-basis-point drop in NPL ratio to 1.18% from end-2022 level. As the results were roughly in line, we retain our fair value estimate of CNY 3.10 for the A-shares and HKD 3.50 for the H-shares. The stock is undervalued, trading close to its historic low of below 0.4 times 2023 price/book value and an attractive dividend yield of over 8%.

First-quarter NIM continued to outperform peers with a 4-basis-point year-on-year decline to 1.70%, in contrast to the 20- to 40-basis-point declines for the other Chinese banks we cover. We believe BOC’s lower-than-peer declines in NIM were partly due to a relatively low base in the year-ago period when the U.S. rate hike cycle started in March 2022. Looking forward, we expect BOC’s NIM trend to face pressure, as the base effect will gradually turn negative in coming quarters. The trend of rising foreign-currency deposit costs is likely to continue into the first half of 2023. In addition, a potential pause in the U.S. Federal Reserve rate hike and weaker global economic outlooks are likely to add more NIM pressures to BOC than for its peers.