No Shining Fundamentals, But Cheap Valuation, Accumulate

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1 : Bank of China (03988 HK) Wilson Li 李 伟 公 司 报 告 : 中 国 银 行 (03988 HK) [email protected] No Shining Fundamentals, But Cheap Valuation, Accumulate 基 本 面 不 靓 丽, 但 估 值 便 宜, 收 集 评 级 GTJA Research 国 泰 君 安 研 究 Overseas business: rising challenges from other Big-4. BOC has been known for its franchise and leading position in the overseas business. However, other ambitious Big-4 banks are beginning to step in and challenge the BOC s traditional advantages. ICBC has been appointed as the RMB clearing bank in Singapore s RMB business. This is a strong signal that BOC is no longer the sole player in China s overseas banking businesses, especially those with strong policy backgrounds. Rating: Accumulate Maintained 评 级 : 收 集 ( 维 持 ) 6-18m TP 目 标 价 : HK$4.73 Revised from 原 目 标 价 : HK$4.16 Share price 股 价 : HK$3.790 Reducing structured deposits: funding cost is reduced, but loan issuing ability is also dragged down. BOC has continued to cut the structured deposits via wealth management products so as to cut the funding cost. BOC s RMB loans only grew by 9.9% (group) and 9.4% (domestic) in 2012, much lower than industry average of 15%. Raise FY13-14 EPS by 7.5% and 14.6%, respectively, due to a better-than-expected NIM. Raise the target price to HK$4.73 from HK$4.16 and maintain the Accumulate rating. BOC s share price has outperformed peers YTD, which is a reflection of valuation recovery. There is no worry in capital adequacy given that its CB is largely unconverted. Potential catalyst is US rate hikes which could enhance the bank s NIM. 海 外 业 务 : 面 临 其 它 四 大 行 的 挑 战 越 来 越 大 中 行 曾 以 其 海 外 业 务 的 优 势 和 领 先 地 位 而 知 名 但 是, 雄 心 勃 勃 的 其 它 四 大 行, 开 始 涉 足 这 一 领 域, 并 挑 战 中 行 的 传 统 优 势 工 行 被 任 命 为 新 加 坡 人 民 币 业 务 清 算 行 这 是 中 行 在 海 外 业 务 中, 尤 其 是 政 策 性 业 务, 不 再 独 大 的 明 显 信 号 压 缩 结 构 性 存 款 : 降 低 资 金 成 本, 但 同 时 限 制 了 放 贷 能 力 中 行 不 断 的 通 过 压 缩 理 财 产 品 来 减 少 结 构 性 存 款, 进 而 降 低 资 金 成 本 中 行 的 人 民 币 贷 款 在 2012 年 仅 增 加 了 9.9% ( 集 团 ) 和 9.4%( 中 行 内 地 ), 比 行 业 平 均 的 15% 要 低 很 多 将 该 行 年 每 股 盈 利 分 别 上 调 7.5% 和 14.6%, 原 因 是 净 息 差 较 预 期 好 目 标 价 从 4.16 港 元 上 调 至 4.73 港 元, 我 们 维 持 该 行 收 集 的 投 资 评 级 该 行 股 价 今 年 以 来 跑 赢 同 业, 体 现 了 价 值 的 回 归 考 虑 到 该 行 可 转 债 大 部 分 尚 未 行 权, 资 本 充 足 率 并 没 有 压 力 未 来 的 催 化 剂 是 美 国 加 息, 可 以 提 升 该 行 的 净 息 差 Stock performance 股 价 表 现 (5.0) (10.0) (15.0) % of return May-12 Aug-12 Oct-12 Jan-13 Apr-13 Change in Share Price 股 价 变 动 HSI 1 M 1 个 月 BOC 3 M 3 个 月 1 Y 1 年 Abs. % 绝 对 变 动 % Rel. % to HS index 相 对 恒 指 变 动 % Avg. share price(hk$) 平 均 股 价 ( 港 元 ) Source: Bloomberg, Guotai Junan International Year End 年 结 Turnover 收 入 Net Profit 股 东 净 利 EPS 每 股 净 利 EPS 每 股 净 利 变 动 PER 市 盈 率 BPS 每 股 净 资 产 PBR 市 净 率 DPS 每 股 股 息 Yield 股 息 率 ROE 净 资 产 收 益 率 12/31 (RMB m) (RMB m) (RMB) ( %) (x) (RMB) (x) (RMB) (%) (%) 2011A 328, , A 366, , F 407, , F 454, , F 522, , Shares in issue (m) 总 股 数 (m) 279,147.3 Major shareholder 大 股 东 Central Huijin 67.7% Market cap. (HK$ m) 市 值 (HK$ m) 1,057,968.3 Free float (%) 自 由 流 通 比 率 (%) month average vol. 3 个 月 平 均 成 交 股 数 ( 000) 279,147.3 FY13 Core CAR FY13 核 心 资 本 充 足 率 (%) Weeks high/low (HK$) 52 周 高 / 低 4.000/ FY13 NPL ratio FY13 不 良 贷 款 率 (%) 1.1 Source..the Company, Guotai Junan International. See the last page for disclaimer Page 1 of 7

2 Overseas business: rising challenges from other Big-4. BOC has been known for its franchise and leading position in the overseas business. However, other ambitious Big-4 banks are beginning to step in and challenge the BOC s traditional advantages. ICBC has been appointed as the RMB clearing bank in Singapore s offshore RMB business. This is a strong signal that BOC is no longer the sole player in China s overseas banking businesses, especially those with strong policy backgrounds. BOC s competitors also accelerated their oversea loan exposures in recent years. Exhibit 1: Oversea loans balance and share RMB mn Overseas loans ICBC 339, , ,624* -share in total loans 5.00% 6.10% 6.83% CCB 180, , ,878 -share in total loans 3.19% 4.72% 5.24% ABC 75, , ,486 -share in total loans 1.53% 2.08% 2.96% BOC 902,036 1,133,120 1,306,014 -share in total loans 15.94% 17.86% 19.03% Source: the Companies, Guotai Junan International. *Number is estimated by us. Reducing structured deposits: funding cost is reduced, but loan issuing ability is also dragged down. Domestic RMB deposits and loans grew by 9.36% and 4.02% respectively QoQ in 1Q13. The deposit growth is quite impressive given that BOC has continued to cut the structured deposits via wealth management products so as to cut the funding cost. We should note that the shrinking in structured deposits also reduced the bank s loan issuing ability in BOC s RMB deposits decreased by 0.2% YoY in 2012, while RMB loans only grew by 9.9% (group) and 9.4% (domestic) in 2012, much lower than industry average of 15%. Exhibit 2: Cut funding cost: structured deposits declined 1, RMB bn Structured deposits Share in BOC's deposit mix, % Q12 2Q12 3Q12 4Q12 1Q No worry in capital adequacy given that its CB is largely unconverted. China Basel III reduces the bank s core tier-1 CAR and tier-2 CAR by 81bps and 93bps to 9.52% and 12.30% respectively in 1Q13, which are still at a solid level. However, this doesn t mean the bank faces capital pressures as its RMB40bn CB might be fully converted eventually. Credit cost tends to rise to mitigate the impact caused by rising NPLs. Credit cost reached 47 bps in 1Q13, higher than that of 1Q12 (34 bps). BOC s credit cost has been still the lowest among the large caps in the past years. A key reason behind is that the bank has a larger oversea exposures, especially in Hong Kong, where the NPL ratio is generally low. NPL shows a better trend than peers. NPL ratio was even reduced by 4bps QoQ to 0.91% in 1Q13, while the NPL balance was up slightly by RMB949mn QoQ, indicating sound asset quality. LLR/loans ratio was down 2bps QoQ at 2.22%, as the See the last page for disclaimer Page 2 of 7

3 bank s domestic branches have already complied with the CBRC s 2.5% requirement. Exhibit 3: BOC s NPL and coverage ratio Exhibit 4: BOC s LLR/loan ratio % 1.00 NPL coverage ratio (LHS) NPL ratio (RHS) % % LLR/Loans A 2012A 2013F 2014F 2015F A 2012A 2013F 2014F 2015F Growth momentum is much weaker than that of its peers, but that s already priced in. Before the reform and listing of the Big-4 banks, BOC has been the number 1 in terms of profit scale. However, its net profit attributable to shareholders is even surpassed by ABC (01288 HK) in The former leader now becomes the laggard one among the Big-4. However, all these have been priced in BOC s share price, which has the most significant discount to the book value among the Big-4. Risk Factors The lower-than-peers credit cost faces upward pressures. US low interest rate and QE might last longer than expected, exerting continuous pressures on the bank s NIM of foreign business. Raise FY13-14 EPS by 7.5% and 14.6%, respectively, due to a better-than-expected NIM. Credit cost in FY13-15 is projected to be 35bps, 34bps and 38bps, which follows an upward trend to mitigate the pressures of rising NPLs. The EPS for FY13-15 is then projected to be RMB0.540, RMB0.601 and RMB0.698 respectively. Exhibit 5: Earnings Adjustment FY13F FY14F FY15F RMB mn Old New Chg % Old New Chg % Old New Chg % Net interest income 280, , % 309, , % 393,492 Net fee income 73,407 73, % 81,111 81, % 85,245 Operating income 393, , % 432, , % 522,717 Operating expense -175, , % -197, , % -225,193 PPOP 217, , % 234, , % 297,524 Provision expense -25,760-25, % -33,795-27, % -34,394 NPBT 192, , % 201, , % 264,062 NPAT 140, , % 146, , % 194,715 EPS (RMB) % % Raise the target price to HK$4.73 from HK$4.16 and maintain the Accumulate rating. The new TP is equivalent to 6.9x 13PE, 1.1x 13PB. The bank s share price has outperformed peers YTD, which is a reflection of valuation recovery. The bank s current stock price is equivalent to its FY12 book value per share. We still maintain BOC s Accumulate rating, considering that it s still the cheapest one among the Big-4 state-owned banks. Potential catalyst is US rate hikes which could enhance the bank s NIM. Exhibit 6: Peers Comparison See the last page for disclaimer Page 3 of 7

4 Company Stock Code Currency Last price PE PB ROE(%) ROA(%) D/Y(%) Market Cap 12A 13F 14F 15F 12A 13F 14F 15F 13F 13F 13F Ind & Comm Bk Of China-H 1398 HK HKD ,954,502 China Construction Bank-H 939 HK HKD ,642,572 Agricultural Bank Of China-H 1288 HK HKD ,243,961 Bank Of China Ltd-H 3988 HK HKD ,057,968 Bank Of Communications Co-H 3328 HK HKD ,657 China Merchants Bank-H 3968 HK HKD ,213 China Citic Bank Corp Ltd-H 998 HK HKD ,414 China Minsheng Banking-H 1988 HK HKD ,810 Chongqing Rural Commercial-H 3618 HK HKD ,804 Simple Average Weighted Average Hsbc Holdings Plc 5 HK HKD ,637,902 Standard Chartered Plc 2888 HK HKD ,527 Boc Hong Kong Holdings Ltd 2388 HK HKD ,809 Hang Seng Bank Ltd 11 HK HKD ,966 Bank Of East Asia 23 HK HKD ,036 Wing Hang Bank Ltd 302 HK HKD ,171 Dah Sing Banking Group Ltd 2356 HK HKD ,940 Simple Average Weighted Average US Citigroup Inc C US USD ,163,927 Bank Of America Corp BAC US USD ,093,491 Jpmorgan Chase & Co JPM US USD ,463,450 Wells Fargo & Co WFC US USD ,580,365 Us Bancorp USB US USD ,415 Bank Of New York Mellon Corp BK US USD ,709 Morgan Stanley MS US USD ,049 Goldman Sachs Group Inc GS US USD ,915 Simple Average Weighted Average UK Royal Bank Of Scotland Group RBS LN GBp ,157 Barclays Plc BARC LN GBp ,636 Lloyds Banking Group Plc LLOY LN GBp ,542 Simple Average Weighted Average Germany Deutsche Bank Ag-Registered DBK GR EUR ,606 Commerzbank Ag CBK GR EUR ,622 Deutsche Postbank Ag DPB GR EUR n.a ,337 Simple Average Weighted Average France Bnp Paribas BNP FP EUR ,422 Societe Generale GLE FP EUR ,051 Credit Agricole Sa ACA FP EUR ,955 Simple Average Weighted Average Singapore Dbs Group Holdings Ltd DBS SP SGD ,759 Oversea-Chinese Banking Corp OCBC SP SGD ,000 United Overseas Bank Ltd UOB SP SGD ,652 Simple Average Weighted Average See the last page for disclaimer Page 4 of 7

5 Source: Bloomberg, Guotai Junan International. Note: Stock prices are as of 9 May Market capitalization is denominated in HKD. See the last page for disclaimer Page 5 of 7

6 Financial Statements and Ratios Profit and Loss Balance Sheet RMB million 2011A 2012A 2013F 2014F 2015F RMB million 2011A 2012A 2013F 2014F 2015F Interest income 413, , , , ,179 ASSETS Interest expense -185, , , , ,687 Balances with central banks 1,919,651 1,934,297 2,181,288 2,446,668 2,771,621 Net interest income 228, , , , ,492 Placements with banks 618, , , , ,927 Fee and commission income 70,018 75,198 78,789 86,740 90,700 Loans and advances, net 6,203,138 6,710,040 7,478,013 8,400,426 9,483,171 Fee and commission expense -5,356-5,275-5,251-5,491-5,455 Securities investment 1,926,952 2,138,934 2,910,556 3,217,564 3,628,518 Net fee and commission income 64,662 69,923 73,539 81,249 85,245 Total assets 11,830,066 12,680,615 14,738,100 16,427,416 18,485,049 Net trading (losses)/gains 7,858 8,451 8,620 8,792 8,968 LIABILITIES Net gains/(losses) on investments 3,442 2,288 2,174 2,065 1,962 Due to banks 1,370,943 1,553,192 1,751,520 1,964,613 2,225,542 Other operating income 24,272 28,550 29,978 31,476 33,050 Customer deposits 8,256,874 9,009,978 10,160,466 11,396,607 12,910,241 Non-interest income 100, , , , ,226 Total liabilities 11,074,172 11,819,073 13,767,934 15,337,505 17,257,900 Operating income 328, , , , ,717 Total equity 755, , ,167 1,089,911 1,227,149 Operating expenses -140, , , , ,193 PPOP 187, , , , ,524 Impairment losses -19,355-19,387-25,232-27,576-34,394 RMB million 2011A 2012A 2013F 2014F 2015F Profit before income tax 168, , , , ,062 Avg EA 11,022,254 11,852,472 13,269,431 15,160,120 17,054,440 Income tax expense -38,325-41,858-48,101-53,423-62,649 Avg loans 6,001,718 6,603,755 7,260,597 8,130,450 9,161,534 Profit for the year 130, , , , ,414 Avg deposits 7,898,015 8,633,426 9,585,222 10,778,537 12,153,424 Net profit attributable to shareholders 124, , , , ,715 Avg assets 11,144,966 12,255,341 13,709,358 15,582,758 17,456,233 Performance Ratios Asset Quality Growth(%) 2011A 2012A 2013F 2014F 2015F RMB million 2011A 2012A 2013F 2014F 2015F Net interest income NPL 63,274 65,448 83, , ,754 Non-interest income NPL ratio (%) Operating Income Loan Loss Reserve (LLR) 139, , , , ,494 Non-interest expenses LLR/NPL (%) PPOP LLR/Total loan (%) Net profit to shareholders Income contribution(%) Net interest income Non-interest income Efficiency(%) Per share information & valuation Cost/Income excl. business tax A 2012A 2013F 2014F 2015F Expense/Avg assets EPS,RMB Liquidity(%) BVPS,RMB Loan/IEA DPS,RMB liquid Assets/IEA EPS growth (%) Avg LDR ROE (%) Period-end LDR ROA (%) CAR(%) PE (x) Core CAR PB (x) CAR Dividend yield (%) See the last page for disclaimer Page 6 of 7

7 Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance >5%; or the fundamental outlook of the sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform Relative Performance <-5%; or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for Shandong Chenming Paper Holdings Limited-H shares (01812) and China City Railway Transportation Technology Holdings Company Limited (08240), Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services and etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) Fax: (852) Website: See the last page for disclaimer Page 7 of 7