On 27 Aug, BoCom reported 1H19 net profit of RMB 42.7bn, up 4.9% YoY and accounting for 55.3%/57.3% of CMBIS/consensus full-year estimates. In 2Q19, PPoP rose moderately by 4.3% YoY (vs 15.7% YoY in 1Q19), as growth in both net interest income and net fee income softened. The high base effect also led to a YoY decline in trading gains. However, bottom-line earnings growth was largely stable at 4.8% YoY (vs 4.9% YoY in 1Q19), thanks to tax savings from rising investment in tax-free government bond. 1H19 annualized ROE slid 0.2ppt YoY to 12.8%.
- Results positives: 1) Healthy loan growth of 5.7% HoH outpaced total asset growth of 3.7% HoH. 1H19 new loans was mainly from corporate segment (+8.0% HoH), as retail loans (+1.1% HoH) were held back by falling credit card overdrafts (-10.0% HoH). Outstanding discounted bills surged 41.7% HoH, suggesting the Bank’s falling risk appetite. 2) Deposit growth picked up to 5.9% in 1H19 (vs 7% in 1H18), sending LDR down slightly to 83.6%. That said, proportion of demand deposit declined 0.7ppt to 41.3%. 3) Asset quality remained solid, as NPL ratio was stable at 1.47%, and provision also held steady at 173.5%. NPL recognition was prudent, with >90-day overdue loan/NPL at 116%.
- Results negatives: 1) 2Q19 NIM contracted 3bp QoQ to 1.56%, by our estimate. Despite lower interbank funding cost (-15bps HoH), deposit cost climbed 10bp HoH due to heightened deposit competition. With relatively large proportion of interbank liability, BoCom would gain more from monetary easing, but marginal benefit should diminish going forward; 2) Retail loan exposure declined 1.5ppt to 32.2%. BoCom’s below-peers retail loan proportion could make it more vulnerable to interest rate liberalization, although the Bank said during results briefing that the pricing of 70% new loans YTD was already based on LPR. 3) 1H19 CIR was 1.4ppt higher at 36.2%, as opex rose 16.8% YoY. Management explained investment in technology development accounted for over 5% of total opex, and will increase to 10% in coming years.
- Initiate BoCom-A with HOLD rating and RMB 6.2 TP. BoCom-A currently trades at 0.59x FY19E P/B, 12% below its past 5-year mean of 0.67x. Our TP of RMB 6.2 is based on GGM-derived target P/B of 0.67x and FY19E BPS of RMB 9.3.
