BOC’s FY19 net profit rose 4.1% YoY to RMB187.4bn, in line with our forecast but 2.7% higher than consensus estimate. 4Q19 earnings growth was subdued at 3.8% YoY, due to weaker fee income and rising opex. As such, full-year ROE declined 0.5ppt YoY to 11.4%. Dividend payout was stable at 30%.
- Double whammy from COVID-19’s global outbreak. The pandemic has restrained economic activities worldwide and triggered interest rate cut in major countries. BOC has above-peers loan exposure to manufacturing sector, thus is more susceptible to potential asset quality risks on weakening export demand. The Bank might see greater NIM pressure, given its higher proportion (25.3% as of 4Q19) of foreign currency denominated assets.
- Results positive: 1) Asset quality remained solid in 4Q19. NPL was unchanged QoQ but down 5bp YoY to 1.37%, likely the lowest among Big-4. Provision coverage also stayed flat QoQ at 183%. NPL formation rose 47bp QoQ to 105bp in 4Q19, primarily due to stricter NPL recognition. NPLs covered 179% of >90day overdue loans (up from 136% in 2Q19). 2) Trading gains increased 325% YoY in FY19, mainly from higher returns on FX related products. 3) Optimized interest-earning asset mix. Loans grew 1.4% QoQ, while investments were largely stable and lower-yield interbank assets fell 5.4% QoQ. 4) Capital position was strengthened. CET1/total CAR rose 6bp/8bp QoQ to 11.3%/15.6% in 4Q19.
- Results negative: 1) 4Q19 NIM narrowed 1bp QoQ and FY19 NIM contracted 6bp YoY to 1.84%. Specifically, asset yield edged up 3bp YoY, but liability cost climbed 8bp YoY, mainly driven by 14bp YoY surge in deposit cost. 2) Net fee income declined 3.7% YoY in 4Q19, leading to a subdued full-year growth of 2.8%. That said, bank card, settlement & clearing, consultancy & advisory, and custodian businesses still saw healthy revenue growth. 3) Deposit growth was lackluster at 0.3% QoQ, and proportion of demand deposit slip 0.8ppt to 47.9%. Structured deposits was up 10.8% HoH.
- Maintain BUY and TP of HK$4.60. We kept our earnings forecast unchanged. BOC trades at 0.43x FY20E P/B, 22% below its past 5-year mean. Despite rising uncertainties from unfavorable global economic condition, the Bank’s near-trough valuation looks attractive for long-term investment horizon.
