BoCom’s 1Q20 net profit rose 1.8% YoY to RMB21.5bn, accounting for 26.5%/27.8% of CMBIS/consensus full-year estimates. The lackluster profit growth was mainly due to rising impairment charges (+11% YoY) and falling NIM, despite faster expansion in interest-earning assets. We expect asset quality pressure to persist in 2Q20, as COVID-19’s impact further materializes. But NPL formation could start to ease in 3Q20, barring any worsening of the pandemic, as guided by management.
- Results positives: 1) Asset growth was healthy at 5.5% QoQ, on 5.0% QoQ loan extension and 7.4% QoQ boost in securities investments. As such, net interest income had a decent growth of 5.4% YoY. New loans were mainly towards corporate segment (+7.3% QoQ) on policy stimulus, while retail lending was subdued (0.2% QoQ) amid weak consumption activities in 1Q20. 2) Deposit growth also picked up to 4.8% QoQ, from 0.4% in 4Q19. LDR remained largely stable at 87.5%. 3) Net fee income was up 5.4% YoY, driven by agency and management service fees, especially from wealth management business. 4) Tax expense declined 11.7% YoY, likely due to rising investment to tax-free govt bonds.
- Results negatives: 1) NIM narrowed 4bp YoY to 1.55, as overall asset yield (-16bp) shrank faster than liability cost (-13bp). In particular, loan yield dropped 19bp YoY after series of LPR cut, while deposit cost stayed relatively rigid (-2bp). We expect further NIM downside, although liquidity loosening could help to ease interbank funding cost. 2) Asset quality deteriorated. NPL ratio climbed 12bp QoQ to 1.59%, and provision coverage pulled back 17.6ppt QoQ to 154.2%. BoCom saw more significant NPL pressure than SOE bank peers, partly due to higher exposure to credit card, of which NPL balance rose 10-20% in 1Q20. Meanwhile, one of the Bank’s two loan collection centers was located in Wuhan, so it lost 45% of collection capacity during the city’s lockdown. 3) Capital ratio weakened, as CET1 and total CAR declined 39bp QoQ and 67bp QoQ to 10.83% and 14.16%, respectively.
- Maintain HOLD and lower TP to HK$5.70. We trim our FY20-22E earnings estimates by 2.8-4.2%, as we lower NIM forecast by 2-3bp and raise credit cost assumption by 4-5bp to factor in COVID-19’s impact. Our new HK$5.70 TP is derived from 0.51x target P/B and FY20E BPS of RMB10.0.
