BoCom’s net profit declined 30.6%/14.6% YoY in 2Q/1H20, despite a solid revenue growth of 6.6%/5.2% YoY. Notable earnings contraction was mainly due to mounting provisions (+99.2% YoY in 2Q20) against deteriorating asset quality. The Bank is following policy guidance to pile up risk reserves, and conceded total RMB14bn profit to the real economy during anti-COVID-19 campaign in 1H20. Although NPL formation may ease in 2H20, credit cost is likely to stay elevated given lower-than-peers provision coverage, further weighing on earnings growth.
- Results positives: 1) Loan/deposit growth was healthy at 2.9%/3.1% in 2Q20. Majority of new loans went to corporate side (+9.9%) in 1H20, but management said retail loan extension started to accelerate in 2Q20 and should account for more than 40% of full-year loan growth. 3) Non-interest income was up 8.8% YoY, driven by management service fees and investment gains. 3) Wealth management business capacity enhanced, with retail AUM +8.2% HoH, no. of OTO fortune customers +8.5% HoH, and private banking clients +13.3% HoH.
- Results negatives: 1) NIM narrowed 3bp QoQ/5bp YoY to 1.52%/1.53% in 2Q/1H20. Due to LPR cuts, asset yields shrank faster than liability cost in 1H20. In particular, loan yield dropped 17bp HoH, but deposit cost only slid 1bp HoH. Management expected further margin pressure in 2H20, but will try to stabilize NIM by replacing higher-cost structured deposits/MLF with cheaper interbank funding. 2) Asset quality worsened. NPL ratio edged up 9bp QoQ to 1.68%, and provision coverage declined 5.5ppt QoQ to 148.7%. This was partly due to more prudent NPL recognition, as SML ratio retreated 38bp HoH. The good news is that credit card NPLs peaked out in Jun and will likely recovered to pre-pandemic level in 3Q20. Loans under deferred repayment scheme amounted to RMB176bn, 3.1% of total loans as of 2Q20. 3) 2Q20 cost-income ratio rose 0.4ppt YoY to 36.2%, higher than large bank peers. 4) Capital position weakened, as CET1 ratio dropped 20bp QoQ to 10.63% on sluggish earnings and cash dividend payout.
- Maintain HOLD and trim TP to RMB5.40. We cut our FY20/21E earnings estimates by 14-16%, to factor in lower NIM/fee income and higher credit cost assumptions. Our revised RMB5.40 TP is based on 0.55x (from 0.62x) target P/B and FY20E BVPS of RMB9.9.
