Highly attractive dividend yield

We like BOC for its highly attractive FY21F dividend yield of 9.3%, which is the highest of the big four China banks.
Despite heightened macroeconomic uncertainty, we expect BOC to continue to deliver stable net profit streams.
Downgrade to Hold from Add. TP cut to Rmb2.90 as we lift the corporate NPL ratio assumption in our stress-test adjusted GGM by 1.5%-pts to 10.5%.

Elevated investor concerns over asset quality & policy risks

We think rising asset quality pressures are manageable from an EPS point of view, given sizable provisioning buffers and conservative non-performing loan (NPL) recognition ratios. Nevertheless, we think bank share prices could struggle to perform as we think both property sector stress and macroeconomic indicators are not likely to materially improve over the next few months. This could see investor concerns over asset quality and policy risks (such as ‘surrendering’ profits which occurred in 2020. See Between a rock and a hard place dated 18 Jun 2020) remain elevated, and thus make it difficult for these banks to materially re-rate in the near term.


Incorporating concerns via a 10.5% corporate NPL ratio assumption

We incorporate elevated investor concerns about the macroeconomy and the asset quality by raising our corporate non-performing loan (NPL) ratio assumption that we use in our stress-test adjusted Gordon Growth Model (GGM), which is the basis of our target
prices. Our new corporate NPL ratio assumption used in this stress test is 10.5% versus 9% previously.

Downgrade to Hold from Add; TP cut to Rmb$2.90

We value BOC-A using a stress-test adjusted GGM, after factoring in historical A-H share valuation premiums. Our FY21F-23F EPS estimates rise by 2.8% – 3.4% driven by lower estimates for payments to preference shareholders and perpetual bondholders. However, due to a 1.5%-pts higher corporate NPL ratio assumption used within our stress test, our TP is cut to Rmb2.90 from Rmb3.80. Given the lower target price, we thus downgrade to Hold due to valuation reasons. Key upside/downside risks: a worse-than-expected economy and greater/lesser social responsibilities.