A return to stability-centric profit growth
- Bank of China’s (BOC) 1H22 net profit rose 4.8% yoy. While 2Q22 NIM’s 4bp qoq rise is a key positive, this was offset by a 9% yoy fall in fee income.
- Like other China banks, 1H22 mortgage growth was weak (+1.4% hoh), while 1H22 corporate loan growth was strong (+11.8 % hoh).
- Remains top pick of big banks, with an Add rating, unchanged TP of HK$4.2.
Back to stable single-digit net profit growth
1H22 net profit rose yoy by 4.8% (2Q22: +0.8%; 1Q22: +9.2%). Before deduction for payment to holders of preference shares and perpetual bonds, 1H22 net profit rose yoy by 6.4% (2Q22: +5.7%; 1Q22: +7%). This marks a return to the low-mid-single-digit net profit growth seen in FY15-FY20, with FY21’s double-digit net profit growth an anomaly. 1H22 net profit made up 49.6% of our FY22F net profit estimates.
What we liked about 2Q22 results
i) 2Q22 net interest margin (NIM) was 1.78% (+4bp qoq, +4bp yoy); ii) 1H22 credit costs were 0.58% (-13bp yoy); iii) 1H22 effective tax rate was 18.3% (-1.8% pts yoy; 2Q22: 18.3%, -1.4% pts yoy); and iv) 2Q22 risk-weighted assets-to-total assets ratio was 59.2% (-1.6% pts qoq, and the lowest since 4Q12’s 57.2%).
What we did not like about 2Q22 results
i) 1H22 cost-to-income ratio was 34.7% (+0.9% pt yoy); ii) 2Q22 net fee income fell yoy by 9.4% (1Q22: -6.8%; 1H22: -7.8%); iii) 1H22 pre-provisioning operating profit (PPOP) growth yoy was 2.1% yoy (2H21: 5.7%; 2Q22: 4.8%; 1Q22: – 0.4%); and iv) 1H22 ROE was 11.6% (-35bp yoy).
What else we thought was interesting about 2Q22 results
i) 2Q22 non-performing loan (NPL) ratio was 1.34% (+3bp qoq). 1H22 mix of loans over 90 days overdue was 0.79% (flat hoh). However, 1H22 mix of loans under 90 days overdue was 0.37% (+9bp hoh). 1H22 special mention loans ratio was 1.29% (-5bp hoh). 1H22 NPL recognition ratio was 171% (+2.4% pts hoh, but -29.5% pts yoy); ii) 2Q22 core Tier 1 ratio was 11.3% (flat qoq); iii) 2Q22 loan-to-deposit ratio (LDR) was 87.6% (+1.5%- pts qoq); iv) 2Q22 provisioning coverage ratio was 183% (-4.6% pts qoq); v) 1H22 mortgage mix was 28.9% (-185bp hoh). 1H22 group mortgages rose 1.4% hoh and 6.3% yoy; vi) 1H22 domestic corporate loans rose 11.8% hoh and 16.1% yoy; and vii) 2Q22 loan growth yoy was 9.9% (1Q22: +10.5%).
Top pick of the big banks; Reiterate Add rating; TP of HK$4.20
We value BOC using a stress-test adjusted GGM, with an unchanged TP of HK$4.20. Given that 17.4% of its FY21 assets were offshore (almost all in Hong Kong), we believe that it is well placed to deliver better-than-peer NIM increase in FY22F and FY23F, as we expect a more than 200bp rise in US rate in FY22F. Potential re-rating catalysts are improving asset quality and economic recovery. Key downside risks: a worse-than-expected NIM trend and greater social responsibilities.