Addressing Malaysian investor feedback
- We hosted BOC in Malaysia on a roadshow, with investor interest on issues relating to profits, NIM, dividends, property, asset quality and loan growth.
- We continue to be confident in FY23F – 25F stability of profits and dividend payout ratios, despite continued revenue pressures & economic challenges.
- NIM pressure remains greatest between 2Q23 and 3Q24F, with impacts from mortgage backbook pricing of about 6bp in FY24F, in our view.
- BOC-A remains our top SOE A-share bank pick. Reiterate Hold rating, TP unchanged at Rmb3.70.
Much Malaysian investor interest in meeting BOC
We brought Bank of China (BOC) to Malaysia to meet investors, with many questions from institutional investors centered around the outlook for bank profitability, net interest margins (NIM), the property sector, asset quality, and loan growth, as well as the sustainability of BOC’s dividend payout ratio.
We see BOC’s strong record of stable profits since 2015 persisting
BOC emphasised its strong record of stable-to-rising net profits (prior to deductions for minority interests, preference share dividends and perpetual bond payments) since FY15 (Fig 1). We see this continuing despite FY23F – 25F revenue pressures relating to net interest margins (NIM) and fee growth, given its sizable buildup of provisioning and nonperformance loan recognition buffers, as argued in Significant buffers to absorb LPR cuts, dated 15 Aug 2023. We assess BOC’s excess buffers over regulatory minimum could fall by 26% pts over FY22 – FY25F to 75% of FY25F pre-tax profits, and fall by 19% pts over FY22 – FY25F to 55% of FY25F pre-provisioning operating profits (PPOP) (Fig 2). As argued in Addressing dividend and profit concerns, dated 11 Jul 2023, we do not expect cuts to BOC’s dividend payout ratios or DPS over FY23F – 25F.
NIM pressure greatest over 2Q23 – 3Q24F period, in our view
We see BOC’s NIM pressure to be the greatest over the 2Q23 – 3Q24F period, due to lower loan prime rates, a worsening time deposit mix, lower mortgage rates, as well as mortgage back-book repricing, with mortgage back-book repricing to have a -6bp impact on FY24F NIM, in our view. The People’s Bank of China (PBOC) has recently stated that as of 1 Oct 2023, 56% of all system mortgages have seen their back-book reprice, with these repriced mortgages seeing a 73bp fall in mortgage yields. Furthermore, Sep 2023 yields on all mortgages had fallen 42bp mom to 4.29%.
Reiterate Hold rating; remains our top SOE A-share bank pick
Our stress-test adjusted GGM-based TP remains unchanged at Rmb3.70. We reiterate our Hold rating on support from continued high FY24F dividend yields but offset by FY23F – 25F revenue pressures. Upside risks include improving asset quality and economic recovery. Key downside risks: a worse-than-expected NIM trend and greater social responsibilities impacting its profits.