Regional financial conference takeaways
- We see BOC maintaining a strong focus on risk management in its lending practices and consequently expect NPL ratios to remain stable.
- While investments in central and local government bonds may rise and adversely impact NIM, this could be partly offset by a lower effective tax rate.
- We do not think that BOC will be materially impacted by bancassurance commission rate cuts, due to its low exposure to this segment.
- Reiterate Hold rating for BOC-A, TP of Rmb3.70.
Conservative approach to credit risk management set to continue
Bank of China (BOC) participated in our regional financial conference, held on 6 – 7 Dec 2023. We see BOC maintaining a strong focus on risk management in its lending practices and consequently expect BOC’s NPL ratio to continue to record a stable decline over the 3Q23 – FY25F period. BOC’s 3Q23 NPL ratio was 1.27%, down 5bp versus 4Q22, which is better than the average 3bp fall in the NPL ratio of the state-owned enterprise (SOE) banks under our coverage.
Increased bond investments could pressure 4Q23F – FY24F NIM
We see increased investments in both central and local government bonds as another factor that could pressure BOC’s net interest margins (NIM) over 4Q23F – FY24F. BOC’s 3Q23 NIM was 1.57%, -7bp qoq and -21bp yoy and we see factors such as mortgage backbook repricing, lower loan yields for new mortgages and new corporate loans as well as a rising time deposit mix as some of the other factors that could pressure BOC’s NIM over 4Q23F – FY24F. While we do see NIM pressure from increased bond investments, we think this could be partly offset via a lower effective tax rate over this period. This trend
towards lower effective tax rates was already evident in 3Q23, with 3Q23’s effective tax rate at 14.4%, -3.1% pts yoy, and 9M23’s effective tax rate at 16.6%, -1.4% pts yoy.
No material impact on BOC from new bancassurance rules
With stricter regulatory guidance on bancassurance commission rates introduced in Aug/ Sep 2023, we expect the bank sector to see notable pressure on bancassurance commissions growth yoy from 4Q23F. However, due to BOC’s lower-than-peer exposure to this segment, we do not expect BOC to be materially impacted by bancassurance commission rate cuts.
Reiterate Hold rating; TP unchanged at Rmb3.70
We value BOC-A using a stress-test adjusted GGM and factor in historical A-H share valuation gaps. Reiterate Hold, given our view of minimal downside risk to FY23F – 25F EPS and given our optimism about the FY23F – 25F revenue outlook for BOC’s non-mainland business. Key upside/downside risks: a better-than/worse-than-expected NIM trend and lesser/greater social responsibilities adversely impacting its profits.
