Bank of Communications (BoCom) is the fifth-largest state-owned bank in China and the first mainland bank listed on the H-share market in 2005.
HSBC holds a 19% stake in BoCom.
The bank has the largest direct exposure to trust assets and trust-related risks among China banks in Daiwa's coverage.
BoCom Trust, the bank's affiliated trust company, experienced 46% AUM growth in 9M13, significantly outperforming the sector average of 35%.
BoCom Trust's AUM accounted for 55% of BoCom's total equity at the end of 3Q13.
Around 10% of BoCom's wealth management products (WMPs) are underwritten by BoCom Trust, which typically invests in less liquid sectors.
Main Issues and Risks
Asset Quality Concerns: BoCom has high loan exposure to the steel-trading sector, which has seen a rise in defaults in 2H13 and 1Q14. The bank's asset quality deterioration in 3Q13 was primarily due to defaults by steel traders and SMEs in the Yangtze River Delta.
Provision Pressures: Despite a large write-off of NPLs in 4Q13, BoCom's loan loss reserve (LLR) ratio remains low, and there is an expectation of higher provision charges over 2014-2015 due to its modest provisioning policy.
Net Interest Margin (NIM): BoCom is expected to report a lower NIM on a QoQ basis in 4Q13, due to a smaller increase in loan yield compared to funding costs.
Regulatory Risks: The loan-to-deposit (LDR) requirement is a key upside risk if relaxed, but currently, BoCom has the highest LDR among the banks in Daiwa's coverage.
LLR Ratio: The CBRC requires all China banks to maintain an LLR ratio of at least 2.5% by the end of 2016. BoCom's LLR ratio at the end of 3Q13 was 2.20%, close to the low end of the H-share banks.
Key Financials and Forecasts
Target Price (HKD): 5.25 (from 6.10)
Upside: 4.1%
21 Feb Price (HKD): 5.04
EPS Forecast (2013E to 2015E):
2013E: 0.820
2014E: 0.809
2015E: 0.820
Net Profit (2013E to 2015E):
2013E: 60,888 million CNY
2014E: 60,116 million CNY
2015E: 60,896 million CNY
Dividend Yield: 6.3% (unchanged)
DPS (2013E to 2015E):
2013E: 0.250
2014E: 0.247
2015E: 0.250
PBR (2013E to 2015E):
2013E: 0.7
2014E: 0.6
2015E: 0.6
ROE (2013E to 2015E):
2013E: 15.2%
2014E: 13.5%
2015E: 12.5%
PER (2013E to 2015E):
2013E: 4.8
2014E: 4.9
2015E: 4.8
Forecast Revisions
Year to 31 Dec
13E
14E
15E
PPOP change
1.0
1.8
2.3
Net profit change
4.3
(0.5)
(5.9)
Core EPS change
4.3
(0.5)
(5.9)
Valuation
Fair Value: Based on a 2014E PBR of 0.7x.
Fundamental PBR: 0.9x (from Gordon Growth Model, assuming 12.0% ROE, 13.40% COE, and 4% terminal growth rate).
Haircut for LGFV Exposure: 30% (HKD1.40/share), leading to a revised fair value of HKD5.25/share.
Sector Averages (2014E):
PBR: 0.8x
PER: 4.7x
Relative Value
ROE and PBR Correlation: Positive correlation with high statistical significance (r-squared of 0.71).
Valuation Comparison with other H-share banks:
Stock
BBG Code
Rating
Price Target (HKD)
Upside (HKD)
Market Cap (%)
PBR (2013E)
PBR (2014E)
PER (2013E)
PER (2014E)
Dividend Yield (2013E)
Dividend Yield (2014E)
ROE (2013E)
ROE (2014E)
P/PPoP (2013E)
P/PPoP (2014E)
EPS Growth (2013E)
EPS Growth (2014E)
ICBC
1398 HK
Buy
4.68
7.45
59.1
201.8
1.0
5.1
4.6
7.0
7.7
21.3
20.3
3.5
3.1
1.4
1.4
CCB
939 HK
Buy
5.31
8.25
55.4
170.8
1.0
4.9
4.6
7.1
7.6
21.1
19.8
3.3
3.0
1.5
1.4
BoC
3988 HK
Buy
3.25
5.00
53.9
118.0
0.8
0.7
4.9
7.5
8.0
17.5
16.7
3.1
2.8
1.1
1.1
ABC
1288 HK
Hold
3.35
4.20
25.3
128.2
1.0
0.9
5.3
6.6
7.1
20.3
19.2
3.2
3.0
1.2
1.1
BoCom
3328 HK
Hold
5.04
5.25
4.1
48.3
0.7
0.6
4.8
6.3
6.3
15.2
13.5
3.1
2.9
1.1
1.0
CMB
3968 HK
Buy
14.12
21.00
48.7
43.3
1.0
0.9
5.4
5.6
5.6
20.2
18.2
3.5
3.3
1.3
1.3
CITIC
998 HK
Outperform
4.25
4.70
10.6
35.2
0.7
0.6
4.0
5.7
5.7
18.2
16.0
2.5
2.3
1.2
1.1
Minsheng
1988 HK
Hold
7.92
8.40
6.0
34.3
1.0
0.9
4.6
5.0
5.1
22.8
19.8
2.8
2.7
1.3
1.3
CEB
6818 HK
Buy
3.10
4.50
45.1
19.2
0.7
0.6
3.7
2.4
2.6
19.6
17.0
2.4
2.5
1.1
1.1
CRCB
3618 HK
Hold
3.33
4.30
29.1
4.0
0.6
0.6
4.3
7.0
7.7
16.4
15.6
2.9
2.5
1.2
1.2
Weighted avg
802.5
0.9
0.8
4.9
4.7
7.1
19.9
18.7
3.2
3.0
1.3
1.3
Conclusion
Recommendation: Maintain Hold (3) due to overhangs related to trust exposure, asset quality, and provision ratios, which cap the upside potential.
Valuation: Despite low valuation, the overhangs remain, and the fair value is set at HKD5.25, implying a 0.7x PBR for 2014E.
Outlook: The bank faces pressure from provisions and regulatory requirements, but may benefit from a relaxation of the LDR requirement.
Risks Summary
Downside Risk: Higher provisions to meet the LLR requirement of 2.5% by 2016.
Upside Risk: Relaxation of the LDR requirement.
Key Ratios
Ratio
2013E
2014E
Net Interest Margin (%)
2.50
2.49
Loan Loss Reserve (%)
2.54
2.91
Provision Coverage (%)
240
233
ROE (%)
15.2
13.5
ROA (%)
1.1
1.0
Total Cost / Total Income (%)
39.8
40.5
Effective Tax (%)
22.3
22.3
Notes
BoCom has a high proportion of MSME loans in its portfolio.
The bank has a relatively low LLR ratio, which may lead to higher provision charges in the future.
BoCom has high reliance on interbank funding, which could be affected by rising interest rates.
