Bank of China (Group)-A:Remains our top pick:main beneficiary of rising US interest rates and OBOR strategy
14% of total assets are denominated in US dollars.
Given that expectations for rising US interest rates are likely to cause the RMB toweaken further in the short and medium term, we maintain our view that BOC has themost differentiated investment case among Chinese banks. Bank of China is not onlyless affected by a weakening RMB (24% of its earnings come from abroad), but itsUSD-denominated assets are also likely to enjoy a better NIM in the medium term. Withsimilar dividend yields among the big four banks, we reiterate our bullish stance onBank of China.
cUS$87bn OBOR loan support in the pipeline.
According to its annual report, in 2015, Bank of China extended US$28.6bn in loans(equivalent to 28% of new loans; including loans, letters of guarantee and letters ofcredit) to "One Belt, One Road" (OBOR) countries, covering about 330 major projects.
The bank expressed its intent to lend about US$87bn in total (about 29% of ourforecast for total new loans in 2016 and 2017). As of end-2015, BOC had overseasorganisations in 46 countries and regions, including 18 in OBOR. Given that demandfor loans is still sluggish in China, this driving force for loans is positive for BOC.
Extending forecast period to 2020.
Given the deteriorating asset quality (rising credit costs) and interest rate liberalisation(narrowing NIM), we estimate Bank of China's net profit after tax will fall 1% YoY in2016. We believe earnings momentum is unlikely to pick up prior to 2018.
Valuation: Maintain Buy rating; lowering PT to Rmb4.20.
We base our price target on a target P/BV multiple of 0.9x applied to 2016E BVPS ofRmb4.49. We assume a long-term sustainable ROE of 9.9%, a cost of equity of 10.2%and a long-term growth rate of 5% to derive our target P/BV multiple. The stock istrading at 0.7x 2016E P/BV and the dividend yield is 5.3%. Our price target impliesc30% upside for the stock.