Bank Of China:Sequential revenue growth remained negative

Sequential revenue growth remained negative

    BOC's 9M16 net profit rose 9.9% YoY to RMB151.6bn, and profit to equity shareholders(after AT1 dividend) up 1.3% YoY. The seemingly strong growth was due mainly to theone-off NCB disposal gain in 2Q16, while pre-provision profit in 3Q16 declined by 3.9%YoY. Sequentially, net interest income and fee income continued to decline QoQ, andcredit cost was cut back to only 61bp in 3Q to boost the bottom line. BOC and BOCHKcollectively announced the plan to sell Chiyu Bank, which is 70.5% owned by BOCHK.

    The disposal could potential lead to another one-off gain in 2H16 or 2017, although thecontribution should be much less than the NCB sale. Maintain earnings and POunchanged. Underperform.

    8bp sequential decline in NIM was a negative

    NIM declined 8bp QoQ to 1.75% in 3Q16, or 1.85% for 9M16, which was slightly worsethan expected given the end of the re-pricing cycle of RMB assets. BOCHK also saw aslight QoQ decline in NIM. Volume growth remained prudent, with loans/deposits up9.3%/12.3% YoY, or 1.5%/3.4% QoQ. With the weak NIM, net interest income fell 0.5%QoQ, or 6.7% YoY. Fees continued to decline by 6.5% QoQ, or 4.2% YoY for 9M16.

    Contribution of non-interest income fell back to 30% of revenue in 3Q16, down from46% in 2Q16 but broadly in line with FY15 levels.

    Stable asset quality, and sharp drop in credit cost in 3Q

    NPL size rose 2.6% QoQ only or 12% YTD, with net annualized formation at only 15bp in3Q16, lower than 26bp in 1H16. NPL ratio rose by 2bp QoQ to 1.48%. Credit costplummeted from 138bp in 2Q16 to 61bp in 3Q15, due partly to the weakness in coreearnings, although 9M16 credit cost remained decent at 90bp. NPL and loan reservecoverage remained broadly flat at 156% and 2.30% respectively. We expect BOC’s NPLformation and credit cost to continue to rise in the coming 2 years.