Bank of China (3988 HK):Happy days are here again

1Q14 results beat. Bank of China (BOC) reported 1Q14 net profit of RMB45.4b, up 13.88% YoY. A recovery in NIM (possibly due to the foreign currency business having bottomed out) and strong fee-income growth of 17.15% YoY were the major drivers of growth. ROE was 19.14% and ROA was 1.3%; both results were improvements.

Deposit franchise picks up. Domestic renminbi deposits were up 9.54% QoQ in 1Q14, far higher than the industry average level of 4.50%. Domestic renminbi loan growth was up 3.76% QoQ, lower than the industry average of 4.20%. The bank shifted more resources to its foreign currency business as aggregate loan growth was 7.24% QoQ, much higher than renminbi loan growth.

Rise in credit cost a positive surprise. BOC’s provisioning level is lower than peers. Credit cost in 1Q14 rose 30bp YoY to reach 77bp, higher than the level in FY13 (32bp). BOC’s more conservative provisioning could provide a cushion for earnings while reassuring investors anxious about potential asset problems at the bank.

Capital position still in good shape, but bank likely to issue preference shares. BOC’s Tier-1 CAR and CAR both declined in 1Q14, from 9.70% and 12.46% at end-2013 to 9.58% and 12.05%. After adjusting for the CB factor (RMB39.4b unconverted), we do not see BOC’s capital ratio as a cause for concern. However, it is still likely that at the encouragement of the regulator, the Big-four state-owned banks will issue preference shares.

Maintain Outperform rating as the bank is likely to deliver higher-than-peers earnings growth. Our HK$4.30 target price on the stock is equivalent to 0.9x 14F P/B.