Bank of Communications:Losing steam

Maintain Neutral rating but lower target price from HK$5.57 to HK$5.35. Our revised target price is equivalent to 0.67x 2014 P/B. BoCom does not have a deposit franchise on the scale of the Big-four state-owned banks nor does it exhibit the balance sheet growth of the joint-stock banks. Furthermore, BoCom has been battered by the current upward NPL cycle, as most new NPLs, especially those emanating from steel-trader loans, originate from the Yangtze River Delta region where BoCom is headquartered.

1Q14 results paint a gloomy picture. BoCom reported 1Q14 net profit of RMB18.7b, up 5.6% YoY, in line with our expectation, and slightly higher than consensus. NIM was down 13bp QoQ and 24 bp YoY to 2.33% in 1Q14, a level much lower than peers due to rising funding costs. Credit costs for 1Q14 were down 1bp YoY to 66bp. Annualized ROE and ROA for 2013 were 17.4% and 1.26%, still poor compared with listed peers.

Balance sheet expansion grinds to a halt, not enough to cushion the fall in NIM. BoCom’s loans and deposits were up 1.3% and 0.8% QoQ, much lower than the industry average of 4.2% and 4.5% QoQ. We expect slow deposits growth to curtail balance sheet expansion and undercut revenue growth.

Missing a differentiated operating strategy. As China’s banks face the challenges of interest rate liberalization and internet financing products like Yu-e-bao, they have found it necessary to adopt differentiated operating strategies and adjust their business models. BoCom was slow to implement deep reforms and now finds itself falling behind its peers.