Bank of China (3988 HK):Overseas business looking up

Foreign business stabilizing NIM. BOC’s NIM was up 9bp to 2.24% in 2013, bucking the sector trend of declining NIM for virtually all of the domestic banks. We put this down to two factors: (1) BOC reduced its interbank business while increasing the loan portion of its assets thus raising asset yield, and (2) overseas NIM contributed 3bp of NIM improvement. NIM of the foreign business is picking up, underpinning BOC’s aggregate NIM performance. We advise investors to buy this turnaround story.

FY13 results beat. Bank of China (BOC) reported FY13 net profit of RMB156.9b, up 12.4% YoY. The bank’s NIM and strong fee-income growth of 17.4% YoY were the major drivers of growth. ROE was 18.0% and ROA was 1.2%.

New management more devoted to overseas and offshore renminbi business. BOC’s overseas business is expanding more rapidly evidenced by 16.5% and 22.1% YoY growth in overseas deposits and loans vs. 10% and 9.6% YoY growth in domestic renminbi deposits and loans. BOC is likely to benefit from higher yields as the Fed continues to taper QE. Its peers, with little or no overseas exposure, do not share this advantage.

Tier-1 capital ratio close to threshold, but not a concern. The bank’s Tier-1 CAR and CAR ended FY13 at 9.70% and 12.46%. BOC’s RMB40b CB is largely unconverted, which could boost CAR by 44bp. After adjusting for the CB, we do not consider BOC’s capital ratio a cause for concern.

Action. We maintain our Outperform rating on BOC as its share price has the most significant discount to book value within the China banks sector. Our HK$4.30 target price on the stock is equivalent to 0.9x 2014F P/B.