Bank of Communications (3328 HK):Stuck in the mud

FY13 results paint a gloomy picture. BoCom reportedFY13 net profit of RMB62.3b, up 6.7% YoY, in line with ourexpectation and market consensus. Rising NPLs drove upcredit cost, erasing bottom-line growth. Annualized ROE andROA for 2013 were 15.6% and 1.1%, very poor comparedwith listed peers.

Earnings growth losing steam. Over the course of FY13,with low revenue growth resulting from falling NIM, bankearnings were highly sensitive to impairment costs. BoCom isfacing rising credit costs, up 6bp to 0.59% YoY in 2013,equivalent to a 27% increase in provisioning expense, whilePPOP increased only 9.5%. The bank’s fee income over totaloperating revenue is lower than its joint-stock peers, and istherefore not high enough to offset the impact of narrowingNIM through higher non-interest income growth.

More affected in the current upward NPL cycle. Most newNPLs originate from the Yangtze River Delta region whereBoCom is headquartered. Because of this, BoCom is facing atougher time than peers.

Expect more active NPL-packed sales to ease NPLpressure. BoCom is more active in NPL-packed sales due tomore intense asset quality concerns. Other state-ownedbanks are now more willing to resolve their NPLs bythemselves so as to achieve better recovery rates.

Maintain Neutral rating but lower target price fromHK$6.20 to HK$5.57, equivalent to 0.7x 2014 P/B.

Compared with peers, BoCom does not have a depositfranchise of the magnitude of the Big-four state-owned banksand does not exhibit balance sheet growth potentialcompared with the joint-stock banks.