BOC Hong Kong:Attractive prospects but already priced in;reinstate at Neutral

We have removed the NR designation from BOC HK shares. We now havea Neutral rating with a 12-m PT of HK$32.40, implying 7% potential upside.

Since its strategic review began in 2015, BOCHK has aggressively chasedasset growth, shifting from a largely HK-focused bank to a more complexregional bank, as reflected by the market raising its COE. These strategicchanges came after a successful run in share price (since 2002) thatreflected its improving risk management, fee franchise, and market sharevs. local peers. BOC HK hopes to replicate this local success at the regionallevel but could face more competition and lacks home market advantages.

While we believe BOC HK has room to grow as a regional bank, based onthe experience of peers, asset growth has not generally meant higherreturns for bank investors. Also, while capital return and US$ rate leverageare positives, we see market expectations as too optimistic.

(1) Capital return: Any special DPS looks unlikely, despite the high CT1CAR, as we think capital consumption will be high given ambitious assetgrowth targets across the region. (2) $ rate rise driven marginexpansion: US$/HK$ rate rises should be positive for this large HK bank,but even after assuming 50bp average higher rates in US$/HK$ (translatesto 22bp higher NIM) we are in-line with Bloomberg consensus on2017E/18E EPS and 7% below on 2017E DPS. HK lending rates have notmoved up despite the HIBOR move.

Our 12-month RIM-derived price target of HK$32.40 for BOC HK implies a1.4X 2017E P/B, broadly in line with where it is currently trading (1.3X2017E P/B). Its 10.9% 2017E ROE, 12.6X 2017E P/E and 13% 2016-20E coreEPS CAGR compare with HK local banks on 9.8%, 14.7X and 11% respectively.

We modestly cut (up to 2%) 2016E-18E EPS and roll out 2019E/20E EPS.