Summary

-According to the 2015H1 interim results released by Bank of Communication (“BoCom” or the “Group” in the following text), as at the end of June 2015, the Group's net profit attributable to shareholders approximately amounted to RMB37.324 billion, up 1.5% yoy, basically in line with our previous expectation, representing the EPS of RMB0.50. However, the growth rate of net profit is far slower than 2014H1, which is mainly due to the significant increase of interest expenses in the period under review, causing the yoy growth rate of net interest income slowed down to 5.73%. Meanwhile, due to the significant increase of bad debt, the Group's impairment of asset consistently surged: increased approximately 13% yoy to RMB11.454 billion. On the other hand, BoCom's income from intermediate business still kept stable growth, and the net administration fee and commission incomes in the period under review increased approximately 23.5% yoy, to RMB19.386 billion;

-We keep an eye on the asset quality of BoCom, which appeared to become worse in 2015Q2. Due to the continued growth of risk of making loans, BoCom kept contracting the loans to SMMEs. As at the end of June 2015, the portions of loans to domestic SMMEs to total loans decreased to 36.73% with the amount of RMB1.29 trillion. Due to the sluggish macroeconomic environment in the recent two years, BoCom's rates of NPLs climbed up from 1.25% in end of 2014, to 1.35% in end of June 2015, with doubtful loan and loss loan particularly surged. The provision coverage ratio dropped from 178.88% in end of 2014, to 170.43%, down 8.45ppts. We believe the asset quality of BoCom will keep deteriorating, while the amount and ratio of NPLs will keep growing, and the NPL ratio would go up to 1.45% in 2015, the trend meets our expectation;

-The level of capital adequacy ratio of BoCom has been lowered. As at the end of June 2015, the core tier-one CAR and CAR dropped 0.44 ppts and 0.92 ppts respectively compared to end of 2014,reaching 10.86% and 13.12%;

-BoCom has steady development on its business, with profit growth slowing down. We expect its net profit growth in 2015 would be lower than 2014, keeping at 2% approximately. In addition, BoCom's dividend payout ratio still stays at the level of 30%, based on 3-stage dividend discount model, to reflect the upcoming market risk, we lower the Group's 12-month target price to HK$7.00, which is around 34% higher than the latest closing price, equivalent to 6.3xEPS and 0.8xBVPS in 2016E respectively. The valuation is quite attractive, and we maintain the“Buy” rating. (Closing price as at 7 September 2015)

Profit growth slows down in 2015

As at the end of June 2015, the Group's net profit attributable to shareholders approximately amounted to RMB37.324 billion, up 1.5% yoy, basically in line with our previous expectation, representing the EPS of RMB0.50. However, the growth rate of net profit is less than that in the same period last year, which is mainly due to the significant increase of interest expenses in the period under review, causing the yoy growth rate of net interest income slowed down to 5.73%. Meanwhile, due to the significant increase of bad debt, the Group's impairment of asset consistently surged: increased approximately 12.75% to RMB11.454 billion.

In 2015H1, having benefitted from the improvement of market environment, BoCom's income from intermediate business recorded faster growth, and the net administration fee and commission incomes in the period under review increased approximately 23.47% yoy, to RMB19.386 billion. Among these, incomes from investment banking business and management fees and commission surged 48.95% and 38.86% respectively, reaching RMB4.686 billion and RMB5.028 billion respectively. Income from bank card fees also recorded an increase of 7.21% yoy to RMB5.487 billion.

The market has undergone severe volatility since mid-June 2015, and therefore we expect the market situation would further worsen in 2015H2. However, BoCom's income from interest margin and intermediate business would keep stable growth throughout the whole year. On the other hand, the increase of operating expenses, in particular the surge of impairment of asset, caused a consistent drop in the Group's net profit growth rate, which kept at around 1%, approximately amounted to RMB67 billion.

It is worth to note that, with respect to the continued growth of NPL, we expect BoCom's impairment provision would still significantly increase if the Group's profit growth rate still maintain at a low level. Therefore, there is the risk for the Group's profit growth rate changing from positive to negative in 2015Q4 or the next year.

Asset quality keeps deteriorating

The asset of BoCom keeps stable growth. The Group's total asset recorded as at end of June 2015 increased nearly 13.62% compared to end of 2014, to RMB7.12 trillion; while net asset growth reached around 3.76%, to RMB488.779 billion, representing BVPS amounted to RMB6.58.

On the other hand, as at the end of June 2015, the portions of loans to domestic SMMEs to total loans decreased to 36.73% with the amount of RMB1.29 trillion. BoCom's rates of NPLs climbed up from 1.25% in end of 2014, to 1.35% in end of June 2015, with doubtful loan and loss loan particularly surged. The provision coverage ratio dropped from 178.88% in end of 2014, to 170.43%, down 8.45ppts.

Meanwhile, BoCom's loans overdue more than 90 days significantly increased 59% compared to end of 2014, to RMB70.993 billion. Since such overdue loans would probably turn to loss loan, there is higher risk for BoCom to face the deterioration of asset quality in the future.

We believe the portion and amount of NPLs of BoCom would keep growing in the near future, and the NPL ratio would go up to 1.45% in 2015, such trend meets our expectation.

Risk

Lower-than-expected growth rate of income;

Worse-than-expected asset quality due to consistent growth of the amount of NPLs;

Increase in capital pressure;

Significant short-term drop in stock price due to market volatility.

FINANCIALS

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