Company Introduction

Bank of Communications (BoCom or the Group) was founded in 1908, which was the one of Big-4 in early stage of domestic banking sector. BoCom was restructured in 1986 and operated in April 1987. It was the first state-owned commercial bank in China and today it is the one of top five largest state-owned banks located in Shanghai. BoCom was listed in H and A Shares in Jun 2005 and May 2007 respectively.

Summary

-Recently BoCom announced 1Q2012 result, its net profits reached to RMB15.88 billion, increased by 19.58% y-y, equivalent to EPS of RMB0.26;

-The Group's total assets increased by 5.89% to RMB4.88 trillion compared with the end of 2011, equivalent to BVPS of RMB4.65, 5.92% higher than that of 2011;

-The profit growths were slightly higher than our expectation due to the results from 2011 and 1Q2012. Therefore we still maintain the performance estimation that the Group's EPS would achieve to RMB1.04 in 2012;

-However, we noted the CAR of BoCom dropped slightly in 1Q2012, representing the Group's faced larger capital pressure, and we concern the effects of its financing plan. We increase the 12-m target price of BoCom to HK$6.56, 17.6% higher than its latest closing price, equivalent to P/E6.3x and P/B1.3x in 2012 respectively, and we recommend Accumulate rating.

Profits continued to rise but growth rates slowed down

General speaking, BoCom's profits maintained quite high growth. By the end of 2011, net profits gained RMB50.735 billion, increased by 29.95% y-y, 0.8% higher than our estimation.

High profit growth of BoCom mainly benefited from strong increase of interest incomes, and especially, intermediate business incomes, but growth rates have slowed down due to the effects of macro environment. As at the end of 1Q2012, net commission fees of BoCom reached to RMB6.041 billion, increased by 21.89% y-y, but dropped significantly by 20.97 percentage points compared with such rate in 1Q2011.

Meanwhile, the Group's net profits increased by 19.58% y-y to RMB15.88 billion, about 7.49 percentage points lower than that of 1Q2011.

Stable growth of assets and loan growth on the top among the peers

BoCom's assets maintained stale growth. By the end of 1Q2012, the Group's total assets increased by 5.89% to RMB4.88 trillion compared with the end of 2011, which recorded the lowest growth rate among top five banks.

On the other hand, loan growth of BoCom recorded the highest among the peers although asset growth has slowed down. As at the end of 1Q2012, the Group's total loans recorded to RMB2.7 trillion, increased by 5.58% compared with the end of 2011.

According to the structure of loans, we can see the loans were mainly distributed in wholesale and retail sectors, and the proportion to total loans increased from 11.35% in 2011 to 12.89% in 1Q2012. At the same time, BoCom reduced the proportion of loans in most of sectors, such as transportation, storage and postal service.

Assets quality improved consistently and capital pressure was larger

Dual decrease of both amount and ratio of NPLs benefited from the improvement of assets quality. By the end of 1Q2012, the Group's NPLs recorded to RMB21.891 billion, RMB95 million or 0.43% lower than that of 2011. NPL ratio reduced 0.05 percentage points to 0.86%. However, we noted Sub-standard loans started to increase, which might cause the Group's NPLs to rise in future.

Moreover, currently the main problem that BoCom facing is the larger capital pressure due to the decrease of CAR. In 1Q2012, CAR and Core CAR of BoCom were 12.42% and 9.39%, decreased by 0.02 and increased by 0.12 percentage points respectively compared with the end of 2011.

Therefore, recently BoCom announced new financing plan that expected to issue new shares in A+H Shares at RMB4.55 and HK$5.63 per share respectively with the amount of RMB30 billion and HK$ 33 billion, equivalent to HK$69.5 billion approximately in total.

Today this plan was approved by shareholders. Capital pressure of BoCom would go down obviously in the short term, and its CAR and Core CAR would increase above 13% and 10% respectively after new share placement completed.

Risks

Asset quality deteriorated due to the growth of NPLs;

Capital pressure continues to rise;

Share price goes down significantly affected by the markets in the short term.

Financial Status

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