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 its 3Q2013 results, by the end of Sep 2013, the Group's net profits reached to RMB48.706 billion, up 9.43% y-y, 4.2% lower than our previous expectation, equivalent to the EPS of RMB0.66, down 5.71% y-y, mainly because of the dilution due to the increase of total capital. The profits were lower than the expectation due to the decrease of interest and intermediate business incomes. The growth rates decreased by 1.75ppts and 1.3ppts to 9.58% and 25.46% compared with 1H;

-The assets of BoCom continued to increase stably, and the Group's total assets raised 9.38% to RMB5.77 trillion compared with the end of 2012, equivalent to the BVPS of RMB5.5, up 7.42%;

-According to the operating performance, BoCom 's corporate banking business developed continually. Based on the “BoCom strategy”, the bank focused on Industry Chain Finance. By the end of Sep, BoCom built over 14,000 industry chain networks with over 80,000 enterprises on the chains. The Group's investment banking business increased strongly with the amount of RMB6 billion, up 40.5% y-y. Additionally, the Group's volume of international settlement increased by 20.8% y-y to USD417.719 billion, and assets under custody reached RMB2.61 trillion, up 74% compared with the end of 2012;

-Meanwhile, BoCom expanded the transformation of new businesses actively with the strong growth of the internet and mobile banking businesses. It is the first to introduce the 2nd generation mobile banking with “cloud + terminal” technology providing smart functions and supporting secure random money transfer and contactless IC card recharge. By the end of Sep, customer number of mobile banking increased by 52.57%, and transaction volume and number increased by 90.48% and 270.94% y-y to RMB0.69 trillion and 41.85 million respectively;

-As at the end of 1H2013, total assets of overseas offices increased by 20.62% to RMB404.663 billion, the proportion of such assets to total assets increased from 7.67% in 2012 to 8.54%, and net profit recorded to RMB1.958 billion with the year-on-year growth rate of 30.10%, the portion increased from 4.84% in 1H2012 to 5.62%. Meanwhile, under the development of the process of RMB internalization, cross-border RMB settlement expanded strongly, and the volume by domestic and overseas branches amounted to RMB354.632 billion, up 77.47% y-y. Additionally, the operating performance of subsidiaries gained the great record, net profit increased significantly by 138.59% y-y to RMB1.014 billion. The trust scale of BoCom International Trust achieved to RMB221.6 billion, up 42% compared with the end of 2012;

-In 3Q2013, the CAR of BoCom declined continually, representing the increase of capital pressure, the Core Tier-1 ratio and CAR dropped 0.27ppts and 0.44ppts to 9.87% and 12.24% respectively. According to the management's feedback in the result conference, the bank will face the capital pressure under the large growth of businesses, with the large decrease of the capital, but BoCom will not to announce new financing plans in the near future, and will focus on the business transformation and control the large capital-consumption projects;

-On the other hand, we always concern about the asset quality. In recent years, BoCom focuses on expanding the loans to SMMEs, and the portion of the loans to total loans increased by 0.97ppts to 42.75% in 3Q2013 from 2012, with the amount of RMB1.23 trillion, up 10.15%. The management stated that the bad debts in excess capacity industries and SMMEs increased consistently, especially in Zhejiang and Jiangshu Provinces, which caused the Group's asset quality to deteriorate continually, the NPL ratio increased from 0.92% in 2012 to 1.01% in 3Q2013, with the sharp growth of doubtful and loss loans. The coverage ratio went down from 250.68% to 217.49%, down 33.19ppts. We believe BoCom will still face the risk of deterioration of asset quality in future, the amount and ratio of NPLs will continue to increase but would still be under the control in general;

-In all, the businesses of BoCom recorded the stable growth, but the profit growth will continue to go down. Based on 3-stage DDM, we maintain the Group's 12-m target price to HK$6.13, around 7.7% higher than the current price, equivalent to 5.2xP/E and 0.7xP/B in 2014 respectively, and recommend Accumulate rating.

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