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

-According to BoCom's 2013 Annual Results, by the end of 2013, the Group's net profits reached to RMB62.295 billion, up 6.7% y-y approximately, around 2.9% lower than our previous expectation, equivalent to the EPS of RMB0.84, down 5.13% 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 incomes. The growth rates decreased from 16% in 2012 and 9% in 2013. Additionally, due to the obvious growth of the NPLs, the Group's impairment losses rose sharply from 16% in 2012 to 27% in 2013. However, BoCom's intermediate business incomes increased strongly by 24% y-y to RMB26 billion during the period;

-The assets of BoCom continued to increase stably, and the Group's total assets raised 13% to RMB5.96 trillion compared with the end of 2012, equivalent to the BVPS of RMB5.65, up 10.4%;

-BoCom's corporate banking business developed stably. Based on the “BoCom strategy”, the bank focused on the reform of business unit, and moves wealth management, trustee, private banking businesses to quasi-business units in future. By the end of 2013, BoCom's investment banking business increased strongly with the amount of RMB7.7 billion, up 26.2% y-y. The Group also acted as lead underwriter with the underwriting amount of RMB310.4 billion, up 98% y-y. Additionally, the volume of international settlement increased by 21% y-y to USD556.868 billion, and assets under custody reached RMB2.81 trillion, up 87% compared with the end of 2012;

-Meanwhile, BoCom continued to expand the transformation of new businesses actively with the strong growth of the internet and mobile banking businesses. It was 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 2013, customer number of mobile banking increased by 81.46%, and transaction volume and number increased by 61.62% and 232% y-y to RMB0.88 trillion and 62.76 million respectively;

-In 2013, the CAR of BoCom declined continually, representing the increase of capital pressure, the Core Tier-1 ratio and CAR dropped 0.11ppts and 0.16ppts to 9.76% and 12.08% respectively. According to the management's feedback in the result conference, the bank will try to issue the subordinated notes firstly, and the issuance of the preferred stock would be delayed if the subordinated notes can meet the capital demand. However, we believe BoCom will still face quite larger capital pressures, and therefore it must issue the preferred stock in future;

-On the other hand, BoCom's asset quality went down. In recent years, BoCom focused on expanding the loans to SMMEs, and the portion of the loans to total loans increased by 0.83ppts to 42.61% in 2013 from 41.78% in 2012, with the amount of RMB1.25 trillion, up 12.15%. However, the bad debts in excess capacity industries and SMMEs increased consistently under the downturn of the macroeconomic environment, 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 1.05% in 2013, with the sharp growth of doubtful and loss loans. The coverage ratio cut from 250.68% to 213.65%, down 37.02ppts. 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 the short term;

-In all, the businesses of BoCom recorded the stable growth, but the profit growth continued to go down, we expect its net profit growth would maintain around 6-7% in 2014. However, BoCom's dividend payout ratio still stays at the high level as 30%, based on 3-stage DDM, we maintain the Group's 12-m target price to HK$6.10 approximately, around 25% higher than the current price, equivalent to 5.5xP/E and 0.8xP/B in 2014E respectively, and upgrade to Buy rating.

Click Here for PDF format...