Bank of China is one of the major state-owned commercial banks in China. The report focuses on its financial performance in the first half of 2024 and provides insights into its earnings, challenges, and the outlook for the remainder of the year.

Financial Performance

• 1H24 Results: Bank of China’s net profit for the first half of 2024 fell by 2.3% year-on-year (YoY), coming in below expectations, mainly due to slower nominal GDP growth in China. The report highlights that the adjusted pre-provisioning operating profit (PPOP) declined by 4% YoY.
• 2Q24 Performance: In the second quarter, BOC’s PPOP saw a slight increase of 0.1% YoY, driven by a 16.3% YoY growth in non-interest income, particularly from net trading income, which surged by 71% YoY. However, the cost-to-income ratio increased by 1.4 percentage points YoY, indicating rising costs.

Key Highlights

• Dividend Announcement: BOC announced an interim dividend per share of RMB 0.1208, maintaining a 30% dividend payout ratio.
• Net Interest Margin (NIM): The NIM remained flat at 1.44% in 2Q24, reflecting stable interest income despite challenging market conditions.
• Asset Quality: The non-performing loan (NPL) ratio was stable at 1.24%, with slight improvements in risk-weighted assets.

Strategic Focus and Risks

• Non-Interest Income Growth: The report emphasizes BOC’s focus on boosting non-interest income, which has been a key driver of profitability amid a challenging interest rate environment.
• Cost Management: Rising costs remain a concern, with the cost-to-income ratio increasing, which could pressure margins if not managed effectively.
• Economic and Regulatory Risks: The report also highlights potential risks, including a slower-than-expected economic recovery in China and the possibility of increased political pressure to lend more, which could affect asset quality.

Investment Recommendation

• Rating: The report reiterates an “Add” rating for BOC, with a target price of HK$4.30, based on a stress-test-adjusted Gordon Growth Model. The valuation is supported by a high FY24F dividend yield of 7.3%, making the stock attractive to investors seeking stable income.
• Outlook: Despite the challenges, the report projects a positive earnings growth of 1.96% for FY24, driven by improved non-interest income and cost control measures.

Valuation and Future Prospects

• The bank’s Return on Equity (ROE) is projected to decline slightly to 9.6% in FY24, down from 10.1% in FY23. However, the long-term prospects remain stable, with the bank expected to benefit from its diversified income streams and strategic focus on green finance initiatives.

ESG Considerations

• The report also discusses BOC’s environmental, social, and governance (ESG) performance, noting that the bank has a combined ESG score of C+ from LSEG. BOC has made strides in green finance, supporting China’s goal of achieving carbon neutrality by 2060.

Conclusion

Bank of China faces a challenging environment with slow economic growth and rising costs. However, its strong focus on non-interest income, stable asset quality, and attractive dividend yield provide a solid foundation for future growth. The report suggests that BOC is a worthwhile investment for those seeking stability and income in a volatile market.

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