Bank of China Limited (601988.SS)

Equity
China
Financial Services

RISK

RETURN

Key risk factors

Low price volatility

Resilient to price shocks

Fair trading liquidity

Key return factors

Solid dividends

Slightly undervalued vs peers

Good growth

Company profileBank of China Limited, together with its subsidiaries, provides various banking and financial services. It operates through six segments: Corporate Banking, Personal Banking, Treasury Operations, Investment Banking, Insurance, and Other Operations. The Corporate Banking segment offers current accounts, deposits, overdrafts, loans, trade-related products and other credit facilities, foreign currency, derivatives, and wealth management products to corporate customers, government authorities, and financial institutions. The Personal Banking segment provides savings deposits, personal loans, credit and debit cards, payments and settlements, wealth management products, and funds and insurance agency services to retail customers. The Treasury Operations segment is involved in foreign exchange transactions, customer-based interest rate and foreign exchange derivative transactions, money market transactions, proprietary trading, and asset and liability management. The Investment Banking segment offers debt and equity underwriting, financial advisory, stock brokerage, investment research and asset management, and private equity investment services, as well as sells and trades in securities. The Insurance segment underwrites general and life insurance products; and provides insurance agency services. As of December 31, 2021, the company had 10,382 branches and outlets, which include 520 institutions in the Chinese mainland and 550 institutions in Hong Kong, Macao, Taiwan, and other countries. It is also involved in the aircraft leasing business. The company was founded in 1912 and is headquartered in Beijing, China.

Valuation: Slightly undervalued

Multiple

TTM

NTM

P/E

4.80

5.70

PEG

1.50

P/B

0.40

P/CR

0.30

P/RIBPT

0.60

P/IBPT

0.60

From a historical and forecasted perspective, the stock is moderately underpriced compared to similar stocks. Specifically, the stock is cheap' on P/E, Editor's note: P/CR is Price to Core Revenue (CR), similar to P/S for corporates. CR = Net interest income + Net fee & commission income. P/IBPT is Price to Income Before Provisioning and Taxes (IBPT), similar to EV/EBITDA for corporates. IBPT = Core revenue -- Operating expenses + Non-recurring income. P/RIBPT is Price to Recurring Income Before Provisioning and Taxes (RIBPT), similar to P/FCF for corporates. RIBPT = Core revenue -- Operating expenses.

Performance: Mixed

The stock's performance has been mixed in the past six months, with growth following a decline. There is no clear price trend compared to its global peers from the same sector and industry (as shown above). The stock has outperformed this peer group by 2ppts over past six months and grown 5ppts slower in the past month. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is neutral.

Analyst view: Somewhat favourable

The average target price is 4.4 and suggests 2% downside potential. Usually, this means a SELL recommendation among investment firms, or a recommendation to decrease one's position in this instrument in the next 12 months. The most optimistic analyst has a target price of 5.7. This translates into 27% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 3.4. This is equivalent to 25% downside potential in the worst case.

Profitability: Average

RoE

Bank of China Limited reported a return on equity (RoE) of 8.3% in the last 12 months, down from 8.7% in FY23. The market consensus projects a RoE of 8.4% in FY24, again behind the peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 0.7% in the last 12 months, a decrease from 0.8% in FY23. The market analysts predict that RoA will be 0.7% in FY24, again weaker than the peers.

C/I

In the last 12 months, the cost-to-income ratio (C/I) declined to 51.2%, below the peers. The consensus estimate for FY24 for CI is 69.3%, however, this time above the peers.

Growth: Good

EPS

Core revenue

IBPT

RIBPT

3988.HK reported revenue of CNY 539 583mn in the last 12 months, down 1% from FY23. The institution earned CNY 273 896 mn of interest before provisioning and taxes (IBPT) in the trailing 12 months (TTM), a decline of 3% from FY23 The dynamics of more stable income, as measure by recurring income before provisioning and taxes (RIBPT), were rather similar. EPS fell 1% from FY23 to CNY 0.78. Market expects EPS to reach CNY 0.83 in FY24.The core revenue has been growing very slowly over the last several years (middle negative), while IBPT growth has been weak. This all contributed to very fast EPS growth (strongly positive). The RIBPT trend is similar to that of IBPT. We emphasize the highly volatile dynamics of EPS. On the positive side, core revenue dynamics is very stable.

Dividends: Solid

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, but the dynamics are somewhat mixed. In the past 12 months, the dividend yield has been outstanding and can be rated excellent compared to its peers. At the same time, the average five-year yield has been significantly higher and exceeded most of its peers. On average, the company pays dividends annually.

Default risk: Moderate

The solvency (credit quality) of 601988.SS is good. The credit profile rests on (a) a substandard capital position, (b) weak asset quality, (с) a robust corporate governance framework, (d) moderate earnings power and cost efficiency, and (e) its weak liquidity profile. We draw special attention to the rather low capital adequacy, fairly low asset quality driven by low loss absorption capacity, fairly weak liquidity position, which could instantly become a critical factor in the case of an unexpected bank run.

Volatility: Low

In normal market circumstances, 601988.SS is not overly volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible. Finally, it may be affected by inherently volatile sector.

Stress-test: Resilient

In highly turbulent market conditions, 601988.SS is not overly volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low. At the same time, due to inherently volatile sector, its maximum losses could be low.

Selling difficulty: Small

601988.SS has above average trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and becomes extremely unfavourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Low

The institutional, legal, and compliance risks associated with the company's country are close to minimal. In combination with rigorous business standards, shareholder rights are well protected.

Other risks: Negligible

No other major risks have been identified.