Incidents:
On March 28, the Bank of China released its 2023 annual report. It achieved annual revenue of 622.9 billion yuan, +6.4% year over year, and net profit to mother of 231.9 billion yuan, +2.4% year over year. The weighted average return on net assets was 10.12%, -0.65pct year over year.
Comment:
The contribution of non-interest income has increased, and the profit growth rate has been rising steadily. The year-on-year growth rates of the Bank of China's revenue, profit before provision, and net profit to mother in 2023 were 6.4%, 3.8%, and 2.4%, respectively. The growth rates of revenue and profit before provision decreased by 0.6 and 0.3 pct, respectively, from the previous three quarters, and the growth rate of net profit to mother increased 0.8 pct compared to the previous three quarters. In terms of the main composition of revenue, net interest income and non-interest income grew by 1.6% and 24%, respectively, with year-on-year changes of -1.6 and 3.5 pct, respectively, from the previous three quarters. Dividing the year-on-year profit growth structure, scale expansion and non-interest income were the main contributors, driving performance growth rates of 20.4 and 13.5 pct, respectively. Judging from marginal changes, the positive contributions of scale expansion and non-interest income increased, and the negative net interest spread dragged down to 17.3 pct, and negative provision dragged down.
Inventory expansion has accelerated, and credit investment has maintained a high level of prosperity. The Bank of China added 705.3 billion yuan in interest-bearing assets in a single quarter, an increase of 244 billion dollars over the previous year. The year-on-year growth rate of interest-bearing assets increased 0.6 pct to 12.6% from the end of the 3rd quarter. Among the new interest-bearing assets added in the 4Q quarter, the increases in loans, financial investment, and interbank assets were 214 billion, 285.3 billion, and 206 billion yuan, respectively. The year-on-year increase of 72.9 billion, 103.5 billion, and 67.6 billion dollars, respectively. The year-on-year loan growth rate increased 0.3 pct to 13.7% compared to the end of the 3Q period. At the end of 2023, loans accounted for 62.7% of interest-bearing assets, down 0.7 pct from the end of 3Q.
Looking at loan investment for the year, the Bank of China added 2.4 trillion yuan in loans in 2023, an increase of 0.6 trillion yuan over the previous year, mainly supported by public loans. Specifically, 1) The increase in loan balances in key areas such as public loans was 2.06 trillion yuan, an increase of 0.78 trillion yuan over the previous year. Credit investment focused on scientific and technological innovation, advanced manufacturing, green development, and micro, small and medium-sized enterprises. The growth rate of loan balances in key areas such as strategic emerging industries (+74.4%), manufacturing (+28.1%), and technology finance (+30.9%) was significantly higher than the overall growth rate of the bank; 2) Retail credit increased by $2.06 trillion over the same period last year; 2) Retail credit increased by $2.06 trillion over the same period last year. There was a decrease of 110.2 billion dollars. Personal housing loans were the main drag, decreasing by 13.5 billion dollars throughout the year; other personal loans invested in consumer loans, personal business loans, etc. increased by nearly 290 billion dollars, and credit cards increased by 43.6 billion dollars.
The absorption of market-based debt increased, and the year-on-year growth rate of interest-bearing debt increased to 13%. At the end of 2023, the Bank of China's interest-bearing liabilities and deposits grew by 13% and 13.4%, respectively. The growth rates changed by 1.3 and -0.2 pct respectively from the end of the 3Q; interest-bearing liabilities were added by 621.5 billion yuan in the 4Q single quarter, with increases of 208.1 billion, 181.5 billion, and 232 billion dollars respectively in deposits, payable bonds, and interbank liabilities. Among them, deposits decreased by 18 billion yuan year on year, and bonds payable and interbank liabilities increased by 45.3 billion and 334 billion dollars, respectively (low base for the same period last year).
Net interest spreads fell 5 bps to 1.59% from the previous three quarters, down 16 bps from the previous year, and were more resilient than comparable peers.
In 2023, the Bank of China's net interest spread was 1.59%, down 5 bps from the previous three quarters and 16 bps year over year. The Banking Insurance Regulatory Commission's commercial bank regulatory indicators for the fourth quarter of 2023 show that the net interest spreads of large banks in 2023 narrowed by 4 bps compared to the previous three quarters, down 28 bps from the previous year. Even considering factors such as differences in statistical caliber between the group and parent banks, the company's interest rate resilience is still superior to comparable peers. The Bank of China's net interest spread shows greater resilience, mainly benefiting from the following factors: 1) the company's share of overseas assets is the highest in the industry, seizing favorable opportunities such as the Federal Reserve's interest rate hike; 2) optimizing the RMB balance structure and increasing the share of savings and loans. Among them, the average balance of medium- and long-term loans in mainland RMB loans reached 74.1%, but due to factors such as declining LPR and stock mortgage repricing, the return on RMB assets was pressured. Looking ahead to 2024, as the Federal Reserve's interest rate cut gradually approaches, the comparative advantage of higher pricing of foreign assets will weaken, but foreign currency deposit costs are also expected to improve accordingly. Furthermore, the reduction in the listed interest rate on early deposit will have a further effect on improving debt costs in 2024, and the deposit cost ratio is expected to decline in 2024.
Non-interest income increased sharply by 24% year over year, and the growth rate of handling fees and net other non-interest income increased quarter-on-quarter. The Bank of China's 2023 non-interest revenue grew by 24% year on year, up 3.5 pct from the first three quarters. Non-interest income accounted for 25.1% of operating income, up 0.1 pct from the previous three quarters. In terms of the main composition of non-interest income in 2023, 1) Net processing fees and commission revenue grew 5.3% year-on-year, up 1.6 pcts from 1-3Q23. The Bank of China increased its business development efforts, and the contribution of consulting (YoY +42.5%), fiduciary business (YoY +25.4%), and bank cards (YoY +10.8%) increased, but due to factors such as capital market fluctuations and low risk appetite among residents, the growth rate of agency business (YoY -5.3%) was relatively weak; 2) net other non-interest income growth rate was 51.3%, up 2.9 pct from 1-3Q23, mainly benefiting from market price fluctuations, which led to a sharp year-on-year increase of nearly 17.2 billion dollars in fair value changes.
The non-performing loan ratio remained the same as at the end of the 3Q period, and asset quality remained stable. At the end of 2023, the Bank of China's non-performing loan ratio was 1.27%, the same as at the end of 3Q; the attention rate was 1.46%, up 11 bps and 23 bps from the beginning and middle of the year, respectively.
The Bank of China accrued credit impairment losses of 106.6 billion yuan for the whole year, an increase of 2.5% over the previous year; the 4Q single quarter accrued impairment losses of 15.5 billion yuan, a year-on-year decrease of 5.8 billion dollars. Impairment loss/average total assets for 2023 fell 5bp to 0.35% from the previous three quarters. At the end of 2023, provision coverage decreased by 3.5pct to 191.7% compared to the end of 3Q; loan coverage decreased by 4bP to 2.44% compared to the end of 3q.
There has been a steady increase in capital adequacy ratios at all levels. At a lower base, the RWA growth rate at the end of 2023 was 10.5% year over year, up 0.5 pct from the end of the 3rd quarter. At the end of 2023, the company's core Tier 1, Tier 1, and capital adequacy ratios were 11.63%, 13.83%, and 17.74%, respectively, up 22, 19, and 44 bps from the end of the 3Q. The new capital management measures were implemented in early 2024. Benefiting from parameter adjustments and optimization of the scope of the Advanced Internal Assessment Act, the capital adequacy ratio of companies at all levels is expected to increase further.
Profit forecasting, valuation and ratings. The Bank of China actively played the role of a major bank “head goose”, and the asset side maintained strong momentum to expand its financial statements. At the same time, with the unique endowment advantage of a broad international business layout, the increase in the return on overseas assets strongly supports net interest spreads. Combined with the 2023 annual report, factors such as the likely peak trend in net interest spreads for overseas businesses and rolling repricing of loans will strongly squeeze 2024 interest spreads. Lowering the company's 2024-25 EPS forecast to 0.80 (-2.2%) /0.83 (-4.1%) yuan, adding the 2026 EPS forecast to 0.86 yuan. The current stock price corresponds to a PB valuation of 0.54/0.5/0.46 times, respectively. The dividend rate has remained stable at 30% in recent years. Based on the closing price of March 28, the dividend rate is 5.4%, which has a good dividend return.
Maintain an “increase in holdings” rating.
Risk warning: The overseas economic environment is becoming more complex, which may greatly disrupt the Bank of China's overseas assets situation.