Incidents:
On April 29, the Bank of China released its report for the first quarter of 2024. During the reporting period, it achieved operating income of 1608 billion yuan, a year-on-year decrease of 3%, and net profit to mother of 56 billion yuan, a year-on-year decrease of 2.9%. The weighted average return on net assets was 9.86%, down 1.28pct year over year.
Comment:
The year-on-year growth rate of net interest income and non-interest income both declined, dragging down the quarterly decline in revenue. The year-on-year growth rates of the Bank of China's revenue, PPOP, and net profit to mother declined by 3%, 4.9%, and 2.9%, respectively, in 24Q1. The growth rates decreased by 9.4, 8.7, and 5.3 pct, respectively, from the previous year. Among them, net interest income and non-interest income decreased by 3.9% and 0.8%, respectively, and decreased by 5.5 and 24.8 pcts from the previous year, respectively. Dividing the year-on-year profit growth structure, scale expansion and income tax were the main contributors, driving performance growth rates of 21.7 and 9.1 pct respectively; judging from marginal changes, the driving effect of scale expansion remained generally flat, with negative net interest spreads dragging down to 29.2 pct, and non-interest income shifting from positive contribution to slightly negative dragging 0.2 pct; negative operating expenses dragged down significantly, and negative provision dragged down slightly to 3 pct.
The expansion has maintained a high level of intensity, with loans focused on green, inclusive and other fields. At the end of 24Q1, the Bank of China's interest-bearing assets and loans increased by 11.3% and 12.4%, respectively, and the growth rate decreased by 1.9 and 1.3 pct, respectively, from the end of the previous year; the share of loans in interest-bearing assets increased by 0.5 pct to 64.4% from the end of the previous year. 1Q added 1.16 trillion yuan in interest-bearing assets, of which loans, financial investment, and interbank assets increased by 917.8 billion yuan, 77.1 billion yuan, and 167.6 billion yuan respectively; loans decreased by 108.1 billion yuan year-on-year under a higher base, financial investment and interbank assets decreased by 23.9 billion yuan and 21.1 billion yuan respectively. The 1Q expansion was mainly driven by credit, focusing on the “five major articles” to effectively strengthen financial support for major strategies, key areas and weak links. Loans in key areas such as green credit and inclusive housing remained high; loans in key areas such as green credit and inclusive housing remained high; Loans added $34.3 billion, up 15.2% from the beginning of the year.
1Q deposits increased by 1.18 trillion dollars, and the share of deposits increased by 0.8 pct compared to the beginning of the year. At the end of 24Q1, the Bank of China's interest-bearing liabilities and deposits increased by 11.2% and 9.9%, respectively, and the growth rates decreased by 1.8 and 3.4 pct, respectively, from the end of the previous year. 1Q added 1.179 trillion dollars in interest-bearing liabilities, of which deposits increased by 1.182 trillion yuan, a year-on-year decrease of 512.8 billion dollars under a high base; the increases in bonds payable and interbank liabilities were 10.3 billion yuan and -103.2 billion yuan respectively, an increase of 187.2 billion yuan and a decrease of 36.9 billion yuan, respectively. At the end of 24Q1, the share of deposits in interest-bearing liabilities increased by 0.8 pct to 80.5% compared to the end of the previous year.
The decline in return on assets compounded the rigidity of debt costs, and the net interest spread fell 15 bps to 1.44% from the previous year. The net interest spread of the Bank of China in 24Q1 was 1.44%, down 15 bps from 2023 and 26 bps from the same period last year. The estimated yield on interest-bearing assets decreased by 11 bps to 3.43% from the previous year. The estimate was mainly hampered by factors such as lower interest rates on stock mortgages and rolling repricing of loans; the cost ratio of interest-bearing debt increased by 5 bps to 2.2% compared to the previous year, or affected by factors such as the regularization of RMB deposits and the increase in foreign currency deposit costs during the Fed's interest rate hike cycle. Looking ahead to 2024, apart from factors common to the industry, such as the cumulative effect of LPR cuts, the Bank of China's foreign currency business accounts for a higher share of its peers. The boost in return on assets from the Fed's interest rate hike was basically reflected in 2023, but the impact on costs may continue to unleash in 2024, and interest spreads may continue to decline. At the same time, the regulation of “manual interest compensation” combined with the continued effect of lowering interest rate listing interest rates for deposits in 2023, domestic deposit costs may decline in 2024, relieving the pressure on interest spreads to a certain extent. The narrowing of interest spreads in 2024 is estimated to be lower than the previous year.
Non-interest income decreased 0.8% year over year, and the share of non-interest income increased by 4.8pct to 29.9% compared to the previous year. In terms of the non-interest income structure, 1) net processing fees and commission income fell 4.6% year on year to 25.1 billion, mainly hampered by a decrease in revenue from agency insurance and other business, and fees such as settlement and cross-border business maintained a good growth trend; 2) net other non-interest income increased 3.8% year over year to nearly 23 billion yuan, mainly boosted by investment income (+11.3 billion yuan year over year), and exchange gains and losses (year-on-year -2.4 billion).
The non-performing rate dropped by 3 bps from the beginning of the year, and provision coverage rate rebounded to around 200%. At the end of 24Q1, the Bank of China's non-performing loan balance increased by 5.37 billion yuan to 258.6 billion yuan at the end of the previous year. The non-performing loan ratio was 1.24%, down 3 bps from the end of the previous year.
The non-performing rate has been declining steadily, and the company still maintains strong loss accrual efforts based on prudential principles. The 24Q1 credit impairment loss was 34.9 billion yuan, an increase of 5.7% over the previous year; 1Q credit impairment loss/average total assets (annualized) was 0.42%, an increase of 7 bps over the previous year. At the end of 24Q1, the provision coverage rate was 199.9%, up 8.3 pct from the end of the previous year; the loan ratio was 2.48%, a slight increase of 4 bps compared to the end of the previous year, and risk compensation capacity increased steadily.
Driven by endogenous accumulation and external capital supplementation, capital adequacy ratios at all levels have increased. At the end of 24Q1, the Bank of China's RWA increased 5.9% year on year, down 4.7 pct from the end of the previous year, or benefited from the positive impact of the implementation of “new capital regulations” to a certain extent. At the end of 24Q1, the company's core Tier 1, Tier 1, and capital adequacy ratios were 12.02%, 14%, and 18.52%, respectively, up 39, 18, and 79 bps from the end of the previous year.
Profit forecasting, valuation and ratings. The Bank of China is actively playing the role of the “head geese” of major banks, and the asset side maintains a high level of table expansion intensity. At the same time, the characteristics of globalization and integration continue to be consolidated, and revenue from cross-border integrated services and other businesses has maintained a good momentum. Maintaining the company's 2024-26 EPS forecast of 0.80/0.83/0.86 yuan, the current stock price is 0.56/0.52/0.49 times the PB valuation, respectively. In recent years, the dividend rate has remained stable above 30%. The current stock price corresponds to a dividend rate of 5.2%, which has a good dividend return. According to the company's announcement, the board of directors reviewed and approved the “Bank of China 2024 Interim Profit Distribution Related Arrangements” to implement the 2024 interim dividend payment on the condition that the Bank has profits to distribute for the 2024 half year. Maintain an “Overweight” rating.
Risk warning: The overseas economic environment is becoming more complex, which may greatly disrupt the Bank of China's overseas assets situation.