Incidents:

On October 30, the Bank of China released its report for the third quarter of 2024. In the first three quarters, it achieved operating income of 478.3 billion yuan, YoY +1.6%, net profit to mother of 175.8 billion, and YoY +0.5%. Weighted average return on net assets 9.55% (YoY -0.82pct).

Comment:

The revenue and profit growth rate has been corrected, and management resilience has increased. Bank of China's 1-3Q operating income, PPOP, and net profit to mother grew by 1.6%, -2.4%, and 0.5%, respectively. The growth rates were 2.3, 0.3, and 1.8 pcts higher than 24H1, respectively.

The main components of revenue: (1) net interest income decreased 4.8% year over year, the decline was 1.7 pct higher than 24H1, and the net interest spread narrowed by 3 bps from quarter to quarter; (2) non-interest income increased 21% year over year, and the growth rate was 15 pcts wider than 24H1. Among them, the decline in net handling fee revenue decreased by 3.7 pct to 3.9% compared to 24H1, and the growth rate of net other non-interest income increased sharply by 27.7 pcts to 49.9% compared to 24H1.

Dividing the year-on-year profit growth structure, scale expansion and non-interest income were the main contributors, driving performance growth rates of 18.5 and 13.6 pct respectively; judging from marginal changes, the negative impact of scale expansion remained at a high level, and the negative impact of interest spreads widened slightly to 27.6 pct. The positive contribution of non-interest income increased significantly, and negative operating expenses dragged down and provision increased slightly.

The rate of table expansion has been steady and declining, and credit investment in key areas continues to increase. At the end of 24Q3, the Bank of China's interest-bearing assets decreased by 2.1 pct to 7.6% from the end of the previous quarter; among them, the year-on-year growth rates of loans, financial investments, and interbank assets were 8.5%, 15.6%, and -8.1%, respectively. The growth rates changed by -2.1, 4.5, and -15.5 pcts respectively from the end of the previous quarter. The share of loans in interest-bearing assets increased 0.6 pct to 65.2% from the end of the previous quarter. The 1-3Q interest-bearing assets increased by 1.59 percent, accounting for 90% of the loan contribution; loans in key areas such as manufacturing, green, inclusive small and micro enterprises, private enterprises, and agriculture increased by 16.5%, 24.4%, 23.2%, 15.3%, and 18.7% respectively from the beginning of the year, all higher than the 7.4% increase in various loans. The increase in interest-bearing assets in the 3Q was 1,637. The increase in interest-bearing assets during the quarter was mainly contributed by loans (288.2 billion) and financial investment (470 billion), while interbank assets decreased by 594.5 billion.

The deposit growth rate decreased by 0.7 pct from the end of the previous quarter, and the share of deposits remained stable. At the end of 24Q3, the Bank of China's interest-bearing liabilities and deposits increased by 7.4% and 4.5%, respectively, and the growth rate decreased by 2.5 and 0.7 pct, respectively, from the end of the previous quarter. Interest-bearing debt increased by 69.8 billion in 3Q, with deposits, payable bonds, and interbank liabilities increased by 71.8 billion, 30.6 billion, and -32.8 billion, respectively. At the end of 24Q3, the share of deposits in interest-bearing liabilities increased slightly by 0.1 pct to 78.5% compared to the end of 2Q.

The 1-3Q net interest spread recorded 1.41%, down 3bps from 24H1. The company disclosed a net interest spread of 1.41% in 1-3Q, down 3 bps from 24H1 and 23 bps from the same period last year. The estimated return on interest-bearing assets and the cost ratio of interest-bearing debt were 3.35% and 2.15%, respectively, down 4 bps and 2 bps from 24H1, respectively. Looking ahead, factors such as lower interest rates on stock mortgages and multiple rounds of LPR cuts during the year will still suppress the return on domestic assets. At the same time, as the Federal Reserve enters the interest rate cut cycle, the return on overseas assets will also face some pressure, but the banking system's continued push to control debt costs will help hedge against the pressure of narrowing interest spreads. In October, the China Stock Bank once again concentrated on lowering listed interest rates. The decline was higher than in previous rounds. The effect of the current interest rate reduction was immediately apparent. The effects of the regular interest rate reduction will gradually be released along with the rolling maturity price of products, which can partially ease the pressure on interest spreads.

1-3Q non-interest income increased 21% year over year, and the growth rate of net other non-interest income increased 15 pcts from quarter to quarter. Bank of China's 1-3Q non-interest revenue was 142.4 billion, up 21% year over year, and its share of revenue increased by 1.3 pct to 29.8% compared to 24H1. Among them, (1) net revenue from processing fees and commissions was 60.7 billion billion (YoY -3.9%), which was 3.7 pct narrower than 24H1. The estimate is mainly affected by factors such as capital market fluctuations, changes in investor risk appetite, fee reduction and concessions. The decline narrows or benefits companies continue to take advantage of their comprehensive and international advantages to actively expand diversified sources of income; (2) net other non-interest income of 81.7 billion (YoY +49.9%), a sharp increase of 27.7 pcts compared to 24H1. Among them, investment income of 36.3 billion (up 19.4 billion yuan year on year, increase of 114.2%), other business income of 37.6 billion yuan (increase of 7.4 billion year on year, increase of 24.6%), and exchange income of 10.7 billion yuan (increase of 2.3 billion yuan year on year, increase of 27.5%) increased significantly year over year.

The non-performing rate was recorded at 1.26%, and the provision coverage rate remained around 200%. At the end of 24Q3, the company's non-performing loan ratio was 1.26%, up 2 bps from the end of 2Q and down 1 bps from the beginning of the year. The balance of non-performing loans at the end of the third quarter was 270 billion, an increase of 16.8 billion during the quarter. Credit and other impairment losses were estimated at 85.8 billion in the first three quarters, a year-on-year decrease of 5.8%; of these, 25.3 billion was accrued in the 3Q single quarter. By the end of the 3rd quarter, the provision coverage rate was 198.9%, a slight decrease of 2.8 pct from the end of the 2nd quarter. Overall, it remained at a good level of around 200%.

The growth rate of weighted risk assets fell 0.3 pct month-on-month, and the margin of safety for capital adequacy ratios was high. At the end of 24Q3, the Bank of China's risk-weighted assets increased 1.8% year on year, and the growth rate decreased slightly by 0.3 pct from the end of 2Q. The core level/level 1/ capital adequacy ratios were 12.23%, 14.36%, and 19.01%, respectively, up 20 bps, 34 bps, and 10 bps from 2Q, respectively. The margin of safety for capital adequacy ratios was strong. In the future, along with the Ministry of Finance's special treasury bond issuance support to supplement the bank's core tier 1 capital, the bank's capital safety margin will be further strengthened, laying a solid foundation for credit investment.

Profit forecasting, valuation and ratings. The Bank of China has actively played the role of the “head geese” of major banks. Credit investment in key areas has maintained a high intensity, various business operations are steady, and global and comprehensive characteristics have been continuously consolidated. Maintaining the company's 2024-26 EPS forecast of 0.80/0.83/0.86 yuan, the current stock price is 0.59/0.55/ 0.51 times the PB valuation, respectively. The company responded positively to the call to give back to investors. According to the 2024 mid-term dividend arrangement, 1.208 yuan (tax included) will be distributed for every 10 shares, and a dividend of 35.6 billion yuan will be distributed, accounting for 30% of the mother's net profit. Increasing the mid-term dividend arrangement will help improve investment stability. The company's current dividend rate (for the past 12 months) is around 5%, which has good “high dividend” characteristics and valuation appeal. 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.