Bocom’s Credit Quality Improves, but Earnings Outlook Still Challenging

Bank of Communications’ 601328 full-year 2022 total revenue slowed to 1.3% year on year from 5% in the first three quarters, as fourth-quarter fee income fell 6.2% from 2021 levels. Despite the slowing revenue growth, net profit growth remained relatively steady at 5.2%, partly on provision release, which we had expected.

We retain our A share fair value estimate of CNY 5.50 per share and H share fair value estimate of HKD 6 per share. Bocom reported a smaller-than-peer year-on-year contraction in net interest margin of 8 basis points. With the help of ongoing asset mix optimization, the bank managed to report only a 1-basis-point decline in average asset yield, while the average loan rate dropped by 12 basis points from 2021, in line with peers.

The stock is trading at a historically low valuation level of below 0.4 times 2022 price/book value with an attractive 8.7% dividend yield. The bank has a solid track record of increasing dividends with its payout ratio staying above 30% since 2016.

We believe the market’s concerns about the deteriorating credit quality of Bocom are more than factored into its current share price. Bocom reported better-than-peer improvement in credit quality in 2022. The nonperforming loan ratio and delinquency ratio have declined to their lowest levels since 2025 to 1.35% and 1.16%, respectively. Management noted that major risky assets accumulated since 2020 had mostly cleaned up by year-end 2022 by accelerating bad-debt disposal and reducing credit exposures to risky industries. Despite the 9% year-on-year contraction in provision expenses, provision coverage ratio expanded at a faster-than-peer face of 14 percentage points to 180.68%. We expect China’s economic uptick to help limit credit risks.