Results positive: 1) 2Q19NIM edged up 2bp QoQ to 1.84%, vs a downward margin trend for other large banks. This was attributed to optimized asset mix and strict control in liability cost, according to management’s explanation during results briefing; 2) Demand deposit rose 7.2% HoH, faster than total deposit growth of 5.5% HoH. In particular, retail demand deposits expanded 11.5% HoH. The proportion of total demand deposit climbed 0.8ppt HoH to 49.5%; 3) Asset quality improved notably, as NPL slid 2bp QoQ to 1.40%, lowest among the Big-5banks. Both special mention and overdue loans saw double-decline in 2Q19. NPL recognition was more stringent, as NPLs covered 135.9% of >90-day overdue loans and 98.5% of total overdue loans (vs 123.5% and 75.9% in 4Q18); 4) CAR was supported by multi-channel capital replenishment. BOC issued RMB 40bn perpetual bonds and RMB 73b preference share in 1H19, boosting total CAR by 36bp HoH to 15.3%.
Results negative: 1) Provision coverage dropped 7.1ppt to 177.5%, lower than Big-5average of 208%, indicating less buffer to hold up earnings should topline growth weakens. 2) Net fee income growth slowed to 3.6% YoY in 2Q19, dragged by falling fees on credit commitment and foreign exchange businesses. 3) 1H19annualized ROE declined 0.7ppt to 14.6%, as net profit growth remained subdued at 4.5% YoY.
Initiate BOC-A with BUY rating and RMB 4.7TP. BOC-A currently trades at 0.63x FY19E P/B, 11% below its past 5-year mean of 0.71x. Our TP of RMB 4.7is based on GGM-derived target P/B of 0.84x and FY19E BPS of RMB 5.6.