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Bank of China Still Attractive Despite Profit Slump

While Bank of China (BOC), the country’s third-largest lender by assets, reported its slowest quarterly profit growth in over 3 years, analysts see the company as a buying opportunity, forecasting 25 to 70 percent upside for its stock over the next 12 months.

Bank of China
Wang Zhao | AFP | Getty Images
Bank of China

Shares of the lender fell almost 2 percent on Friday in reaction to its earnings results, which reflected weaker loan demand and a slump in fee income growth. The bank is expected to have posted the biggest drop in profit growth amongst the “Big Four” - Industrial and Commercial Bank of China , China Construction Bank and Agricultural Bank of China , which are due to report earnings next week.

However, Simon Ho, Analyst at Citi Research, says the bank’s cheap valuation – the lowest amongst its peers trading at 0.8 times book value - alongside its relatively higher overseas presence compared to its competitors, makes the lender his top pick in the space.

“Despite being the Bank of China, it has the most overseas businesses and the lowest exposure to China in the sector. (It) is naturally less exposed to the negative net interest margin and fee income trends in the domestic space,” said Ho, who sees 25 percent upside for the stock over the next year, in a note.

The BOC has 25 percent of its loan book and asset base denominated in non-yuan currencies - the highest among the listed Chinese banks and well above the average 7 percent among its Hong Kong-listed peers, according to Berstein Research.

The bank’s lower exposure to onshore yuan loans makes it more immune to the negative impact of interest rate cuts – a factor that threatens the profitability of the entire mainland banking sector, Mike Werner, Senior Analyst at Bernstein Research said.

In addition, Werner, who forecasts 70 percent upside for the stock from current levels, says he’s also positive on the bank because there has been a significant improvement in its credit profile in the recent months.

“It was able to secure collaterals from local governments against a substantial portion of its loan book. The credit enhancements make us much more comfortable with BOC's credit quality, despite the bank's excessive 2009 loan growth,” he said.

The lender’s latest earnings report reflected an improvement in asset quality. Its ratio of non-performing loans to total loans stood at 0.94 percent as of the end of June, from 0.97 percent at the end of March, the bank said.

However, not all analysts are in agreement about the positive outlook for the company’ stock.

Jim Antos, Banking Analyst at Mizuho Securities, who has assigned an underweight rating on the company, sees 18 percent downside for its stock over the next year.

“If you compare Bank of China and the other Big 4 banks, it has a consistently lower earnings growth history. Since investors are looking for superior growth from the H-share (Hong Kong listed) banks compared to banks regionally, it is less attractive,” Antos said.

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