BANK OF CHINA LIMITED

One of the “Big Four” Banks in China

Bank of China Ltd (3988.HK) is one of the largest financial institutions in China. It is commonly considered as one of the “Big Four” banks in China, together with China Construction Bank Corp, ICBC Ltd and Agricultural Bank of China.

The bank was formally established in February 1912. From 1912 to 1949, the bank serves as the country’s central bank, international exchange bank and specialised international trade bank. That is why Bank of China is also the most internationalised bank among the four. It has branches in more than 40 countries outside of China, in every continent.

For the most part of the past century, Bank of China was a nationalised bank. However, since 1994, the firm was transformed into a state-owned enterprise and was listed on both the Hong Kong Stock Exchange and the Shanghai Stock Exchange in 2006, turning it into a public company.

STOCK INFORMATION

TICKER SYMBOL: 3988.HK
MARKET CAP: HK$1.37 Trillion (Updated 29 March 2017)
MARKET PRICE / SHARE: HK$3.93 (Updated 39 March 2017)
INDUSTRY: Finance

THE BUSINESS

Bank of China is still a traditional bank. Most of its profit derives from interest income such as loans. The company has continuously been able to increase its income for the past five years. Its average return on assets is consistently around 1.2% while it obtains a return on equity of roughly 18% for the past 5 years.

Its net asset per share has been improving from just RMB 2.38 per share in FY2010 to RMB 5.11 per share in FY2015. The bank has also been relatively conservative, with its Capital adequacy ratio standing at around 12% to 13% on average over the past five years.

KEY OPPORTUNITIES

1. Internationalisation of the RMB

It is no secret that China is slowly trying to internationalise its currency, the RMB. Over the past decade, China has opened up many RMB hubs outside of China to allow for easier clearing of RMB internationally. As Bank of China is the most internationalised local bank in China, it stands in a good position to benefit as the RMB become more and more acceptable globally.

2. The growth of China

China itself is transforming into a high-income nation. Although it is still far from its goal, the prospect of China is huge. Given that its financial institutional are generally still not as mature as many of the banks in the developed nations, there is so much that can be done to improve the competitiveness of its local banks. Starting as one of the Big Four and the one with the most international experiences, Bank of China stands out to have the potential to truly become an international bank.

KEY RISKS

1. Asset quality in China

Yet, there are many who are doubtful about the future of Chinese Banks. For one, they are uncomfortable that Chinese banks are constantly earnings net interest margin (NIM) above 2%. In comparison, banks in the USA generally earns less than 1% on net interest margin. Many see such a high NIM as unsustainable or that the figures might not be as truthful as it should. Similarly, due to the strict restriction on borrowing in China, the shadow banking industry has been flourishing in an attempt to sidestep the regulation. If excessive risk is being taken in the shadow banking industry, which it seems to be doing, there might be a risk that it will affect the traditional banks as well.

2. Government Interference

Although Bank of China is a public company, its largest shareholder is still the government of China. More importantly, many of its top management are assigned by and are themselves party members. Therefore, the bank still has a strong government presence.

The objective of the government might at times be very different from that from the shareholders. There is a real risk that Bank of China can be used by the government to pursue its own agenda that might be damaging for shareholders.

TOP SHAREHOLDER (As at 31 April 2015)

1. China Hujin Investment Ltd – 64.26%
2. HKSCC Nominees Ltd (Including National Council for Social Security Fund and Temasek Holdings) – 27.75%
3. The Bank of Tokyo-Mitsubishi – 0.18%

Financial Statements

Income Statement – Click here

Balance Sheet – Click here

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim owns Bank of China Ltd.

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