Is Bank of China Limited The Most Undervalued Bank In Asia Now?

Listed on both the HKEX and SSE in 2006, Bank of China Limited (BOC) is China’s most globalised and integrated banking group with a presence in 56 nations. 23 of which are situated along China’s Belt and Road Initiatives. Presently, BOC has moved up 1 spot and now ranks third in the list of Top 1000 World Banks by the Banker. As at 10 March 2019, it has a market capitalisation of HK$ 1.06 trillion.

In this article, I’ll cover its fundamentals, latest financial results and evaluate its stock based on its current price of HK$ 3.61 a share. Thus, here are 10 things to know about BOC before you invest.

  1. Loan Portfolio  
    BOC has achieved CAGR of 14.3% in its loan & advances assets, growing from RMB 3.2 trillion in 2008 to RMB 10.6 trillion in 2017. Starting from 2010, BOC has kept its non-performing loan (NPL) ratio steady at 1.0% – 1.5%, thus, maintaining the quality of its loan portfolio.

Source: BOC’s Annual Reports

  1. Investments
    BOC’s investment portfolio consists of:

    – Financial Investments Available-For-Sale
    – Financial Investments classified as Loans & Receivables
    – Debt Securities Held-to-Maturity
    – Financial Assets at Fair Value through Profit or Loss

BOC had achieved CAGR of 12.0% in its portfolio of investments to RMB 4.6 trillion in 2017 from RMB 1.7 trillion in 2008.

Source: BOC’s Annual Reports

  1. Net Interest Income
    BOC has achieved CAGR of 8.5% in its net interest income, increasing to RMB 338.4 billion in 2017 from RMB 162.9 billion in 2008. Growth in its net interest income is attributable to BOC’s increment in its loan assets, investments and cash deposit in central bank, banks and other financial institutions in the 10-year period. However, the growth rate is lower for net interest income due to a slight dip in its net interest margins for the past 10 years, down from 2.63% in 2008 to 1.84% in 2017.

Source: BOC’s Annual Reports

  1. Non-Interest Income
    BOC has matured into an integrated financial services provider as it has expanded and diversified into:

    – BOCI: Investment Banking Services
    – BOCIM: Fund Management Services
    – BOC Insurance: Property Insurance Business
    – BOC-Samsung Life: Life Insurance Business
    – BOC Aviation: Aircraft Leasing Business
    – BOC Asset Investment: Debt-for-Equity Swap & Related Business

    BOC has achieved CAGR of 9.2% in its non-interest income. It increases from RMB 66.0 billion in 2008 to RMB 145.4 billion in 2017. This is due to improved performance from its diversified operations. In 2016, BOC had reported RMB 179.6 billion in non-interest income, the highest for the 10-year period. This is inclusive of BOC’s disposal gains of Nanyang Commercial Bank in 2016.

Source: BOC’s Annual Reports

  1. Profitability  
    BOC had achieved CAGR of 8.7% in operating revenues, increasing from RMB 228.9 billion in 2008 to RMB 483.8 billion in 2017. For the 10-year period, BOC has reduced its cost-to-income ratio from 33.6% in 2008 to 28.3% in 2017, thus, is more cost-effective. As a result, BOC achieved as much as 11.57% in CAGR for its shareholders’ earnings. It has increased from RMB 64.4 billion in 2008 to RMB 172.4 billion in 2017. For the last 10 years, it has made an average of 14.81% in return on equity (ROE). It means, it made RMB 14.81 in earnings from every RM 100.00 in equity from 2008 to 2017.

Source: BOC’s Annual Reports

  1. Latest 12-Month Financial Results
    From Q4 2017 to Q3 2018, BOC recorded a total of RMB 495.5 billion in operating revenue and RMB 180.2 billion in shareholders’ earnings or a total of RMB 0.611 in earnings per share (EPS).

    Figures in RMB Billion unless stated otherwise
PeriodQ4 2017Q1 2018Q2 2018Q3 2018Total
EPS (RMB)0.0910.1660.2040.1500.611

Source: BOC’s Quarterly Reports

  1. Balance Sheet Strength
    As at 30 September 2018, BOC has recorded Total Capital Ratio (TCR) of 14.92% and liquidity coverage ratio (LCR) of 133.73%. This means, BOC is well-capitalised and has adequate resources to meet its obligations in the event of stress economic conditions.

    Presently, BOC was granted credit ratings as follows:

    – Standard & Poor’s Ratings Services: A
    – Moody’s Investors Service: A1
    – Fitch Ratings: A
    – Rating and Investment Information, Inc: A
    – Dagong Global Credit Rating Co., Ltd (RMB): AAA

  2. Growth Strategy 1: Key Regional Developments
    BOC is actively supporting the developments of various main economic regions such as:

    – the Beijing-Tianjin-Hebei Region
    – the Yangtze Economic Belt
    – the Guangdong-Hong Kong-Macao Greater Bay Area

    This is key towards continuous increase its loan assets for BOC into the future, particularly its corporate loan segment. On 30 September 2018, BOC has increased its loan & advances assets to RMB 11.4 trillion from RMB 10.6 trillion on 31 December 2017.

  3. Growth Strategy 2: Belt & Road Initiatives
    To-date, BOC has granted US$ 115.9 billion in credit to support as much as 600 main infrastructure projects such as roads, ports, airports, water processing and electricity in nations along the Belt and Road Initiatives since its launch in 2015. BOC would continue to expand its presence in these nations, pushed for internationalisation of RMB, and expand the range of foreign exchange products & services. These initiatives enable BOC to be developed into a world-class bank in the 21st century.

  4. P/E Ratio
    As at 10 March 2019, BOC is trading at HK$ 3.61 a share.

    Hence, based on its latest 12-month EPS of RMB 0.611 or HK$ 0.71, its current P/E Ratio is 5.08, below its 10-Year Average of 6.50.

  1. P/B Ratio
    As at 30 September 2018, BOC has reported net assets a share of RMB 5.35 or HK$ 6.25. Thus, its current P/B Ratio is 0.578, the lowest in the 10-Year Period.

  1. Dividend Yields
    In 2017, BOC has paid out RMB 0.18 or HK$ 0.21 in dividends per share (DPS). Hence, its dividend yield is 5.82%, close to its 10-Year Average of 5.88% per annum.

VIA’s Verdict

BOC has delivered consistent growth in sales, profits, and dividend payouts for the last 10 years. Despite strings of impressive results, its stock price had been stable, trading mostly at HK$ 3.00 – HK$ 4.00 levels as shown below:

Source: Google Finance

In terms of valuation, BOC has P/E Ratio of 5.08, P/B Ratio of 0.578 and yields a total of 5.81% per annum. Is this a good time to buy BOC? Please do leave your comments below:

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