Bank of Communications: Net Interest Margin Stabilizes on Higher Asset Yield

First-half 2023 revenue and net profit growth of 4.8% and 4.5%, respectively, at the Bank of Communications 601328, or BoCom, were largely in line with our expectation. Net interest margin, or NIM, is declining—as are peers—but at a much lesser 2 basis points in the second quarter from the first quarter as the bank was able to allocate more funds to higher-yield foreign currency bonds. While we expect pressures to remain, we believe BoCom’s ongoing asset and liability mix optimization and the June deposit rate cut will help deliver relatively steady NIM.

In addition, BoCom has lesser exposure to retail banking, which is seeing greater fee income and NIM pressure, relative to China Merchants Bank and Ping An Bank. As such, we are keeping our profit forecasts and our HKD 6.00 per H-share (CNY 5.50 per A-share) fair value estimates unchanged. BoCom is attractive at the current share price level, trading at a historical trough of below 0.3 times 2023 price/book value. We believe the market’s concerns over slowing retail banking revenue are overdone.

BoCom’s second-quarter fee income strongly rebounded 7.8% year on year, in contrast with the 7.7% decline in the first quarter. This was supported by the 4% growth in bank wealth management products from 2022, contrary to the 8.4% decline for the bank industry. BoCom’s credit card consumption activity remained strong, with credit card transaction amount staying at the industry’s third-largest at CNY 1.3 trillion. We expect wealth-management-related fee income to gradually improve as banks further reduce term deposit rates and scale down the issuance of high-cost deposits in 2023.