BoCom 2Q14 NIM rebounds strongly by 11ps q/q to 2.44%

Thanks partly to improved investment yield.

BoCom’s sequential NIM rebounded by 11ps q/q to 2.44% in 2Q14 after a large drop of 13bps in 1Q.

According to a research note from Barclays, it believes the rebound was mainly due to the following reasons: Firstly, higher loan yield: the bank’s loan yield increased by 16bps q/q to 6.32% in 2Q14, mainly driven by stronger corporate loan yield (+20bps q/q).

Retail loan yield was stable (+3bps q/q), but discounted bill rate was down by 10bps q/q.

Here's more from Barclays:

2) Falling interbank liability cost amid better system liquidity condition: the interbank liability cost was down by 41bps to 4.16% in 2Q. Consistently, interbank asset yield also dropped by 22bps q/q in 2Q;

3) Investment yield also improved in 2Q14, +34bps q/q to 4.45%.

Interbank regulations (Documents #127, #140, #178) had little impact on BoCom’s interbank activities. The bank only had RMB 13bn trust beneficiary rights (TBR) reverse repo. Management plans to grow investments in non-standard credit asset (NSCA), which amounted to RMB 118bn with 6.3% yield in 1H14, significantly higher than the bond yield of around 4%.

However, we saw deposit cost continue to rise, +15bps q/q to 2.41% in 2Q14 (vs. +4bps in 1Q14), driven by both corporate deposit cost (+15bps q/q) and retail deposit cost (+13bps q/q).

According to management, going into 2H, the bank will focus on improving the asset yield and stabilizing the funding cost, in an effort to slow the NIM compression trend, amid the interest rate deregulation process.

In our view, BoCom will benefit from the government’s effort to keep market rates at low level (including interbank rate) in 2H, as the bank relies highly on interbank fundings (24% of total liabilities).