BOC's ASEAN assets more profitable than most investors think

It's assets are not low-returning.

Bank of China (Hong Kong) has been noted to be undergoing significant strategic change as it is repositioned to become the regional arm of BOC Group.

According to a research note from Barclays, contrary to common perception among investors that BOC Group's overseas assets are low-returning, Barclays believes that ASEAN expansion is ROE-accretive.

Barclays estimates BOC's ASEAN assets generate a ROE of at least 8.7%, higher than Nanyang Commercial Bank's 8.2%.

Here's more from Barclays:

Where we differ? BOC's ASEAN assets are more profitable than you think: The overseas business of BOC Group outside of Greater China actually generated an attractive ROE of 28% in 2014.

This is contrary to common perception among investors that BOC Group's overseas assets have low returns. We believe this is a result of limited financial disclosure available on only a few of BOC Group's ASEAN business including Thailand which was loss making in 2014.

There is no information of the profitability of BOC Group's Singapore and Indonesia business which we believe would account for the bulk of ASEAN assets to be transferred to BOCHK. The average ROE of ASEAN peer banks is ~14.5%, of which Singapore is 11.6% and Indonesia is 20.7%.

BOC ASEAN expansion appears ROE accretive: BOC's overseas businesses have a high ROE, largely as a result of high operating leverage with assets/equity of 42x. Overseas branches are typically not required to hold large amounts of capital given funding from the parent.

Even if we assume that operating leverage falls to 12.9x in line with BOC Group and BOCHK excluding NCB, after a potential injection of capital and all else equal, overseas assets would still generate an ROE of 8.7% (based on an ROA of 0.7%), still higher than NCB's ROE of 8.2% in 2014.

Moreover, we see potential for ROE to rise given that ASEAN peer banks on average operate at 14.5% ROE. Therefore, we believe the sale of NCB and re-investment into ASEAN assets is ROE accretive but will depend on how quickly capital is deployed.