Here’s more from Barclays

Stronger-than-expected fee income and lower credit costs push up profit.

Barclays said BOC reported a net profit of RMB 139.4bn for 2012 (3% ahead of its forecast and 5% above Bloomberg consensus), up 12% y/y.

The key variance to our estimate was the stronger-than-expected fee income (+8% y/y) and lower credit cost (29bps in 2012 vs. 32bps in 2011).

Key positives, in our view, included: 1) broad-based sequential NIM expansion of 5bps in 4Q12; 2) strong fee recovery in 4Q12 (+28% q/q); 3) solid capital position with 10.5% Tier 1 ratio (+16bps q/q); and 4) total overdue loans dropped by 6% h/h.

We believe BOC’s strategic shift to do more SME business and designating maintaining a stable NIM as a key branch performance indicator could help support NIM improvement going forward.

BOC has proactively reduced high-cost structured deposits (principal-guaranteed wealth management products) to help lower its funding cost. For example, structure deposits declined by RMB 5,109 bn (down 76%) in 2H12 to only RMB 1.6 bn, or 2.1% of total on-shore deposits (vs. 8.4% in June 2012).

Largely as a result of this initiative, NIM for domestic RMB business improved successively for the past three quarters, from 2.28% in 1Q12 to 2.50% in 4Q12.