Bank of China's net profit up 8% to RMB39.8b in 1Q13

Check out BOC's results here.

According to Barclays, BOC reported a net profit of RMB 39.8bn for 1Q13, up 8% y/y, while pre-provision profits (PPOP) of RMB 62.5bn was 5% ahead of its higher-than-consensus estimate.

Here's more from Barclays:

Looking at the details, the stronger-than-expected non-interest income (+12% y/y) was partly offset by higher credit cost (47bps in 1Q13 vs. 34bps in 1Q12) as BOC tries to maintain the group’s reserve/loan ratio (2.2% at 1Q13).

Key positives, in our view, included 1) continued group level NIM expansion of 1bps q/q in 1Q13; 2) strong fee growth (+17% y/y or +24% q/q); and 3) stable asset quality with the NPL ratio down by 4bps to 0.91% as of end-1Q13 from 0.95% at end-2012, while the NPL amount grew mildly by 1.4% in 1Q13.

The key negative, in our view, was the bank’s weaker Tier 1 ratio of 9.5% as of end-1Q13 (-1ppt q/q), under new capital rules. We believe BOC’s strategic shift to designate maintaining a stable NIM continued to work well. The stock is trading at 0.9x FY13E P/B with an attractive dividend yield of 6.5% in FY13E.

Solid operating trend with strong fee income growth: BOC’s net interest income was RMB 67bn in 1Q13 (+10.5% y/y), supported by stable NIM (+1bp q/q in 1Q13) and solid loan growth (6.7% in 1Q13). The bank’s fee income reached RMB 24.7bn in 1Q13, up by 17% y/y or 24% q/q, driven by agency and credit card fees. Since its operating expenses growth (+9% y/y) was lower than that of operating income (+11% y/y), BOC’s cost-to-income ratio slightly improved by 0.8ppt to 40.8% in 1Q13.

Good sequential NIM (+1bp q/q in 1Q13) thanks to reduced expensive structured deposits: To our surprise, the bank’s group level NIM continued its sequential expansion trend for the successive third quarter and reached 2.22% in 1Q13.

Thanks to its proactively reduced high-cost structured deposits (down by RMB 88.6bn in 1Q13 to RMB 75.4bn at end-1Q13), NIM for domestic RMB operation was largely flat q/q at 2.49% in 1Q13 vs. 2.50% in 4Q12. In addition, NIM for overseas operation and on-shore foreign exchange operation also improved slightly helping group’s NIM.

The bank’s total deposits grew by 7.6% in 1Q13, driven by non-expensive normal deposits (+8.8% in 1Q13). Domestic RMB deposits was up strongly by 9.4% in 1Q13. Its 1Q13 loan growth was 6.7%, where domestic RMB loans increased by 4%.

Benign asset quality; higher credit cost to meet regulatory requirement: The bank’s asset quality was largely benign, its total impaired loans for the group was RMB 66.4bn, up 1.4% in 1Q13 (vs. +2.1% in 4Q12), and the impaired loan ratio dropped by 4bps to 0.91% as of end-1Q13. However, the bank took a higher provision of RMB 8.3bn, with credit cost of 47bps in 1Q13 (vs. 34bps in 1Q12 and 31bps in 4Q12), which maintain group’s reserve/loans ratio to 2.2%.

Weaker capital position under new capital rules: Under the old capital standard, BOC’s Tier-1 ratio and total CAR were down by 21bps/40bps q/q to 10.33%/ 13.23% at end-1Q13, respectively. And the new capital rules further bring down the bank’s Tier-1 ratio and CAR by 80bps/102bps to 9.53% and 12.30%, respectively. The capital ratio drop was in line with most of the banks reported so far. The two ratios were still above regulatory requirements. We don’t think the bank has immediate capital raising needs.