Bank of China HK's NIM contracts despite cross-border growth

The bank will likely focus on loan mix and deposit adjustment to reduce impact.

Bank of China Hong Kong (BOCHK) will benefit the most from growth in cross-border financial services, but headwinds are expected as net interest margin (NIM) tightened sharper than expected, according to an OCBC Investment Research report.

Adjusted NIM came in at 1.69% with the underlying NIM for Q4 2019 down 6bp QoQ due to US rate cuts. The environment remains challenging this year and BOCHK is seen to focus on loan mix adjustment and deposit structure enhancement to cushion negative impact, the report said.

Loan book and total deposit significantly bloomed 10% and 6% YoY respectively, higher than the system growth, with the bank targeting mid- to high-single digit loan growth this year spurred by good momentum in ASEAN and cross-border business.

BOCHK’s capital position is still robust with Common Equity Tier 1 ratio at 17.8% and asset quality remained benign with non-performing loans (NPL) ratio at 0.23%. Whilst FY19 credit costs were at 14bp, Q$19 credit costs picked up 21bp, the report noted.

“Going forward, we expect adjustments to the expected credit loss model to factor in a more conservative macro outlook would push up credit costs further,” OCBC said.

BOCHK will likely focus on restructuring its ASEAN subsidiaries which comprised around 7% of its pre-provisions profit last year, the report said. Its operations in the regions will be a catalyst for growth which posted agile deposit and loan growth of 18% and 27%, respectively.

On the other hand, difficulties in NIM and uncertainties in asset quality, which is likely to lead to a material pick up in credit costs, are likely to limit any significant re-rating, the report concluded.

Photo courtesy of Wikimedia Commons.