Bank of Communication's 1H14 net profit climbs 5.6% YoY to CNY36.8b

Loan growth, meanwhile, remained moderate.

The net profit of Bank of Communications (BOCOM) for 1H14 was CNY36.8b, up 5.6% YoY.

According to a research note from Maybank Kim Eng, this was higher than its conservative forecast of CNY27.2b. Major discrepancies from the consensus forecast included higher NIM and credit costs.

Meanwhile, the report said that BOCOM registered NIM recovery albeit loan growth was moderate.

Here's more from Maybank Kim Eng:

NIM widened by 11bps QoQ to 2.44% in 2Q14 (2.39% in 1H14), mainly due to higher lending spread and lower funding costs.

BOCOM will continue to improve the risk-adjusted return of assets and reduce the more costly negotiated deposits.

We raise our NIM forecast by 7bps to 2.35-2.37% for 2014-15. However, with tight capital and deposit constraints, loan growth remained moderate at 5.1% HoH in 1H14.

BOCOM will maintain a tight loan underwriting standard to avoid further deterioration in asset quality. We lower our loan growth forecast from 10% p.a. to 9% p.a. during 2014-15.

Tight cost control; limited asset quality improvement. With moderate pace of outlet openings (23 in 1H14) and increase customer utilization of e-banking, mobile banking and self-service machines, total expenses grew 2% YoY in 1H14.

We lower our expense forecast by 2.3% for 2015. New NPL formation rose from CNY7.7b in 1Q14 to CNY9.6b in 2Q14.

Provision-to-loan ratio remained below the regulatory minimum at 2.3% in Jun 2014. Special mention loans also surged by CNY15.6b HoH to CNY74.6b in Jun 2014 (2.17% of total loans).

We maintain our conservative credit cost forecast at 1.1% for 2014 (0.61% in 1H14).

Adopting advanced internal-rating-based (AIRB) approach. This has lowered BOCOM’s risk-weighted assets by 6.1% QoQ and raised its CET1 CAR to 10.7% in Jun 2014.

As the benefit of AIRB approach will phase in over a few years, we forecast BOCOM’s CET1 CAR to rise to above 11% by end-Dec 2016.