Bank of China’s Strong 2022 Results Supported by NIM Expansion in Foreign Currency Business

Narrow-moat Bank of China 601988, or BOC, reported 2.1% and 5% year-on-year growth in full-year 2022 total revenue and net profits, respectively. As the results were roughly in line, we retain our fair value estimates of CNY 3.10 for the A shares and HKD 3.50 for the H shares. The stock is undervalued, trading close to its historic low of below 0.4 times 2023 price/book value and an attractive 8.8% dividend yield. The bank has a solid track record of growing dividends with a steady payout ratio above 30% since 2016.

The 8.4% year-on-year growth in net interest income was the strongest among the big four banks, supported by a 1-basis-point expansion in net interest margin, or NIM. BOC managed to keep NIM steady in 2022 thanks to expanding margins in its overseas operations and foreign currency business in mainland China. The average loan rate of foreign currency business reported a 91-basis-point year-on-year increase in 2022, despite an 18-basis-point decline in the average loan rate of mainland RMB business. However, we expect BOC’s NIM to face rising pressures in coming quarters, due to the loan repricing and rising foreign currency deposit costs. The average rate of foreign currency deposits in 2022 increased 14 basis points to 0.5% from 2021, although it had declined 11 basis points year on year to only 0.28% in the first half of 2022. This implied significant upward pressure in foreign currency deposit costs during the second half of 2022, and we expect this trend to continue in the first half of 2023. A potential pause in the Federal Reserve rate hike and weaker global economic outlooks are likely to add more NIM pressures to BOC than to its peers.