Bank of Communications Earnings: Fee Income Lags SOE Peers, but NIM Contraction In Line

Bank of Communication’s 601328 first-quarter results are largely within our expectations. First-quarter revenue and net income grew 5.5% and 5.6%, respectively, year on year, with Bocom benefiting from net gains arising from trading activities. As with its state-owned peers, the bank’s net interest income contracted 4% year on year. However, Bocom’s 8% contraction in fee income was larger than that of most state-owned peers. Bocom’s wealth management-related fee income was negatively affected by capital market volatility in the first quarter as well as a high base in the same period last year. Positively, management noted meaningful recovery in the demand for wealth management products and credit card consumption starting in March. We expect Bocom’s fee income growth to recover starting from the second quarter, as the base effects will become favorable in coming quarters, along with the recovery in consumer confidence. Thus, we continue to forecast midsingle digits in full-year fee income growth.

We leave our fair value estimate unchanged at CNY 5.50 per A-share and HKD 6.00 per H-share. Bocom’s H-shares are trading at a 16% discount to our fair value estimate and over 8% dividend yield. That said, we prefer Agricultural Bank of China and China Construction Bank among the state-owned banks, given better growth potential and profitability, as implied by their higher returns on equity.