The Company Analysis Report about
Bank of China
?. General Situation of BOC
Bank of China！or Bank of China Limited in full, is one of China’s four state-owned
commercial banks. Its businesses cover commercial banking, investment banking and insurance. Members of the group include BOC Hong Kong, BOC International, BOCG Insurance and other financial institutions. The Bank provides a comprehensive range of high-quality financial services to individual and corporate customers as well as financial institutions worldwide. In terms of tier one capital, it ranked 18th among the world’s top 1,000 banks by The Banker magazine in 2005. On July 14, 2004, Bank of China became the sole banking partner of Beijing 2008 Olympic Games.
Bank of China is the most internationalized commercial bank in China. BOC London Branch, the first overseas branch of the Chinese banks, was established in 1929. From then on, the Bank successively opened branches in global financial centers, and has built up its network in 27 countries and regions. Currently, it had over 10000 domestic operations and over 600 overseas operations. In 1994 and 1995, Bank of China became the note issuing bank in Hong Kong and Macao respectively. It was the first among Chinese banks to recruit international experts and to introduce modern business management concepts into its operations with a view to become a premiere international bank.
The bank has undergone capital enlargement at a high speed, and launched IPO with the issuance of 177 billion common shares in June 2006, and was successfully listed in Shanghai Stock Exchange on July 5th, 2006 (Stock trading Code: 601988 ).
Bank of China has received wide recognition from its peers, customers and authoritative media for the credit and performance it achieved in past years. It has been awarded “Best
Bank in China” and “Best Domestic Bank in China” by Euro for eight times; it has been included in the Fortune Global 500 for 16 consecutive years; in addition, it was awarded “Best Domestic Bank in China” by The Asset, awarded “Best Trade Finance Bank in China” and “Best Foreign Exchange Bank in China” by Global Finance, and awarded “the Top 10 Product Service Enterprises in China” by Far Eastern Economic Review; since BOC Hong Kong was restructured and listed in the Hong Kong stock market, it has been the winner of many significant awards, including “Best IPO Investor Relation Award” issued by the Investor Relations Magazine and “ Best Transactions” and “Best Privatization Award” issued by Asian Finance.
- 1 - 周敏 刘抒 王琛 刘旻 蔡宁 朱琳
?. Industry Analysis
; Diversified merge of banks
With the opening of the financial industry, the merge trend which in order to improve the whole level of banks developed greatly. Until November of 2005, 19 foreign financial institution bought shares of 16 national banks. The total investment was up to 16.5 billion dollars.
For national banks, Bank of America and Temasek holding company invested 5.466 billion dollars in the Bank of Construction. Royal Bank of Scotland, Union Bank of Switzerland and Asian Development Bank totally invested 3.675 billion dollars in Bank of China.
For share-holding commercial banks, Asian Development Bank, Citibank and Hongkong and Shanghai banking invested 2.6 billion dollars in the Bank of Communication, China Everbright Bank, China Minsheng Banking, Industry Bank, Pudong Development Banking, Shenzhen Development Banking and China Bohai Banking which was under constructing.
For regional commercial banks, Scotiabank, Common Wealth Bank, the International Group of Netherland, German Investment and Development Company, International Financial Company invested 1.2 billion dollars in the Bank of Beijing, Bank of Shanghai and other commercial banks which in the Xian, Jinan, Hongzhou and Nanchong province.
No matter what from any aspect such as company nature, capital scale and region belonging, the merge of the banks appeared to be diversity.
Although the investment proportion is unlimited, attract strategic investors could improve the management level which will create the environment for national banks listed in the foreign countries. For the foreign-funded party, to cooperated with national banks will not only share the macro economic stable growth of China and the net advantage, clients resource and potential development ability of the high-level financial products which was the features of the Chinese bank industry, but also will get plentiful gains from the secondary market.
Foreign banks coming into the bank industry of China will cause the fierce competition among the foreign banks. Foreign banks could enter into the national financial markets with the method of set out a new company, buy the share of national banks and set up the branch institution and they have a lot of competitive advantages such as mix operation, excellent management, high-level risk pricing, the opening of the advancing products and sales. All of these advantages will become the potential threaten to the service or clients of the national banks.
- 2 - 周敏 刘抒 王琛 刘旻 蔡宁 朱琳
; Demand of financing promote stock reform and the high pricing
The re-financing should do after completing the stock reform according to the requirement to the banks by the Security Regulation Commission. Compare to other industries, banks have the higher positive attitude to the stock reform. In the stock reform program of the Minsheng bank, the shareholders of the non-outstanding stocks pay the actual pricing level of deliver 3 shares by every 10 shares to the shareholders of the outstanding stocks. This program became the model for the following banks.
Now, the shareholders of the non-outstanding stocks for the listed banks are relatively dispersal. So in the following stock reform, the program may come to the trend of diversity. For example, deliver the share with warrants. If the Pudong Development bank, Huaxia bank and China Merchant Bank are all following the program of the Minsheng bank, then their P/E and P/B ratio will decline greatly after the stock reform. For the P/E ratio will decline by 12 times and the P/B ratio will decline by 2 times, the investment value of the banks will worth more.
Investors should notice that there are have some uncertain factors in the program of bank’s stock reform. At the same time, the setting of the new variety of the financial innovation such as warrants will have the direct influence to the stock price. And the re-financing plan will cause the greatly fluctuation for the stock price after the stock reform.
; Good factor for banks for the tax reform
Now, the business tax for the bank industry in China is 5% which was decline by 3 percent since year 2001, but its business tax rate is still the highest compare to other service industry in China. There have huge difference between foreign banks and national banks on the income tax. According to the current tax policy, the national banks should pay 33% tax for its income, but the income tax rate for the foreign banks is 15%. Such unfair tax rate is bad for national banks.
Currently, Mingkang, Liu, the chairman of the Banks Regulation Commission express that the business tax will adjust to a lower level. It will benefit for bank industry if it is true. We predict that, the business tax will decline by 1% and the net profit for the listed banks will increased by 4 to 6 percents. So the tax reform will still be the main drive for the net profit increasing of the banks and financial institutions. If consider about combine with the income tax, the financial enterprise will increase by 1.493% by declining each percent. Assuming combine the income tax to the 25% for the financial enterprise, then the net profit of the financial enterprise will increased by nearly 12%.
; The process of market-oriented interest rate
The process of market-oriented interest rate become fast in 2006. It mainly base on two
- 3 - 周敏 刘抒 王琛 刘旻 蔡宁 朱琳
sides. One is the need of deepen the foreign exchange reform. Because the RMB swap service will definitely involve in the interest rate and the interest rate swap will need a structure which more market-oriented interest rate. Such process will promote the process of the rate to be market-oriented interest rate. On the other side, the short-term financing for the enterprise, the ABCP issuing and the a plenty of the RMB financial products and the money market fund will benefit to form the market interest rate structure with multi-level which will promote the process of the market-oriented interest rate.
The assets structure of the listed banks, the allocation proportion of the securities is between 15%-20%. The process of the market-oriented interest rate will make commercial banks increase its risk of interest rate on the basis of the tradition credit risk. This will bring more uncertain for the banks about the revenue of security investment.
; The regulation system of divided-management
Now, the financial industry is still use divided-management and divided-regulation financial system. Banks, security and insurance has its relatively independent regulation system which can not develop mixed service. But the issue of the 《The Security Law》,
the financial products and service came with the innovation. The trend of mix and integrity among the banks, security and insurance become more and more apparently. The classic examples for mixed-management are the personal financial service, fund management companies.
The divided-management transform to the mixed-management will be the necessary trend for the development of the financial industry in China. For banks, the advantage of the mixed-management will become apparently because of its asset scale, network and huge volume of clients. This will benefit to enlarge the off-balance service in the bank industry and optimize the income structure of the service and decline the systematic risk.
?. Financial Statement Analysis
; Profit increase fast, contribution from domestic business increase.
Until the end of 2006, the total asset of BOC is 5,330,000,000,000RMB, with an increase of 12.28% over the same period last year; the balance of loan is 2,430,000,000,000RMB, with an increase of 8.8% over the same period last year; realize profit after tax 471,520,000,000 RMB, with an increase of 44.65% over the same period last year; realize net income 418,920,000,000 RMB, with an increase of 52.38% over the same period last year; earning per share is 0.17 Yuan. Until the end of 2006, total amount of all kinds of loans of the Group is 2,430,000,000,000 RMB, 1,967,600,000,000 RMB more than the end of last year, with an increase of 8.8% over the same period last year.
The main drives are the reduction of pressure of provision for bad debts, the increase of the difference of interest rate, the improvement of the manage efficiency and the descent of virtual interest rate. We can see that the increase of profit over the same period last
- 4 - 周敏 刘抒 王琛 刘旻 蔡宁 朱琳
year is 18.86% pre-provision and 21.53% pre-tax. In 2006, the Group’s return on asset is
0.94%, with an increase of 0.22% over last year. It is the highest in the past four years. The return on share capital (except the profit of the minor shareholder) is 3.47%, with an increase of 0.95% over last year. It is 13.86% while include the profit of the minor shareholders, with an increase of 0.7% over last year. And the contribution rate by the operation within border improves more. Until the end of 2006, the total amount of assets within border is 4,290,000,000 RMB, with an increase of 12.28% over the same period last year. It occupies 76.84% of the total asset of BOC, with an increase of 0.1% over the same period last year. And it realizes net profit of 263,100,000,000 RMB, with an increase of 97.26% over the same period last year, which attributes 62.28% of the net profit of the BOC, with an increase of 14.29% over the same period last year. The operation within border has become important resource of income and increase of profit.
; Enlarge the difference of interest improved the operation utility and
decreased the effective tax rate
In 2006, makeup of loan is further optimized. The low profit bill financing operation is reduced properly and the occupation of the high profit loan operation. Because of the quick increase of interest-asset and the prominent effect on reducing debt cost of active management of debt, the level of net difference of profit and net difference of interest of BOC are enhanced persistently. They achieved 2.28% and 2.24% separately, with an extension of 7 and 2 basic points. The BOC’s average yield of interest-asset is 4.34%, 47
basic points enhanced. Although the act that BOC enhanced the risk free rate in 2006 cause positive effect on the profit of Company RMB Saving and Loaning Operation, the average interest rate of RMB interest-asset still dropped from 4.1% last year to 3.99% this year. This is mainly because interest rate of bond investment and discount note decreased, while occupation of average balance in year in the RMB interest-asset increased. In 2006, BOC reinforced management of budget and control of cost. The level of increase of cost in operation and management is far below the level of increase of income. Cost of operation is still under control effectively. Rate of cost-benefit drop to 38.96% from 39.3%, reach the lowest point during the last four years. The effectual tax rate is 29.63%, with a decrease of 11.25 percents. The main reason is that with the permission from the Ministry of Finance and the National Revenue, BOC staff’s wage
; Non-interest income increase fast, the structure of loan become
In 2006, BOC realized non-interest income 169,210,000,000 RMB, with an increase of 8.31% over the same period last year. The occupation of non-interest income is 12.29%, with a decrease of 1.17% over the same period last year. If we rule out the effect of the loss from assessment of foreign exchange, the occupation of non-interest income is 18.14%, with an increase of 1.27% over the same period last year. Besides, the net income of handling charge and commission is 143,230,000,000 RMB, with an increase of 54.89% over the same period last year. The diverse operation extended further. Pre-tax profit from investment bank and insurance operation increased 188.31% over the same
- 5 - 周敏 刘抒 王琛 刘旻 蔡宁 朱琳
period last year, attribution rate enhanced to 2.80% from 1.18%. Personal loan increased 11.41% over the same period last year, with an occupation of 23.9%, 0.56 percents more than last year. Company loan paid attention to controlling risk on industry attribution. Since 2004, occupation of loan of realty industry is balanced below 9%.
; Continued decreasing rate and balance of bad loans with
increasing of coverage rate
The cost of loan is controlled at 0.5%. At the end of 2006, the amount of five levels of bad loans was 98.82 billions with a decreasing of 5.006 billion Yuan over the same period last year. Rate of nonperforming loans is 4.04%, with a decrease of 0.58 percents over the same period last year. Besides, loan occupation dropped to 8.15% from 12.71%, occupation of second class and doubt class also decreased, loss class’s occupation is the
same to last year. Total amount of non-performing loan within border organization is 95.822 billion RMB, with a decrease of 2.387 billion from the end of last year. Rate of non-performing loan is 4.82%, with a decrease of 0.64 percents from the end of last year. Company loan loss plan is 11.687 billion RMB, which is only 0.799 billion RMB more than last year. However, because of the good control of non-performing loan, provision cover rate is 96%, 15.45 percents enhanced.
; The investment structure of bonds adjusted a bit
In 2006, average balance of stock investment arose 27.65%, reached 1.88 thousand billion RMB. Occupation of stock investment in total asset is 35.29%, 0.07 percents higher than last year. The main cause of change of the structure of stock investment are: first, in order to get the highest return with the risk controlled well, companies invest comeback capital to stocks which would be sold when the original stocks expired step by step; second, on the base of overall consideration of risk and income, companies extended the amount of treasury bond in hank, and invest part of the capital to foreign short-term stock.
; The exchange risk decreased and capital adequacy ratio increased Through foreign exchange settlement, foreign exchange net position decreased 10.2 billion dollars, which decreased exchange risk effectively. In 2006, BOC foreign exchange position net loss is 9.82 billion RMB. Foreign exchange position loss about option deal is 2.758 billion RMB. Therein, benefits of the option contract option signed with Huijin Company is 1.949 billion RMB, which compensate some of the on the sheet position 4.707 billion RMB loss caused by value increase of RMB. Foreign exchange position loss about swap of foreign currency is about 4.508 billion RMB. Therein, benefits of the swap of foreign currency long-term business is about 2.222 billion RMB, which compensate some of the swap of foreign currency short-term business loss of 6.73 billion RMB. The decrease of IPO and foreign exchange position lead to the decrease of requirement of market risk capital, for which companies’ capital is abundant. Until the end of 2006, BOC
rate of capital adequacy is 13.59%, rate of key capital adequacy is 11.44%, which are 3.17 percents and 3.36 percents higher than last year. It is the highest level during the recent years. Abundant capital assures the speed of company extension. Now, company’s
dynamic PE is 26.38, dynamic PE 3.20, evaluation is lower than CMB China, CMBC and
- 6 - 周敏 刘抒 王琛 刘旻 蔡宁 朱琳
SPDB, as much as ICBC. Keep investment class of “recommend cautiously”.
- 7 - 周敏 刘抒 王琛 刘旻 蔡宁 朱琳