Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Bank of Communications   / Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/24562" target="_blank" data-smartkarma-citation="entities:24562:1">Bank Of Communications (601328 CH)</a> showed some positive signs in its latest Q119 release. In fact, though this is not always so, the bank broadly justified a top quintile PH Score™ - our quantamental value-quality gauge.</p><p>Earnings quality was satisfactory without any non-operating or "other non-interest" items of note, and importantly in contrast to the slew of results recently out of China that show overdependence on trading gains. Funding costs did not swamp Interest Income generation either. Despite a lack of  granularity, NPLs actually decreased YoY. Sharply higher Loan Loss Provisions, we think, may be related to a build-up of the "Doubtful Loans" bucket as at FY18. The latter exerted a negative impact on the bottom-line: the credit cost trend in recent bank releases out of China has also been pinpointed by SK colleague, Daniel Tabbush. Somewhat disappointingly double-digit OPEX growth did run ahead of single-digit "underlying Income" expansion, revealing negative "jaws" and putting some doubt as to veracity of Efficiency enhancement as seen by a lower CIR. We would have preferred to have seen single-digit OPEX growth. But that will probably come later.</p><p>What we do like is the steady-state nature of the business. A sober bottom-line expansion. True, hit hard by elevated growth of credit costs. A meagre increase in credit, directed mainly to mortgages and credit cards, plus a slight reduction in NPLs or impaired Loans despite some higher provisioning for the "doubtful" category. Not surprising then that Deposit growth was slightly down YoY. Should this raise alarm bells? Maybe not as the bank's profile looks to be marked by cautionary pause and prudence. The mindset here seems to be appropriately risk-averse. There is no gung-ho growth amidst so much uncertainty. Putting the house in order and preparing for eventualities and headwinds has value.</p><div class="content-highlight"><p>The PH Score™ is about valuation in part as well as fundamental trends. And the bank is attractively priced. P/Book, Franchise Valuation, and Dividend and Earnings Yields stand at 0.65x, 7%, 5.1%, and 17%, respectively. This seems related for now to risk of growth rather than growth of risk. Given the tailwind of a high PH Score and having detailed caveats, we can see shares of Bank of Communications outperforming from here and the Income component is worthwhile. </p></div>

Bank Of Communications (601328 CH) showed some positive signs in its latest Q119 release. In fact, though this is not always so, the bank broadly justified a top quintile PH Score™ - our quantamental value-quality gauge.Earnings quality was satisfactory without any non-operating or "other non-interest" items of note, and importantly in contrast to the slew of results recently out of China that show overdependence on trading gains. Funding costs did not swamp Interest Income generation either. Despite a lack of  granularity, NPLs actually decreased YoY. Sharply higher Loan Loss Provisions, we think, may be related to a build-up of the "Doubtful Loans" bucket as at FY18. The latter exerted a negative impact on the bottom-line: the credit cost trend in recent bank releases out of China has also been pinpointed by SK colleague, Daniel Tabbush. Somewhat disappointingly double-digit OPEX growth did run ahead of single-digit "underlying Income" expansion, revealing negative "jaws" and putting some doubt as to veracity of Efficiency enhancement as seen by a lower CIR. We would have preferred to have seen single-digit OPEX growth. But that will probably come later.What we do like is the steady-state nature of the business. A sober bottom-line expansion. True, hit hard by elevated growth of credit costs. A meagre increase in credit, directed mainly to mortgages and credit cards, plus a slight reduction in NPLs or impaired Loans despite some higher provisioning for the "doubtful" category. Not surprising then that Deposit growth was slightly down YoY. Should this raise alarm bells? Maybe not as the bank's profile looks to be marked by cautionary pause and prudence. The mindset here seems to be appropriately risk-averse. There is no gung-ho growth amidst so much uncertainty. Putting the house in order and preparing for eventualities and headwinds has value.The PH Score™ is about valuation in part as well as fundamental trends. And the bank is attractively priced. P/Book, Franchise Valuation, and Dividend and Earnings Yields stand at 0.65x, 7%, 5.1%, and 17%, respectively. This seems related for now to risk of growth rather than growth of risk. Given the tailwind of a high PH Score and having detailed caveats, we can see shares of Bank of Communications outperforming from here and the Income component is worthwhile. 

Bank of Communications: Weaving a Net Is Better than Praying for Fish at the Edge of the Water.