Aging Demographics And Rising Credit Costs Will Impair Performance

Key Takeaways

• Exposure to challenged sectors and demographic shifts will constrain loan demand, elevate credit costs, and pressure both earnings and margins.
  
• Intensifying global tensions, digital disruption, and regulatory scrutiny threaten cross-border growth, non-interest income, and the bank's long-term competitiveness.
  
• Diversification of income streams, global expansion, digital investment, strengthened capital base, and focus on structural growth areas are supporting stronger profitability and long-term resilience.

Catalysts

Provides various banking and financial services in Chinese Mainland, Hong Kong, Macao, Taiwan, and internationally.

• Exposure to structurally challenged sectors such as real estate and local government debt is likely to increase non-performing loan formation over time, causing elevated credit costs and pressuring net margins and overall earnings.
  
• China's slowing population growth and the rapidly aging demographic profile threaten to structurally reduce domestic loan demand and limit long-term revenue growth potential for Bank of China, regardless of short-term asset expansion.
  
• Heightened geopolitical tensions and ongoing international fragmentation may restrict Bank of China's ability to expand or even maintain its global business, eroding cross-border revenue streams and curtailing international fee and commission income.
  
• Persistent competition from technology-driven fintechs and neobanks puts pressure on Bank of China's ability to capture high-margin retail and payment businesses; this threatens to erode fee income and compress net margins as Bank of China struggles to match the speed of digital innovation.
  
• Rising global moves away from traditional dollar and RMB-centric payment systems, coupled with increasing regulatory scrutiny on shadow banking activities, could sharply curtail foreign exchange, trade settlement, and other non-interest income streams, undermining Bank of China's long-term earnings quality.

Bank of China Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bank of China compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bank of China's revenue will grow by 8.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 40.9% today to 34.6% in 3 years time.
• The bearish analysts expect earnings to reach CN¥238.5 billion (and earnings per share of CN¥0.72) by about September 2028, up from CN¥224.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, up from 5.9x today. This future PE is greater than the current PE for the HK Banks industry at 6.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.57%, as per the Simply Wall St company report.

Bank of China Future Earnings Per Share Growth

Risks

• Rising non-interest income, including robust growth in wealth management fees, bond underwriting fees, and international settlement fees, is positioning Bank of China to mitigate pressure on net interest margins, with positive impacts on top-line revenue and fee-based earnings.
  
• The Bank's expanding global operations, especially in Hong Kong, Southeast Asia, and other Belt and Road regions, are steadily increasing overseas profits and revenue contribution, strengthening the Group's resilience and earnings diversification.
  
• Large-scale investments in digital transformation, AI, and fintech integration are driving improvements in operational efficiency and cost-to-income ratios, which are likely to boost net margins over the long run.
  
• The strong capital position following the significant core Tier 1 capital injection has enhanced risk resistance and enabled increased lending activity, supporting asset growth and the potential for higher future profits and dividends.
  
• The Bank is capitalizing on structural growth areas such as technology finance, green loans, SME lending, and pension finance, which are expected to generate secular loan growth, improved asset quality, and incremental revenue streams over the medium to long term.

Valuation

• The assumed bearish price target for Bank of China is HK$3.6, which represents two standard deviations below the consensus price target of HK$5.16. This valuation is based on what can be assumed as the expectations of Bank of China's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$5.93, and the most bearish reporting a price target of just HK$2.8.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥688.6 billion, earnings will come to CN¥238.5 billion, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 8.6%.
• Given the current share price of HK$4.46, the bearish analyst price target of HK$3.6 is 24.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.