AI And Global Expansion Will Shape Future Digital Markets

Key Takeaways

• Focus on AI, digital finance, and globalization could drive revenue growth, enhance competitiveness, and diversify revenue through emerging industries and international initiatives.
  
• Improved risk management and strategic partnerships may stabilize asset quality, boost consumer loans, and increase earnings with higher loan asset volumes and global integration.
  
• Geopolitical uncertainty and regulations challenge Bank of China's global operations, impacting margins and profitability amid low interest rates and real estate risk.

Catalysts

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

• Bank of China's strategic focus on high-growth areas such as AI, digital finance, and emerging industries could drive revenue growth by increasing the proportion of high-yield assets, enhancing the competitive edge in new markets, and fostering service innovation in these sectors.
  
• The bank's globalization strategy continues to expand, with emphasis on integrating into international development patterns such as supporting the Belt and Road Initiative (BRI), enhancing cross-border RMB services, and increasing regional management capabilities. This could boost net margins by strengthening overseas business contributions and diversifying revenue streams.
  
• Continuous improvements in risk management, including early identification and resolution of potential non-performing loans (NPLs), could stabilize asset quality and reduce credit costs. This is likely to protect net earnings by maintaining a lower non-performing loan ratio and ensuring efficient resource utilization.
  
• Initiatives to boost consumption, especially in housing and travel, along with strategic partnerships, may increase consumer loans and personal secure lending, thereby potentially increasing operating income through enhanced fee-based services and long-term asset growth.
  
• Strengthening the infrastructure and support for private enterprises through integrated financial services and globalization efforts could enhance corporate lending growth. This initiative is expected to increase earnings by capturing market share in sectors poised for high growth, thereby contributing to higher loan asset volumes.

Bank of China Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of China's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.7% today to 35.4% in 3 years time.
• Analysts expect earnings to reach CN¥253.2 billion (and earnings per share of CN¥0.81) by about May 2028, up from CN¥221.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.4x on those 2028 earnings, up from 5.4x today. This future PE is greater than the current PE for the HK Banks industry at 5.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

Bank of China Future Earnings Per Share Growth

Risks

• The continued low interest rate environment poses challenges to the Bank of China’s net interest margins, as further rate cuts and market competition may compress NIM further and impact net interest income. This could potentially affect margins and earnings.
  
• Intense market competition and the infrastructure upgrade demands may increase operational costs and challenge the group's ability to maintain cost-to-income ratios, impacting net margins and operational efficiency.
  
• The instability of the real estate market remains a significant risk to asset quality, especially given the real estate sector's status as the largest source of new non-performing loans, which could negatively impact the bank’s earnings and profitability.
  
• The geopolitical uncertainty, increased global protectionism, and unstable supply chains could pose challenges to the Bank of China’s global operations. Such factors may impede revenue growth from international subsidiaries and transactions.
  
• The evolving regulatory and policy environments, both domestically and internationally, could impose additional compliance costs and operational burdens, potentially affecting overall margins and profitability.

Valuation

• The analysts have a consensus price target of HK$4.673 for Bank of China based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$5.66, and the most bearish reporting a price target of just HK$2.73.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥714.6 billion, earnings will come to CN¥253.2 billion, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 7.7%.
• Given the current share price of HK$4.34, the analyst price target of HK$4.67 is 7.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.