Bank of China (BoC) has reported a net profit of 54.76 billion yuan ($7.48 billion) for Q3 2021, marking a 3.3% increase from Q3 2020. However, this growth rate is slower compared to the previous year's 4.8% YoY increase and the substantial 13.2% rise seen in the same period of 2021.
The deceleration in growth is attributed to the Chinese government's measures to reduce borrowing costs in an attempt to stimulate the struggling economy. Consequently, BoC's net interest margin (NIM), a key profitability indicator, declined from 1.67% in June to 1.64%.
This trend was not unique to BoC alone. Four other state-owned banks also experienced margin contraction after lowering interest rates on existing mortgages, a strategy aimed at reviving the real estate sector amidst economic challenges.
Despite these pressures, BoC managed to decrease its non-performing loan ratio to 1.27% by the end of September.
In contrast, Industrial & Commercial Bank of China Ltd.'s three-month profit remained flat while Bank of Communications Co.'s profits fell almost 3%. On the other hand, China Construction Bank (OTC:CICHF) Corp. and Agricultural Bank of China (OTC:ACGBF) Ltd. managed to balance falling margins with lower credit impairments.
The $56 trillion Chinese banking sector is grappling with shrinking margins and increasing bad loans due to economic support measures and risk mitigation efforts in the sluggish property sector, along with attempts to avert a credit crisis in the $9 trillion local government debt market.
The National Administration of Financial Regulation reported a 1.6% increase in combined profits at commercial banks to 1.9 trillion yuan in the first three quarters, with a non-performing loan ratio drop to 1.61%. The industry's net interest margin hit an all-time low of 1.74% by the end of June, and banks have cut deposit rates thrice since last September to protect their margins.
Despite the challenges, BoC's NPL ratio dropped to 1.27%. However, a downward trend in NIM is predicted to continue until 2024.
InvestingPro Insights
In light of the recent financial report of the Bank of China (BoC), InvestingPro provides some real-time data and tips to further understand the bank's performance and prospects.
According to InvestingPro Data, BoC has a market cap of 27.78M USD and a P/E ratio of 11.22, which is relatively low, suggesting that the bank's shares may be undervalued. The bank's revenue growth in the last twelve months as of Q4 2023 was 38.83%, indicating a strong financial performance despite the economic challenges.
Two key InvestingPro Tips for BoC are noteworthy. Firstly, BoC has consistently increased its earnings per share, which is a positive sign for investors. Secondly, the bank has maintained dividend payments for 17 consecutive years, demonstrating its commitment to rewarding shareholders. However, it's worth noting that the bank's poor earnings and cash flow may force dividend cuts in the future.
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