Barclays upgrades Bank of China to EW

Thanks to better earnings and valuation.

Barclays has upgraded Bank of China (Hong KOng) (BOCHK) to Equal Weight from Underweight and raised its 12-month price target to HK$25.0 from HK$23.0.

According to a research note from Barclays, it raised its FY14E/15E/16E net profit forecasts by 3%/6%/4%, respectively, which are +2%/-4%/-5% vs. Bloomberg consensus. A key reason for the upgrade includes upward earnings revisions driven by better NIM and fee outlook in 2014-15.

Other reasons are rolling over valuation to FY15 forecasts, and better valuation after recent share price correction, particularly after "Occupy Central" in late September.

Here's more from Barclays:

In addition, increased rates in the US and the potential benefit from Shanghai-Hong Kong Stock Connect should also be positive for the stock sentiment as well as earnings medium term.

We believe risk of asset quality deterioration for BOCHK's China operation is manageable in the next 12-18 months.

BOCHK is currently trading at 1.4x 2015E P/B, which is at fair value, in our view.

Prefer BOCHK to most China banks we cover: Barclays' global equity strategy team downgraded emerging market equities to neutral from overweight.

They also prefer developed markets over emerging markets. We have turned more cautious on China banks recently and prefer BOCHK to most China banks (excluding BOC, rated OW).

In our view, BOCHK is one of the defensive players given its reasonable dividend yield of 4.5% in FY15E and solid capital position.

China's asset quality deterioration should continue but risks appear manageable: We expect China's asset quality to continue to deteriorate.

However, our sensitivity analysis (Figure 2) shows such deterioration may only have moderate impact on BOCHK's earnings except in cases of dramatic asset quality deterioration.

Downside risks: 1) asset quality, particularly in China, deteriorating faster than expected; 2) US interest rate increase postponed and at smaller magnitude (we expect 50bps hike in 2H15 and 100bp hike annually in 2016-17).

Upside risks: 1) Hong Kong property market remains steady with no revaluation for BOCHK's commercial properties; 2) US interest rate hike occurs earlier and more quickly than expected; 3) China's asset quality weakening is slow and mild. Hang Seng Bank (11 HK, OW, PT$153) is our top pick among HK banks.