Here's why BOC's 1% profit growth is likely a one-off phenomenon

Weaker revenue momentum is lurking.

According to Barclays, although BOC posted 1% profit growth in 1H15 (similar to large peers ICBC/ABC and meeting consensus), they are skeptical whether positive profit growth can continue.

Relative to peers, they believe the bank has weaker revenue momentum (both on the fee and margin side), and it has arguably suboptimal provision levels (hence risks of higher credit cost).

Here's more from Barclays:

BOC reported RMB91bn net profits for 1H15, up 1.1% y/y, in-line with consensus. The bank’s revenue growth (+1.7% y/y) was largely dragged by net fee income (-4.0% y/y), which was due to 1) high base of 1Q14 fee income; 2) lower settlement fees (-26% y/y) resulting from weak exports/imports; and 3) a lower fee scheme imposed by the NDRC since Oct last year. PPOP grew by 1.8% y/y and impairments went up by only 2.9%.

BOC’s gross loans grew by 4.9% h/h, with overseas loan growth (+5.8%) slightly outpacing that of domestic loans (+4.8%), while total deposits went up by 6% h/h. On a q/q basis, loans and deposits increased by 3.8% and 6.2% respectively. According to BOC’s management during the analyst briefing, the bank will keep focusing on deposit acquisitions going forward as its key funding source, even though China is soon to discontinue the 75% cap on loan-to-deposit ratio (LDR) as a regulatory requirement.

BOC’s NIM edged down by 8bps to 2.18% in 1H15, mainly driven by narrower loan-to-deposit spread (-9bps). Domestic RMB loan-to-deposit spread went down by 23bps h/h as RMB loan yield declined by 19bps due to benchmark rate cuts by the PBOC. However, this is partly offset by higher yielding RMB investments (+14bps) and lower funding costs on interbank liabilities (-55bps), leading to a moderate 4bps h/h contraction in domestic RMB business NIM.