Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

You wouldn't expect a Chinese bank with large offshore exposure, low levels of bad debt and a comparatively small amount of wealth-management products to be unpopular with investors. Yet that's the reality Bank of China Ltd. is facing.

The nation's fourth-largest lender, which reported third-quarter earnings Wednesday, has about 25 percent of its assets overseas, well above larger rival Industrial & Commercial Bank of China Ltd. at 19 percent. Nonperforming loans in the first half came in at 1.47 percent, compared with an industry average of 1.7 percent and as high as 2.4 percent at Agricultural Bank of China Ltd. They were 1.48 percent in the three months ended Sept. 30. There's also relatively little high-risk shadow banking activity versus say, China Merchants Bank Co.

Up and Leaving
Of the nation's biggest lenders, Bank of China has the lowest asset exposure domestically
Source: Bloomberg Intelligence
Note: Based on first-half 2016 earnings.

Bank of China also has a tendency to dispose of assets, reaping a neat windfall for shareholders. There was the almost $9 billion sale of Nanyang Commercial Bank Ltd. last December that resulted in a first-half special dividend, and the IPO mid-year of its aircraft leasing unit. The Beijing-based lender still has plans to sell its interest in Chiyu Banking Corp., too.

Combined, those factors should make Bank of China a choice pick, yet its stock has, for the most part, underperformed over the past 12 months.

Last But Not Lucky
Bank of China has underperformed its peers
Source: Bloomberg

One reason could be its lower net interest margins, or the difference between the rate at which a bank borrows and lends. Bank of China's larger offshore exposure necessarily means those margins are bound to be lower than at other banks, considering rates domestically are much higher than in the West. Its net interest margin for the first nine months narrowed to 1.85 percent from 2.14 percent a year earlier.

Still, that bigger overseas presence could also mean investors are ignoring the lender at their peril.

While all banks have been getting proactive on cutting back advances to zombie state-owned firms hurt by the economic slowdown and beefing up business with households instead, a property correction would hit Bank of China less hard than competitors with more skin in the home game.

Foreign currency-denominated investments rose 27.4 percent year-to-date, Wednesday's figures showed, exceeding yuan-denominated investments and increasing their share of the total balance to 25.4 percent as at the end of the third quarter. CICC Research, which did note asset quality deterioration was worse than expected, has a buy rating on the bank's Hong Kong-traded shares and a HK$4.51 target price, or 28.1 percent upside.

What's more, China's central bank is conducting a trial monitoring of banks' off-balance-sheet wealth-management products under its macro-prudential assessment system, according to people familiar with the matter. That will put significant pressure on the likes of China Merchants Bank and even ICBC, which has more than 10 percent of total assets in such products compared with just 6 percent for Bank of China, according to JPMorgan Chase & Co.

In a world where real estate wobbles pose a constant threat and lenders that have overreached will struggle, investors may soon wish they were bigger fans of China's oldest bank.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net