Guosen Securities (Hong Kong) has released a research report initiating coverage on BOC Hong Kong (02388) with an "Outperform" rating. The firm projects the company's net profit attributable to shareholders for 2025-2027 at HK$38.9/40.2/42.7 billion, representing year-over-year growth of 1.8%/3.4%/6.2% respectively. EPS is expected to be HK$3.68/3.81/4.04, corresponding to P/E ratios of 10.0x/9.7x/9.1x and P/B ratios of 1.09x/1.04x/0.98x. Based on comprehensive absolute and relative valuation methods, the firm believes the company's fair value ranges from HK$43.6-48.4, representing approximately 18%-31% upside potential compared to the closing price on October 10.

Guosen Securities (Hong Kong)'s key points are as follows:

**Revenue and Profit Growth Accelerated, Profitability Recovering** In the first half of 2025, the company achieved operating revenue of HK$40.0 billion, up 13.3% year-over-year; net profit attributable to shareholders reached HK$22.2 billion, up 10.5% year-over-year. The annualized weighted average ROE for the first half was 12.9%, up 0.5 percentage points year-over-year.

**Stable Asset Growth** The company's total assets at the end of June increased 10.0% year-over-year to HK$4.40 trillion, up 4.9% from the beginning of the year, with market share remaining stable compared to year-end. Deposits at the end of June increased 5.8% from the beginning of the year to HK$2.87 trillion, while total loans increased 2.0% from the beginning of the year to HK$1.71 trillion. The Common Equity Tier 1 capital ratio at the end of June was 20.05%, up 0.03 percentage points from the beginning of the year.

**Net Interest Margin Declined, Focus on Subsequent Fed Rate Cuts** The average daily net interest margin for the first half was 1.34%, down 12bps year-over-year, with the decline widening compared to the annual report last year. As a result, net interest income for the first half decreased 3.5% year-over-year to HK$25.1 billion. The decline in net interest margin was mainly due to the Fed entering a rate-cutting cycle, with market rates lower than the same period last year, leading to decreased asset yields. The CME FedWatch Tool shows a high probability of Fed rate cuts for the remainder of this year and next year, which is expected to put some pressure on the company's net interest margin and overall performance.

**Significant Growth in Non-Interest Income** Net fee income for the first half increased 25.8% year-over-year, mainly benefiting from the recovery in investment market sentiment. The company capitalized on customer wealth management demand opportunities, with significant growth in insurance, securities brokerage, fund distribution and management commission income. Other non-interest income increased 99.1% year-over-year, mainly due to increased global market trading business income and market volatility causing foreign exchange-related product prices to rise, leading to substantial growth in net trading gains.

**NPL Formation Rate Rose but Asset Quality Remains Relatively Excellent** The calculated NPL formation rate for the first half was 0.40%, up 0.32 percentage points year-over-year; the credit cost ratio for the first half was 0.40%, up 0.16 percentage points year-over-year. The company's impaired loan ratio at the end of June was 1.02%, down 0.03 percentage points from the beginning of the year, mainly due to restructuring and write-offs of individual existing NPL accounts and repayments from individual NPL accounts. The company's provision coverage ratio at the end of June was 86%, up 1 percentage point from the beginning of the year. The company's impaired loan ratio has shown an upward trend since 2022, but remains below the overall industry level. Overall, the company faces some increased asset quality pressure, but remains relatively excellent compared to the industry overall.