Bank of China shares have posted very strong gains over the past few years, so the obvious question now is whether the current price still lines up with the earnings investors are paying for. With the stock back in focus, the key issue is how that recent share price strength squares with what the bank is actually generating in profit.
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Over the past 5 years the stock has returned 218.4%, which puts a lot of weight on whether the current earnings can support that kind of re-rating.
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The bank's role in helping Shenzhen issue ¥4,000,000,000 of offshore bonds in Hong Kong may support expectations that Bank of China can keep using its balance sheet and fee income potential in large capital market transactions.
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There is a second opinion on Bank of China worth weighing. See what analysts think Bank of China's shares could be worth .
The issue now is whether Bank of China's recent share price level is justified by the earnings the business is producing today.
If you want a clean comparison for Bank of China's recent 218.4% five year return and earnings focus, it can help to line it up against 171 high quality undervalued stocks .
Does Bank of China Look Fairly Valued on Earnings?
For a large bank like Bank of China, earnings typically sit at the centre of how investors frame the share price, so the P/E ratio is a natural anchor. Right now the stock trades on about 7.0x earnings, which is slightly above the 6.6x peer average and also north of the wider banks sector on roughly 5.2x. That points to investors paying a modest premium to the broader industry for each unit of profit.
The in house fair P/E estimate, which blends factors such as growth expectations, profitability, size and risk, suggests Bank of China's current 7.0x multiple is broadly in line with what those fundamentals might justify. Because the group recently helped Shenzhen issue ¥4,000,000,000 of offshore bonds in Hong Kong, part of that earnings multiple likely reflects the market's view on its role in larger capital market deals as well as traditional lending. Readers need to judge whether that balance of income streams feels robust enough for this kind of pricing multiple. Explore the numbers behind Bank of China's P/E valuation .
The Bank of China Narrative: What Would Justify Today's Price?
Narratives pick up where the valuation puzzle for Bank of China leaves off. They spell out which assumptions on future growth, profitability and earnings would need to hold for the shares to be worth materially more or materially less than today, and they sit on Simply Wall St's Community page. Each one treats fair value as a specific thesis about Bank of China's business that you can watch over time, rather than a single static number.
Community views on Bank of China are split between those who see solid fundamentals supporting today's valuation and those who focus more on structural risks.
Bull case: roughly fairly valued
"The strategic emphasis on high-growth business segments including technology finance, comprehensive wealth management, and pension products suggests the market may be underestimating the sustainability of future revenue and EPS growth…"
Discover why this Narrative puts Bank of China at roughly fairly valued .
Bear case: 6% overvalued
"Market tends to apply discount due to state ownership and governance factors…"
Explore why this Narrative puts Bank of China at 6% overvalued .
One more Bank of China check that sits beside the current P/E story
Price and today's earnings give you a snapshot, yet professional models that map where this business might be a few years from now offer a different lens on what you are really paying for. Explore where analysts expect Bank of China to be in a few years .
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Companies discussed in this article include 3988.HK .
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