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Equity Bottom-Up

China Citic Bank Corp Ltd H / Equity Bottom-Up

With no revenue growth and 0.6% net profit growth for the past three quarters, China Citic Bank’s third-quarter results remained weaker than peers', as it relies heavily on interbank funding and state-owned enterprise credit exposure, which are both suffering from regulatory headwinds as a result of financial deleveraging in the economy since late 2016. However, the results highlighted consistent quarter-by-quarter improvement in top-line growth over the past three quarters along with most peers, thanks to stabilizing interbank rates, diminishing regulatory headwinds in fee-income services, and recovering lending demand. We modestly increase our fair value estimate to HKD 5.60 (CNY 4.80) per share, from HKD 5.20 (CNY 4.50), to factor in a small increase in our growth assumption in 2017 and the time value of money. The larger fair value estimate change for H-shares also reflects 1.56% appreciation in the Chinese yuan renminbi against the Hong Kong dollar since our last update on Aug. 14.Our valuation implies 0.65 times 2017 price/book value, at the low end of the valuation range for Chinese banks in the Hong Kong Stock Exchange. This is justified by its weaker-than-peer return on equity, funding base, and capital position. The bank is slightly undervalued with a 10% discount to our fair value estimate for H-shares, but overvalued with a 32% premium to our fair value estimate for A-shares. The valuation gap is due to A-share investors preferring smaller banks with faster credit growths while paying less attention to the quality of a bank’s deposit base and loan book, in our view. Looking forward, similar to other banks, we expect accelerating revenue growth will continue for the next two to three quarters due to a low base in the year-ago period, while net interest margin will likely benefit from stronger credit demand. But Citic’s further NIM recovery will probably be slower than peers' as the bank deleverages its shadow bank exposure and optimizes its loan mix.Fee-income growth was the highlight of the result, accelerating to 18% year on year, versus negative 2.1% and 16.5% in the first and second quarters, respectively. Fee income represented nearly 30% of total revenue. The strong growth was attributable to solid growth in bank cards, custody, and the investment bank business. The latter was driven by its interbank customers, which saw improved experience from the introduction of the “Eco Financial” cloud platform in May 2017. Growth in net interest income gradually recovered to negative 5% from the year-ago period, versus 8.9% and 5.8% respective declines in the first two quarters. NIM rebounded to 1.78% from 1.77% in mid-2017, still 23 basis points lower than the year-ago period. Third-quarter NIM recovered strongly by 6 basis points from the second quarter, helped by industry-wide recovering loan yields and stabilizing interbank rates. Citic continued to scale down its shadow bank exposures to 10.5% of total assets versus 20.3% in 2016. We expect decreased NIM headwinds for the bank, as the most painful period of deleveraging is largely over.The bad-debt ratio improved to 1.66% of total loans, versus 1.69% and 1.65% in 2016 and mid-2017. Total bad debt when adding back accumulated write-offs increased 25% year on year, versus 36% in the year-ago period. Despite signs of stabilizing credit quality, provision expenses grew 31% in the past quarter to make up for zero growth in the first half. As a result, annualized credit costs for the first three quarters amounted to 1.74% versus 1.76% in the year ago period. We expect credit costs will further increase to last year’s level in the coming quarter as revenue growth recovers.Analyst: Iris Tan, CFA

With no revenue growth and 0.6% net profit growth for the past three quarters, China Citic Bank’s third-quarter results remained weaker than peers', as it relies heavily on interbank funding and state-owned enterprise credit exposure, which are both suffering from regulatory headwinds as a result of financial deleveraging in the economy since late 2016. However, the results highlighted consistent quarter-by-quarter improvement in top-line growth over the past three quarters along with most peers, thanks to stabilizing interbank rates, diminishing regulatory headwinds in fee-income services, and recovering lending demand. We modestly increase our fair value estimate to HKD 5.60 (CNY 4.80) per share, from HKD 5.20 (CNY 4.50), to factor in a small increase in our growth assumption in 2017 and the time value of money. The larger fair value estimate change for H-shares also reflects 1.56% appreciation in the Chinese yuan renminbi against the Hong Kong dollar since our last update on Aug. 14.Our valuation implies 0.65 times 2017 price/book value, at the low end of the valuation range for Chinese banks in the Hong Kong Stock Exchange. This is justified by its weaker-than-peer return on equity, funding base, and capital position. The bank is slightly undervalued with a 10% discount to our fair value estimate for H-shares, but overvalued with a 32% premium to our fair value estimate for A-shares. The valuation gap is due to A-share investors preferring smaller banks with faster credit growths while paying less attention to the quality of a bank’s deposit base and loan book, in our view. Looking forward, similar to other banks, we expect accelerating revenue growth will continue for the next two to three quarters due to a low base in the year-ago period, while net interest margin will likely benefit from stronger credit demand. But Citic’s further NIM recovery will probably be slower than peers' as the bank deleverages its shadow bank exposure and optimizes its loan mix.Fee-income growth was the highlight of the result, accelerating to 18% year on year, versus negative 2.1% and 16.5% in the first and second quarters, respectively. Fee income represented nearly 30% of total revenue. The strong growth was attributable to solid growth in bank cards, custody, and the investment bank business. The latter was driven by its interbank customers, which saw improved experience from the introduction of the “Eco Financial” cloud platform in May 2017. Growth in net interest income gradually recovered to negative 5% from the year-ago period, versus 8.9% and 5.8% respective declines in the first two quarters. NIM rebounded to 1.78% from 1.77% in mid-2017, still 23 basis points lower than the year-ago period. Third-quarter NIM recovered strongly by 6 basis points from the second quarter, helped by industry-wide recovering loan yields and stabilizing interbank rates. Citic continued to scale down its shadow bank exposures to 10.5% of total assets versus 20.3% in 2016. We expect decreased NIM headwinds for the bank, as the most painful period of deleveraging is largely over.The bad-debt ratio improved to 1.66% of total loans, versus 1.69% and 1.65% in 2016 and mid-2017. Total bad debt when adding back accumulated write-offs increased 25% year on year, versus 36% in the year-ago period. Despite signs of stabilizing credit quality, provision expenses grew 31% in the past quarter to make up for zero growth in the first half. As a result, annualized credit costs for the first three quarters amounted to 1.74% versus 1.76% in the year ago period. We expect credit costs will further increase to last year’s level in the coming quarter as revenue growth recovers.Analyst: Iris Tan, CFA

Top-Line Growth Continued to Recover for the Past Three Quarters for Citic; Increasing FVE