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Morningstar | China Citic’s NIM Expanded After the PBOC’s Liquidity Boost in the 3Q

No-moat China Citic Bank’s third-quarter results were largely in line with our expectation, with growth in total revenue and net profits both slowing to 4.1% and 3.3%, respectively, from 5.9% and 7.1% in the first half. Net profits were on track to deliver our forecast CNY 45 billion or 5.7% year-on-year growth in 2018. After the bank’s contraction stage since 2017 to reduce its shadow banking exposures as regulations tightened, the bank’s balance sheet has resumed growth. Total assets increased 3% from 2017, boosted by 10% and 11% growth in loans and financial investment. As a bank with relatively high reliance on wholesale funding, its net interest margin, or NIM, was boosted by the PBOC’s recent liquidity injection. However, noninterest income growth remained weak as fee income further declining 4.7%, indicating the bank still face downward pressure caused by ongoing asset mix restructuring to reduce risks.

We retain our CNY 4.80 per share fair value estimate for A shares and HKD 5.40 per share for H shares. Trading at 0.54 times forward price/book value for H shares, the low end of valuation range of peers, the stock is slightly undervalued at 10% discount to our fair value estimate. However, we believe such safety margin is not enough to compensate for its higher-than-peer uncertainties, given its weak credit quality and high interbank funding reliance. As its corporate banking restructuring is coming to an end, the bank will put more effort into retail banking transformation which has represented 43% of profit before tax. We expect inclusive finance, credit card and consumption loan will achieve higher growth in the near term.

The results highlighted a 14 basis point expansion in NIM to 1.92% from the year-ago period. Leveraging lower wholesale funding cost after the central bank’s liquidity injection over the past third quarter, Citic has increased its shares of interbank funding by 3 percentage point to 24%, to replace higher-cost bonds issuance. Deposit growth remained challenging, posting a 0.3% decline from mid-2018 and 5% from 2017. We expect limited room for future loan growth as loan to deposit ratio has reached to a record high level at 98%. On the assets front, loans grew 4% from mid-2018 while interbank assets contracted over one third from 2017. We suspect the bank has shifted part of its off-balance-sheet shadow banking assets back to its book to comply with new asset management rules.

Bad debt ratio slightly fell one basis point to 1.79% from mid-2018. In response to the regulator’s call for stricter bad debt recognition, Citic started to recognize 100% of loans overdue more than 90 days as bad debt. Provision coverage ratio improved to 161% from mid-2018 as credit costs increased. However, such provision coverage ratio remained low compared with peers. Given the rebound in special-mentioned loans, we expect increasing provision pressure for the banks in the coming quarters.