EUR 850.00 For Business Accounts Only

Morningstar | 601939 Updated Forecasts and Estimates from 09 Nov 2018

Narrow-moat China Construction Bank, or CCB, posted solid third-quarter results featuring 5.6% growth in revenue and 6.6% growth in net profit. Fee income growth was a bit disappointing, as asset management and cash settlement-related services fee continued to fall due to strict regulation and the regulator’s call for banks to reduce related service charge to small businesses. Though growth for the past quarter rebounded to 7.6%, versus a 6% growth and a 2.2% decline respectively in the first two quarters, the improvement was mainly attributable to lower base in the year-ago periods. In light of the 3% fee income growth for the first three quarter, we lower our fee income growth forecast to 5% from 8%. Despite the small disappointment in fee income growth, growths in net interest income and pre-provision operating profits, or PPOP, are spotlights of the results. This was supported by an expansion in net interest margin in the past quarter, partially helped by PBOC’s liquidity injection. This, together with a strong 67-basis-point improvement in cost/income ratio, resulted in an acceleration in PPOP growth to 8.1%. We retain our CNY 7.20 per share fair value estimate for the A shares and HKD 8.20 for the H shares. Trading at a 23% discount to our fair value estimate and 0.7 times 2018 price/book assuming 10% growth in book value per share, the H shares appear undervalued in our view, as the market is overly concerned about CCB’s credit quality, given the weakening economy. We believe large banks including CCB have among the strongest customer bases, low shadow-bank exposure, industry-leading capital strength and profitability, which should enable them to better steer through challenges.

Despite rising deposit competition amid challenging economic conditions, third-quarter NIM rose 14 basis points to 2.22% from the previous quarter. We suspect this was attributable to changing assets mix toward loans and local government bonds facilitated by RRR cuts, while lower-return interbank assets declined 3% from mid-2018. Deposit growth saw modest acceleration to 4.4% from 4.1% in the first quarter, with shares of retail deposits and demand deposits standing at around 46% and 54%. Looking forward, we expect looming challenges for NIM in the near-term given the regulator’s policy easing in order to boost weakening credit demands from private sector. We don’t rule out the possibility to cut benchmark rate when economic outlooks further deteriorate.

Credit cost for the first three quarters rose to 1.30% from 0.95% in the year-ago period, in response to weakening economic activity and the regulator’s call to speed up bad debt recognition and disposal. As a result, bad debt ratios fell one basis point to 1.47%, with bad debt balance after adding back accumulated write-offs growing 15% from the year beginning. Provision coverage strengthened to 195% from 171% in 2017. With bad debt balance covering over 152% of loans overdue more than 90 days, we believe CCB’s bad debt classification and provision coverage remain industry-leading. We expect a slight increase in credit costs in 2018 to counter these risks.