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Morningstar | CCB Reported Slower Revenue Growth Than Its Peers in 1Q; Despite Strong Fee Income Growth

Narrow-moat China Construction Bank reported first-quarter results, with a 4.2% growth in net profit compared with the year-ago period. While net profit growth was in line with its large peers and our expectations, the 3.3% growth in total revenue was slightly lower than our expectations. This was attributable to growth in net interest income, decelerating to 4.5% from 7.5% in 2018 as rising deposit costs weighed on net interest margin. Another negative impact on revenue growth was because of slowing premium income from its life insurance subsidiary, CCB Life Insurance. This subsidiary is undergoing painful business restructuring. Premium income in 2018 fell by nearly half the income amount of 2016, after the regulator tightened regulations to curb rampant sales of high-yield short-term savings type of insurance products in the bancassurance channel. We expect this will continue to weigh on CCB’s non-interest income growth over the next few quarters. The upside to the results is the solid growth of fee income at 13% from the year-ago period, up from 4% in 2018, boosted by strong growth in bank cards, electric banking and agent sales; which made up almost 60% of total fee income. Given that revenue and net profit growths are roughly in line with our expectations, we retain our fair value estimates of CNY 7.20 for the A shares and HKD 8.20 for the H shares.

Trading at a 15% discount to our fair value estimate and 0.7 times 2019 price/book assuming 10% growth in book value per share (versus an 11% compound annual growth rate over the last three years), the H shares appear undervalued, in our view, because the market is overly concerned about CCB’s credit quality. While CCB has one of the lowest risk-loan portfolios among Chinese banks, government-led infrastructure loans and home mortgage loans accounted for 25% and 34% of total loans, respectively. Bad-debt ratios of such loans are low at 0.92% and 0.24%. We believe large banks, including CCB, have some of the strongest customer bases, low shadow bank exposure, and industry-leading capital strength and profitability, which should enable them to cope better with challenges.

Another weak spot of the results is a six-basis point increase in cost-to-income ratio as revenue growth slowed to low single digits, and the positive effect of tax reduction on increased local government bond investment abates. Credit quality also remained strong. The bad debt ratio stayed flat from 2018 at 1.46% and the bad debt balance slightly rebounded by 3% from 2018 due to the seasonal pattern. The bad debt formation rate fell to 0.68% and provision coverage further improved to 214% as credit costs remained high at 1.24%.