ORD Daily Insight

China CITIC Bank reported 3Q17 net profit of Rmb34.7bn and EPS of Rmb0.68 (+0.56% YoY), inline with our expectations. Total loans grew 12.0% YoY, while total deposits decreased 2.2% YoY.

    Net interest margin (NIM) declined by 23ppts YoY and increased by 1ppt QoQ to 1.78%. Netinterest income decreased 6.6% YoY, while fees and commission income rose 10.5% YoY. Itscapital adequacy ratio (CAR) dropped from 12.0% in 2016 and 11.9% in 1H17 to 11.8% in end-3Q17, while its non-performing loan (NPL) ratio fell from 1.69% in 2016 and increased from 1.65%in 1H17 to 1.66%. Its coverage ratio increased from 156% in 2016 to 161%. We maintain our EPSforecasts of Rmb0.89 in 17E (+5% YoY), Rmb0.97 in 18E (+9% YoY), and Rmb1.07 in 19E (+10%YoY). We lower our target price from HK$6.09 to HK$6.03. With 19% upside, we maintain ourOutperform rating.

    Retail transition paying off. We believe the bank’s lagging valuation and share performance ismainly due to investors’ concern about its heavy reliance on corporate business. However, we believeCITIC Bank’s retail transition has started to pay off. In terms of asset structure, its loan exposure toriskier industries like manufacturing, mining, and wholesale/retail declined from 27% in 2015 and22% in 2016 to 18% in 1H17 (vs sector average of 26%). Its retail loan ratio increased from 26% in2015 and 33% in 2016 to 37% in 1H17 (vs sector average of 33%). Its deposit-to-total liabilities ratioremained stable at 66% in 1H17 (vs sector average of 64%). Its exposure to interbank liabilitiesdeclined from 23% in 2015 and 21% in 2016 to 19% in 1H17 (vs sector average of 22%). With a lowbase and its continuous promotion of retail business, we see further improvement in fundamentals aslikely, and expect valuation recovery.

    Chasing laggard. Looking forward into 4Q17, the tightening loan quota and strengthening propertyregulation will lead to a rising funding cost for the real economy, resulting in further downwardpressure on property sales and property investment, as well as related manufacturing investment andconsumption growth. Disappointing property sales during the peak season in September and Octoberwould lead to rising market concerns about economic growth. As a result, we expect a relievingpolicy overhang, leading to valuation recovery in the banking sector. The targeted reserverequirement ratio (RRR) cut indicates that interbank liquidity will gradually improve in comingmonths. CITIC Bank may benefit more in terms of NIM given its relatively higher reliance oninterbank liabilities, as well as its larger valuation discount. The stock only rallied by 9% YTD, (vs23% for the sector and 21% for the HSCEI). It is only trading at of 0.50x 17E PB, vs a sector averagelevel of 0.73x. The H-share is trading at a 33% discount to the A-share, vs a sector average discountof 19%.

    Maintain Outperform. We maintain our EPS forecasts of Rmb0.89 in 17E (+5% YoY), Rmb0.97in 18E (+9% YoY), and Rmb1.07 in 19E (+10% YoY). We lower our target price from HK$6.09to HK$6.03, representing 0.55x 18E PB. With 19% upside, we maintain our Outperform rating.