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DBS Group Research: China Citic Bank - Equity Report (28 August 2013)

Summary

Recommendation: BUY
Price Target: 12-Month HK$4.96 (Previous: HK$4.95)
Reason for Report: Moderate change in EPS forecasts
Potential Catalyst: Improvement in macro outlook to ease asset quality concerns

Core Content

Company Overview

• China Citic Bank is the 7th largest bank in China, offering a range of financial products and services to retail and corporate customers.
• The bank has a niche in corporate banking.
• Market Cap: HK$176,856 million (US$22,802 million)
• H-shares: 32% of total issued capital
• Major Shareholder: CITIC Group (61.85%)

Financial Highlights

• 2Q13 Net Profit: Rmb11.2bn, which was 13% above Bloomberg survey, 10% above forecast.
• 1H13 Net Profit: Rmb20.391bn, 62% of full year forecast, 63% of consensus estimates.
• EPS (HK$): 0.97 in 2013F, 1.10 in 2015F.
• ROE: 16.8% in 2013F, 14.8% in 2015F.
• P/BV: 0.64x in 2013F, which is below the sector average.

Valuation and Forecast

• Dividend Yield: 5.1% in 2013F, rising to 5.8% in 2015F.
• EPS Growth (%): 15.2% in 2013F, 12.7% in 2015F.
• Credit Cost: Expected to remain higher than peers at 85-100bps during 2013-2015.
• ROA: 1.08% in 2013F, 0.95% in 2015F.
• P/BV (x): 0.64x in 2013F, 0.5x in 2015F.
• Capital Adequacy Ratio (CAR): 11.47% in 2Q13, down from 13.44% in 2012.
• Core CAR: 8.92% in 2Q13, down from 10.05% in 2012.
• Dividend Payout Ratio: 20.0% in 2013F, 20.0% in 2014F, 20.0% in 2015F.

Key Concerns

• Overdue Loans: Increased significantly, reaching Rmb14.2bn in June 2013, up from Rmb11.7bn in January 2013.
• NPLs: Increased to Rmb16.4bn in 2013, with a ratio of 0.90%.
• Credit Cost: 56bps in 1H13, higher than peers.
• NIM: Declined more than expected, influenced by a drop in loan-to-deposit ratio and asset mix shifts.
• Profitability: ROE is forecasted to be near 15%, but asset quality remains a concern.

Main Points

• Positive Aspects:

  • Strong income momentum with both interest and fee income exceeding expectations.
  • Net profit for 2Q13 beat consensus estimates.
  • The bank's P/BV is relatively low, offering potential for re-rating if macroeconomic conditions improve.

• Negative Aspects:

  • Overdue loan trends are concerning, and asset quality may deteriorate.
  • Credit cost assumptions are higher than peers, affecting profitability.
  • Core CAR dropped below 9%, indicating potential capital stress.

Key Assumptions

• NIM: Expected to decline gradually from 2.56% in 2013F to 2.36% in 2015F.
• Loan Growth: Projected to slow from 15% in 2013F to 12% in 2015F.
• Fee Growth: Expected to stabilize from 44.1% in 2013F to 12% in 2015F.
• Cost-to-Income Ratio: Expected to remain stable at around 39.0%.
• Credit Cost: 85-100bps for 2013-2015.
• ROE: Forecasted to be 16.8% in 2013F, 14.8% in 2015F.
• Dividend Payout: Maintained at 20.0% for 2013F-2015F.

Sensitivity Analysis

• NIM +/- 10bps: Net profit +/- 8.6%
• Credit Cost +/- 10bps: Net profit +/- 5.0%

Conclusion

Despite its issues with asset quality and credit costs, China Citic Bank is still recommended as a BUY due to its strong income momentum, positive EPS forecasts, and the potential for re-rating if macroeconomic conditions improve. The bank's low P/BV ratio and expected ROE near 15% support the valuation. However, the high credit cost and declining CAR suggest continued monitoring of its financial stability.