20140224-大和证券-Pioneering_Internet_finance_11页_476kb

China Citic Bank (998 HK) Summary

Core Content

China Citic Bank (998 HK) is a leading bank within the CITIC Group, known for its innovative approach to internet finance. Since late-2013, it has launched several internet-based financial products in collaboration with major internet players, such as POS loans, Yu'ebao, and e-commerce loans, which are expected to enhance its lending margins and deposit base.

Main Points

• Internet Financial Products: Citic Bank has introduced various internet-based financial products, including POS micro loans, Yu'ebao, and e-commerce loans, aiming to drive net interest margin (NIM) and attract low-cost demand deposits.
• POS Micro Loans: These are unsecured loans targeting micro merchants, with a maximum loan amount of CNY 0.5 million and a maximum tenor of 90 days. They are approved 24/7 through online platforms, offering high margins and efficient loan disbursement.
• Yu'ebao: Citic Bank serves as the custodian for Yu'ebao, a money market fund managed by Taobao, which has a significant asset under management (AUM) of CNY 400 billion as of February 2014. This role brings in custodian fees and demand deposits.
• Collaboration with Tenpay: Citic Bank has partnered with Tenpay, a subsidiary of Tencent, to offer payment services and access to e-commerce transaction data, enabling precise marketing and credit assessment.
• Valuation and Target Price: Using the Gordon Growth Model, the fair value is estimated at HKD 5.95 per share for 2014, with a target price of HKD 4.70, implying a target 2014E PBR of 0.7x. The current PBR is 0.6x, suggesting the stock is undervalued.
• Outperform Rating: The report reiterates an Outperform rating due to the bank's encouraging innovation in micro lending products and better-than-expected 2013 earnings.

Key Information

• Target Price: HKD 4.70, with an upside of 10.6% from the 21 Feb price of HKD 4.25.
• Financial Performance:
  • Net profit is expected to grow slightly in 2014E (from CNY 38,812 million in 2013E to CNY 38,889 million).
  • Core EPS (fully-diluted) is forecasted to increase marginally from 0.830 to 0.831.
  • The bank's PBR is expected to decline from 0.7x in 2013E to 0.6x in 2014E.
• Dividend Yield: Maintains a consistent dividend yield of 5.7% in 2013E and 2014E.
• ROE: Expected to decrease from 18.2% in 2013E to 16.0% in 2014E.
• Loan Growth: Loan growth is projected to be 17.0% in 2013E and 12.0% in 2014E.
• Deposit Growth: Deposit growth is expected to be 16.7% in 2013E and 14.0% in 2014E.
• Risk Management: The bank is leveraging big data and online platforms to improve credit risk management and reduce marketing costs.
• Provision Risk: The key downside risk is the need for further provision charges to meet the required loan loss reserve (LLR) ratio by end-2016, as the current LLR ratio is the lowest among its peers.

Financial Summary Highlights

Valuation and Relative Value

• Valuation Methodology: Fair value is calculated at a 2014E PBR of 0.7x, derived from the Gordon Growth Model with assumptions of a sustainable ROE of 13.2%, COE of 14.8%, and a terminal growth rate of 4%.
• Relative Valuation: The regression analysis of ROE and PBR among H-share banks indicates a positive correlation with high statistical significance, with an R-squared of 0.71. Citic Bank is considered undervalued relative to its peers.
• Comparison with Peers: Citic Bank's PBR and ROE are lower than those of ICBC and CCB but higher than ABC and BoCom, indicating a competitive position in the market.

Risks

• Loan Loss Reserve (LLR) Ratio: The bank's LLR ratio is currently the lowest among its peers, posing a risk of further provision charges to meet regulatory requirements by end-2016.
• Market Conditions: Any further decline in the bank's NIM could affect its profitability, though the report believes this is unlikely due to the high margins from internet-based products.

Conclusion

Citic Bank is positioned to benefit significantly from its internet finance initiatives, which are expected to drive margins, attract deposits, and enhance fee income. Despite the risks associated with meeting the LLR ratio requirements, the bank's current valuation is deemed undemanding, supporting the Outperform rating.