Top pick among large banks
CCB remains our top pick among the large state-owned banks. We like the bank for its high returns, excellent funding franchise and extremely strong balance sheet.
Under our new rating structure, our call for CCB changes to Add, from Outperform. Catalysts to unlock value include greater clarity on the pace and impact of China’s economic reforms, improving macro data and possible positive surprises on asset quality. We maintain our GGM-based HK$9.01 target price (1.42x FY14 P/BV).
1) CCB has the most profitable banking franchise among big state-owned banks. We expect CCB to continue to deliver the highest asset profitability (1.52% ROA in 3Q13) among state-owned banks, reflecting a disciplined approach to loan pricing. Returns are supported by a continued shift into higher-margin consumer lending, which has recently grown at double the pace of the bank’s corporate business and accounted for 28.2% of total loans in 3Q13, up from 25.9% in FY11. 2) Returns are further supported by a strong fee income franchise (21.2% of total revenues in 9M13). 3) Shifting investment portfolio: CCB has one of the most conservative investment allocations in the sector (43% government bonds). Management has recently started a process of reallocating some of its investment portfolio to higher-return investments. We expect this to support the net interest margin and ROA in the quarters ahead. 4) Excellent funding franchise: 69.1% LDR and demand deposits at 49.7% of total deposits allow CCB to comfortably fund loan growth and make it relatively more insulated to possible further deposit rate liberalisation. 5) Sector-beating capital strength: CCB has the strongest balance sheet among large state-owned banks, with the second-highest tier-1 CAR (10.87% in 3Q13) and lowest asset to equity leverage (14.4x in 3Q13) among large state-owned banks. 6) CCB has very low LGFV exposure, at 4.0% of total loans (3Q13), one of the lowest in the sector.
CCB is trading at 1.0x FY14 P/BV for 20.5% ROE and 5.1x FY14 P/E for 11.0% EPS growth. Its dividend yield is 6.8%.