On 17 Oct, CITICB reported 9M19 net profit of RMB 40.8bn, up 10.7% YoY and accounting for 86.5%/87.4% of CMBIS/consensus full-year estimates. In 3Q19, revenue saw an impressive gain of 21.3% YoY (vs 14.5% YoY in 1H19), mainly driven by strong net interest income (+11.2% YoY), net fee income (+37.5% YoY), and trading and investment gain (+55.6% YoY). Despite a 38.9% YoY surge in provision charges, bottom-line earnings still picked up by 12.3% YoY (vs 10.1% YoY in 1H19). 3Q19 annualized ROE expanded 0.11ppt YoY to 11.7%.
- Results positives: 1) CITICB’s loan growth remained healthy at 3.1% QoQ, faster than system loan growth of 2.6% QoQ and total asset growth of 1.0% QoQ. We believe it was primarily driven by retail loans, as the Bank targets to lift its retail loan proportion to near 60% by 2021 (43% as of 2Q19); 2) Asset quality was well managed. NPL formation declined 38bps QoQ to 1.34%, and NPL ratio stayed flat at 1.72%. Provision coverage climbed 9.7ppts QoQ to 174.8%; 3) NIM widened 2bps QoQ to 1.98%, given a better mix of interest-earning assets and strict control in funding cost; 4) Net fee income rose 37.5% YoY, likely on strong bank card and agency service fees; 5) Capital position improved, as CET1 CAR was up 18bps QoQ to 8.76%. The outstanding RMB 40bn A-share CB has entered into conversion period since 11 Sep, and it could potentially boost CAR by 80bps with 10.2% EPS dilution.
- Results negatives: 1) Deposit growth slowed to 0.4% QoQ, pushing up LDR by 2.6ppts to 97.7%. This was likely due to less deposit absorption effort under CBIRC’s clampdown on irregular structured deposits; 2) 3Q19 opex went up 14.9% YoY, possibly on rising expenses in technology development.
- Maintain BUY and RMB 6.7 TP. CITICB-A currently trades at 0.68x FY19E P/B, 13% below its past 5-year mean of 0.78x and 22% lower than A-share JSBs’ average of 0.87x. We anticipate a positive share price reaction to the overall solid 3Q19 results. Furthermore, we see rising incentives for management to accomplish a decent earnings track record in order to facilitate CB conversion.
