CITICB reported FY19 net profit of RMB48.0bn, up 7.9% YoY and in line with preliminary announcement on 8 Jan. 4Q19 earnings contracted 5.8% YoY on still heavy impairment charges (+30.1% YoY), as the Bank tried to strengthen provision buffer against potential asset quality shock. As such, FY19 ROE declined 0.2ppt YoY to 11.1%. Management suggests dividend payout of 25%, 1ppt lower than that of FY18.
- Results positives: 1) Asset quality improved. NPL ratio fell 7bp QoQ to 1.65% while provision coverage remained stable at 175%. NPL recognition became more stringent as NPLs covered 132% of >90day overdue loans; 2) 4Q19 NIM was up 1bp QoQ by our estimate, and full-year NIM widened 3bp YoY to 2.12% (FY18/19 figure was restated due to reclassification of credit card income). Asset yield stayed flat YoY at 4.48%, but interbank and debt financing cost retreated 55bp and 72bp, more than offsetting the 20bp YoY hike in deposit cost; 3) FY19 net fee income rose 25.3% YoY, mainly driven by bank card and agency service businesses. 4) CIR declined 2.9ppt YoY, pointing to better operating efficiency.
- Results negatives: 1) Loan growth slowed to 1.1% QoQ in 4Q19, and 4.5% QoQ asset expansion was largely from rising investments in securities and interbank assets. We believe it was mainly due to CITICB’s falling risk appetite amid rising credit risks. In particular, growth in credit card loans decelerated to 2.9% in 2H19 from 13.0% in 1H19. 2) Deposit growth was slower than peers at 0.6% QoQ, likely due to pull-back in structured deposits (9.35% of total deposits as of 4Q19) after regulatory tightening. As a result, LDR stayed elevated at 98.2%. 3) CET1 CAR dropped 7bp QoQ to 8.69%. Conversion of its RMB40bn CB could boost CAR by 78bp.
- Maintain BUY and lower TP to HK$5.60. We trim our FY20-21E earnings estimates by 4.2-5.6%, as we lower NIM forecast by 7-8bp and raise credit cost assumption by 15bp to reflect COVID-19’s impact. That said, CITICB’s current valuation of 0.34x FY20E P/B and 7.9% dividend yield look attractive, and we still see incentive for management to deliver solid earnings growth in order to facilitate CB conversion.
