CITICB reported decent revenue/PPoP growth of 10.3%/15.2% YoY in 2Q20. However, solid topline was slashed by heavy provision charges, leading to YoY earnings contraction of 26.5%/9.8% in 2Q/1H20. We see little surprise from the negative profit growth, given CBIRC’s earlier announcement of 9.4%/24% banking sector earnings decline for the same period. Policy guidance on profit concession and overhang from the pandemic should continue to weigh on China banks’ bottom line growth in 2H20. Having said that, we see limited share price downside at current depressed valuation. Thorough NPL exposure and front-loading of provisions bode well for long-term rerating.
- Results positives: 1) Heathy deposit growth of 3.9% QoQ outpaced loan growth of 1.4% QoQ. LDR fell 2.3ppt to 94%. 2) 2Q20 NIM widened 4bp QoQ to 2.01%, mainly on rising yield of retail loans. Yet, 1H20 NIM still narrowed 12bp YoY amid decline in overall asset yields and rigid deposit cost. Management expected further margin contraction in 2H20, but likely in smaller magnitude. 3) Trading income rose 20% YoY, mainly on higher return of bond investments amid falling market rates. 4) 2Q20 cost-income ratio dropped 3.2ppt YoY to 23.1%, suggesting better operating efficiency.
- Results negatives: 1) NPL ratio picked up 3bp QoQ/18bp HoH to 1.83%, higher than joint-stock banks’ average of 1.63%. This was mainly due to worsening asset quality of retail loans, esp. credit cards, of which NPL ratio surged 76bp HoH to 2.50%. However, management saw credit card NPLs abating from the peak in Mar 2020. 2) Provision charges soared 66.5% YoY in 2Q20, yet provision coverage slid 1.6ppt QoQ to 176%, below peer average of 204%. 3) Capital position weakened on softer earnings and cash dividend payout in 2Q20. CET1/total CAR fell 12bp/10bp QoQ to 8.80%/12.57%.
- Maintain BUY with lower TP of RMB6.80. We cut FY20/21 earnings forecasts by 14.1%/15.5%, to reflect lower NIM/fee income and higher credit cost assumptions. Our revised TP of RMB6.80 is based on 0.71x (from 0.75x) target P/B and FY20 BVPS of RMB9.62.
