Positives: improving asset quality, stronger retail profit and stable div payoutChina Construction Bank （CCB） reported FY16 net profit attributable tocommon shareholders of Rmb230.4bn （up 1% yoy）， which was 1% higher thanmarket consensus. This is a solid set of results, in our view, with severalpositive underlying trends. Its asset quality showed signs of improvement witha lower NPL formation rate and NPL ratio. As a result, it was able to top upprovision coverage above the 150% regulatory floor. CCB’s retail bankingsegment recorded strong growth with PBT up 12% yoy to make up 44% ofgroup PBT. The bank declared a 30% dividend payout ratio, translating into ayield of 4.8%. We maintain our Buy rating.
　　Key trends in FY16 results
　　Improving asset quality: We estimate CCB’s NPL formation rate hasdropped to 0.8% in 2016 from 1.4% in 2015. As such, its NPL ratiodeclined by 6bps yoy to 1.52%. With a credit cost of 81bps, the banktopped up its provision coverage to be above the 150% regulatoryrequirement. Meanwhile, its overdue and special mention loans havedeclined in both balance and ratio in 2H16.
　　Stronger retail: CCB’s retail banking segment recorded PBT of Rmb129bn（up 12% yoy） in 2016, contributing 44% of group PBT （2015: 39%）。 Thestrong retail PBT was driven by cost efficiency （down 8% yoy）。 If measuredby 12-month rolling profitability, its retail segment posted ROE of 21.7%,which offset the weaker return for its corporate segment at 8.0%.
　　NIM was down 43bps yoy to 2.20%, mainly dragged by VAT reform, ratecuts and purchase of municipal bonds.
　　Fee income recorded 4% yoy growth on higher WMP and guarantee fees.
　　The cost-to-income ratio was down by 2.6ppt to 31%.
　　Loan balance grew 12% yoy, with 69% of new loans during the yearextending to retail customers and 20% to overseas and subsidiaries’
　　customers. In contrast, CCB’s corporate loan balance only made up 7% ofthe total.
　　Capital wise, CET-1 ratio, tier-1 ratio and total CAR decreased mildly to12.98%, 13.15% and 14.94%, respectively.
　　Valuation and risks
　　We value CCB using a three-stage GGM （PV= （ROE-g）/（COE-g））， with our targetprice based on 2017E book values. Key downside risks: property pricecorrection and slowed infrastructure build. We will seek more details from theanalyst briefing held at 5:30 PM, 30 March 2017 （Thursday） at 30F, CCBTower, Central, Hong Kong. The key things to watch for include the outlook onNIM, asset quality and dividend payout ratio.