3Q17 PPoP growth accelerated to 11% yoy driven by strong NIM recovery
CCB reported 3Q17 net profit of Rmb63bn, up 4% yoy, and in line with ourforecast. This is indeed a better-than-expected set of results. The two keypositive surprises are 1） its strong NIM recovery （+8bps qoq/+5bps yoy），leading to accelerating PPoP growth of 11% yoy in 3Q17 vs. 7% in 1H17; and2） a higher credit cost （+55% yoy） to drive up NPL coverage by 3ppt to 163%.
We believe CCB’s results should have positive read-through to other big banks,especially on NIM front. We forecast big-four banks in combination to registerPPoP growth of 9% in 3Q17 in our preview report and suggest investors switchfrom ICBC to BOC/ABC/CCB based on valuation perspective.
Key trends in 3Q17 results:
NIM trended up strongly by 8bps qoq （vs. +2bps qoq in 2Q17） andrecorded expansion of 5bps on a year-on-year basis the first time since3Q14. The strong NIM number was driven mainly by faster asset repricingwith asset yield up 19bps as per our calculation. As such with decent AIEAgrowth （+8% yoy）， net interest income grew by 10% yoy. This should implya positive NIM/NII read-through to other big banks.
Loan growth was robust at 10.8% yoy. By segment, CCB focused more onretail loans （+22% yoy） and overseas loans （+22% yoy）， while corporateloans only grew by 2% yoy. Customer deposits were up 8.0% yoy, leadingto a slight higher LDR of 77.3%.
Non-interest income grew by 6.2% yoy, among which net fee income wasup 1.8% yoy due to decent growth in bank cards, internet banking andwealth management, according to the bank. Other net operating incomewas strong （Rmb3.2bn vs. Rmb309mn loss in 3Q17） which was driven byvarious subsidiaries, in our view （i.e. insurance）。
Stable asset quality with NPL formation rate at 63bps as per our estimate（vs. 61bps in 1H17 and 83bps in 3Q16）。 NPL ratio dipped by 1bps qoq to1.50%. With higher credit cost （81bps vs. 79bps in 2Q17 and 55bps in3Q16）， NPL coverage rose to 163% from 160% in 2Q17.
Capital position strengthened with CET-1 ratio up 16bps qoq to 12.84%.Tier-1 ratio and CAR came in at 12.99% and 14.67% in 3Q17, respectively.
Operating expenses grew by 4.5% yoy, slower than 9.3% revenue growth.As a result, CIR improved by 1.3ppt yoy to 27.9%.
Investment thesis
We rate CCB as Buy, because 1） it generates the second-highest ROA amongpeers with the strongest capital base and solid asset quality; 2） CCB is a keybeneficiary of targeted RRR cut; 3） its valuation discount to ICBC has reached a5-year record high at 7%, post a 19ppt underperformance YTD.