Resilient Asset Quality With Solid Capital Position
CCB delivered stellar FY17 results, with accelerating earnings growth onsequential NIM expansion and improving cost efficiency. The bank'sconservative provisioning policy and stringent NPL recognition support abenign asset quality trend. CAR remains the strongest in the sector,barring any equity raising demands in the foreseeable future. CCB alsoenjoys the highest ROE among the Big-4 banks. Maintain BUY withunchanged GGM-based TP of HKD10.30 （25% upside）。
Faster earnings recovery despite rising provisions. China ConstructionBank’s （CCB） FY17 net profit rose by 4.7% YoY （vs 1.5% in FY16） toCNY240bn, 1% above consensus and our estimates. On a quarterly basis,4Q17 NII growth came in at a robust 16.8% YoY, more than offsetting the 7.8%YoY decline in fee income. CIR retreated 2.2ppts YoY on good costmanagement, leading to a strong PIOP growth of 14.8% YoY. Meanwhile, CCBproactively boosted provisions by 37% YoY. That said the bank was still able toachieve a 9% YoY growth in earnings in 4Q17, up from 3.8% YoY in 9M17.
Margin expansion speeds up. NIM widened at a faster pace by 13bps in4Q17, following the 7bps increase in 3Q17. This was likely driven by increasingasset allocation to retail loans, among which the higher-yielding consumptionand credit card loans rose by 44% in FY17. As a result, CCB's outstanding retailloans reached 41% of its total loan book, only after China Merchants Bank's（CMB） 50%. We expect the margin uptrend to persist in the coming quarters asloan pricing continues to improve.
Most prudent NPL recognition. NPL ratio （down 1bps QoQ） declined for thesixth consecutive quarter, as NPL balance remained largely stable in 4Q17.
With 11% HoH decline in overdue loans, NPLs now covers 171% of 90-dayoverdue loans, which suggests CCB's conservative loan classification. Its LLCratio further improved to 171%, ie the second highest among the Big-4 banks.
Still the best capitalised Chinese bank. CCB's capital position furtherstrengthened after issuing CNY60bn of domestic preference shares in 4Q17.
CET1 and total capital adequacy ratio （CAR） edged up 25bps and 83bps QoQto 13.1% and 15.5% respectively, both are highest in the sector. Dividendpayout was maintained at 30%, the same as its Big-4 peers – Agricultural Bankof China （ABC） and Industrial and Commercial Bank of China （ICBC）。
Maintain BUY. We keep our earnings forecasts and valuations unchanged. OurGGM-derived TP of HKD10.30 is based on FY18F P/BV of 1.2x, in line with itshistorical mean. We would seek more details from CCB's analyst briefing at5:45pm today.