3Q18 results in line with expectations
China Construction Bank （CCB） posted 3Q18 revenue Rmb160.1bnand 1-3Q18 revenue rose 5.9% YoY. Net profit attributable toshareholders up 6.6% YoY to Rmb67.1bn or mb0.27/sh. NPLformation rate edged up in 3Q18, and we advise watching assetquality at other large banks. We think CCB remains a high-qualitybank offering strong profitability, excellent cost control, resilient NIM,and robust capital and provisioning levels.
Trends to watch
Strong showing. CCB’s 1–3Q18 revenue rose 5.9% YoY to Rmb500bn.Net interest income grew 9.7% YoY, but non-interest income fell 3.1%.PPOP climbed 7.7% YoY on excellent cost control （opex up 1.3%）。
B/S stays solid. CCB’s loan balance has increased 7.9% YTD and willlikely grow 10% for the year. Deposit balance has risen 4.4% YTD. Itsloan-to-deposit rate stayed at 80%, implying ample liquidity.
Capital adequacy ratio and reserve charges lead sector. CCB’s T1 andoverall CARs reached 13.34% and 16.23% in 3Q18.
Rising NPL formation rate warrants attention. CCB’s annualized NPLformation rate was largely flat YoY for 1–3Q18 at 63bp but climbedfrom 33bp in 1Q18 to 62bp in 2Q18 and 88bp in 3Q18. See page 3 fordetails.
Earnings forecast
Maintain 2018 and 2019 EPS forecasts at Rmb1.03 and Rmb1.12.
Valuation and recommendation
CCB-A and-H are trading at 0.83x and 0.61x 2019e P/B. Maintain BUYon both with target prices of Rmb12.02 and HK$9.83, implying 1.3x2018e P/B and 41% and 94% upside.
Risks
Asset quality erosion due to international trade and FX fluctuations