4Q18 earnings moderated on subdued NIM. CCB set out the first FY18results from Big-4 banks, with full-year net profit up 5.1% YoY to RMB 255bn,1.3%/1.4% below our/consensus forecasts. This was mainly due to a 1.2% YoYdecline in 4Q18 earnings, led by narrowing NIM and prudent impairmentcharges. On the flip side, net fee income growth was robust at 9.8% YoY, drivenby strong bank card and e-banking related fees. Tax expenses retreated onrising investments to tax-free government bonds. The Bank declared a DPS ofRMB 0.31 for FY18, implying a payout ratio of 30%, same as FY17.
Margin pressure looms but downside risk manageable. Despite a 10bpsfull-year NIM expansion in FY18, 4Q18 NIM fell 12bps QoQ, by our estimate.
This was likely due to falling loan yields amid liquidity loosening. We believeSOE banks face greater margin pressure in FY19, as they are closely followingregulatory guidance on pricing for MSE loans. That said, any NIM contractionwould be modest, given most banks’ limited MSE loan scale and potential easein funding cost from RRR cuts.
Asset quality stayed healthy. NPL balance declined 0.5% QoQ, and NPL ratioslid 1bp to 1.46% in 4Q18. Provision coverage climbed 13ppts to 208%, as CCBproactively topped up impairment charges （+12.7% YoY）。 It maintained themost rigorous NPL recognition standard, with NPLs to >90-day overdue loansat 166%. The Bank had a rational loan growth in 2H18 （2.5% HoH）， and itreduced exposure to risky sectors （ie manufacturing, whole sale & retail） whileincreased allocation to retail segment （ie mortgage, credit card）。
Capital position topped peers. CCB remained as the best capitalized Chinabank, with CET-1/Tier-1/total capital ratio rising 49bps/50bps/96bps to13.8%/14.4%/17.2% in 4Q18. Capital buffer against CBIRC’s requirementstrengthened to 490-570bps, indicating decent internal capital generationability and little need for external equity raising.
Maintain BUY and HK$ 9.30 TP. CCB’s disappointing margin trend and slowerearnings pace may somewhat raise investors’ concerns, yet performance onasset quality and capital fronts suggested greater resilience to economic cycle.
The stock is trading at 0.71x FY19E P/B, 30% below historical mean （sincelisting in 2005） of 1.02x. Dividend yield is attractive at 5.5%. We await moredetails from CCB’s results briefing at 5:45pm, 28 Mar.