Results in line; negatives: AFS loss, weak capital, wholesale funding
CITIC Bank (CNCB) reported FY16 results with net profit of Rmb41.6bn, up1.1% yoy. The results came as no surprise as CNCB pre-announced in January.PPoP grew by 13% yoy on decent fee income and cost discipline, offset by ahigher provision charge. We note the bank recorded an unrealized AFS markto-market loss of Rmb6.2bn in 4Q16 (or 1.8% of shareholders’ funds), whichwas attributed to the bond market correction. With its heavy reliance onwholesale funding (29% of liabilities), relatively large shadow banking exposure(17.5% of assets) and weak capital position (8.6% CET-1), we expect CNCB tobe vulnerable amid escalating financial deleveraging. Sell maintained.
Key trends highlight in the results
NIM was flat qoq in 4Q16 at 1.95% (down 31bps yoy) with total assets up16% yoy. The bank is relatively reliant on wholesale funding, whichaccounted for 29% of interest-bearing liabilities in 2016, making it sensitiveto higher market rates amid market rate hikes.
Fee income grew by 10% yoy in 4Q16, driven by bank cards, agencyservices and wealth management.
Opex dropped by 17% yoy in 4Q16, leading to a much lower CIR of 33%(vs. 4Q15 40%)
Asset quality wise, the NPL ratio rose 19bps qoq to 1.69%. We estimatethat the gross NPL formation rate was 1.5% in 2H16, lower than 1.7% in1H16 and 1.6% in 2H15. Nevertheless, the bank set aside a record-high215bps credit cost in 4Q16 in order to maintain NPL coverage at 156%.
Non-standardized assets declined by 12% hoh in 2H16 to Rmb1.0trn,accounting for 17.5% of total assets (21% in 1H16). Nevertheless, the bankset aside a provision of only Rmb1.8bn for the shadow credit exposure,seemingly insufficient to offset potential credit risks.
Capital position deteriorated with CET-1 ratio down 37bps qoq to 8.64%.With Rmb35bn preferred shares issuance in Oct’16, Tier 1 and CAR werebooted by 50bps qoq to 9.65% and 11.98%.
On dividend, the bank maintained a 25% payout ratio with DPS ofRMB0.215.
Valuation and risks
We value CNCB using a three-stage GGM (PV= (ROE-g)/(COE-g)), basing ourHKD4.26 target price on 2017E book values. Key upside risks: relaxed policieson liquidity, provision and shadow banking exposure;