PPOP beat, bottom line missed; too early to call for a fundamental turnaround
China CITIC Bank （CNCB） reported 3Q17 profit of Rmb10.7bn, down 2% yoy,which was 4% below our forecast. Notably, this was the third quarter in a rowthat CNCB reduced its asset balance, leading to a 5% decline in net interestincome （NII）。 This was offset by strong fee income （up 18% yoy） andaggressive cost saving （down 9% yoy）。 As a result, its PPoP growth came instronger than expected at 10% yoy vs. 1% in 1H17. We welcome its proactivedeleveraging efforts, but we still believe it is too early to call for a fundamentalturnaround of the bank, until we see: 1） easing funding pressure; and 2） reliefof capital pressure. Hold rating retained.
Key operation trends in 3Q17
Balance sheet continued to shrink by cutting shadow bankingexposure: total assets dropped by another 2% qoq in 3Q17 （-1.7% qoqin 2Q17） due to the large reduction of receivable investment （-31%qoq） to Rmb582bn, representing 11% of total assets （vs. 15% in 2Q17and a peak of 24% in 1Q16）。 We think this actually led to a depositcontraction （-4% qoq）。 As a result, LDR rose to 95.5% （2Q17: 89.5%）。
NIM recovered but NII declined: NIM rebounded 11bps qoq to 1.83%（still down 12bps yoy） due mainly to shrinkage of low-yield assets.However, as highlighted in our preview report （link）， we focus more onnet interest income （NII）， which actually declined by 5% yoy, due tobalance sheet contraction.
Fee income growth accelerated to 18.4% yoy from 16.5% yoy in 2Q17,which might be due to strong credit card business. However,regulators started to check unsecured consumer lending in September,which may slow down credit card lending going forward.
Operating expenses were down notably by 9% yoy: this runs contraryto the bank’s strategy of scaling back lower-opex shadow bankingwhile stepping up heavy-opex retail banking business. We are not surewhether the decline in operating expenses will be sustainable.
Improved asset quality: the NPL formation rate was 118bps in 3Q17per our estimate, lower than the 145bps in 1H17. With higher creditcosts charged （182bps vs. 126bps in 2Q17 and 151bps in 3Q16）， theNPL coverage ratio saw a big improvement to 161% vs. 153% in 2Q17.
Weak capital adequacy: the bank’s CET1 ratio remained weak at8.56%, down 5bps qoq; RWA density jumped by another 3ppt qoq to75.5% after cutting low-risk weight receivable investment. Tier-1 ratioand total CAR came in at 9.5% and 11.8%, respectively, as of 3Q17.