Maintain BUY, with a GGM-derived TP of HKD6.50 offering 28% upside. On 20 Jun, we attended CITIC’s credit card themeopen day in Shenzhen, and our key takeaways are:
1. CITIC's 3-year retail banking transformation has borne fruit;
2. Credit card business has been a key driver for retail banking and enjoys huge growth potential;
3. Management guided for a stable asset quality outlook and improving ROE trend.
We see limited downside with its currently distressed valuation, and expect increasing retail banking contributions tosupport a gradual re-rating ahead.
Notable progress in retail transformation. Corporate banking is a traditional advantage for China CITIC Bank （CITIC）。 However,China banks are facing increasing challenges from a decelerating macro-economy and interest rate liberalisation. Therefore, CITICimplemented a 3-year strategic plan in 2014-2017 to boost its retail business – which offers benefits of counter-cyclicality, stablefunding source and risk diversification.
During this period, both revenue and net profit contributions from the retail segment significantly increased, reaching 33% and 42% ofthe respective totals in 2017, from 19% and 7% in 2014. The bank's retail client base grew at a 17% CAGR to 80m, and is expected toreach 120m by 2020. Management targets to drive up retail AUM by CNY500bn to CNY2trn in 2018, and allocate 80% of new loans tothe retail sector this year. In terms of asset mix, the bank aims to lift the retail proportion of interest-earning assets to 50%, from 40%.
Credit card as the core engine for retail banking. The credit card business has huge growth potential in China, due to a lowpenetration ratio. According to Bank for International Settlements （BIS） statistics, the number of credit cards per capita was 0.34 inChina, far below 3.2 in the US and 2.6 in Hong Kong. Rapid urbanisation and consumers upgrading their lifestyles also underpin thegrowth of the credit card business in China.
On the back of multi-channel customer acquisition, CITIC's credit card transaction volume achieved a 35% CAGR in 2014-2017,driving up its market share to 6%. Credit card overdrafts contributed to 27% of the bank's retail loans, from 9% in 2010. Faster profitgrowth （72% CAGR） vs revenue growth （43% CAGR） for the business also point to enhanced operating efficiency. Meanwhile, theNPL ratio of CITIC's credit card segment stayed low at 1.24%, vs the 1.61% sector average.
Stable asset quality outlook. Despite slowing credit growth and accelerating bond market defaults, management believes there islimited contagion risk to the banks' loan book. This is as recent bond defaults were mainly led by a shadow banking clean-up andconcentrated on companies with excess leverage. Thus, this is unlikely to result in systemic risks. Moreover, CITIC has activelydisposed of NPLs and optimised its loan mix in the past few years.
In early June, the China Banking and Insurance Regulatory Commission （CBIRC） reportedly tightened NPL recognition standards,where nationwide state-owned and joint-stock banks are required to classify all >90 days overdue loans into NPLs by 2Q18.Management guided that even if this were to be implemented, CITIC will still be able to keep its LLC ratio above the 150% threshold.
Recovery in ROE. CITIC's ROE is below other joint-stock banks’ due to its higher asset impairment ratio, operating costs and taxexpenses. However, the bank has been narrowing its ROE gap with peers and recorded a 26bps YoY ROE rebound in 1Q18. Lookingforward, management is confident that it can maintain ROEs above 13%, with recovering earnings and moderate asset growth.
A dedicated player in fintech development. CITIC targets to spend CNY2bn （around 5% of net profit） per year on technology, whichwill mainly be focused on software and hardware development. It also set out a market-oriented remuneration system for IT-relatedpersonnel. Management disclosed some key operating indicators for CITIC AiBank, the direct banking subsidiary jointly set up byCITIC and Baidu. CITIC AiBank, which began operating in Nov 2017, has acquired nearly 3m clients. It has booked an outstandingloan balance of CNY14.7bn and NPL ratio of 0.19%.
Maintain BUY, with an unchanged GGM-based TP of HKD6.50. The stock is trading at 0.52x FY18F P/BV, 32% below the 0.76xsector average. As CITIC seems over-punished for its balance sheet restructuring amid financial deleveraging, we see limiteddownside from its current valuation. Still, its retail transformation has made notable progress and may start to bear fruit in the comingquarters. That said, we still prefer large banks with a solid funding base and limited shadow banking exposure. Our sector Top Picksare Agricultural Bank of China （ABC） and Bank of China （BOC）。