Stable earnings and asset quality. China CITIC Bank reported 2018 results on Tuesday. Total loans asof 2018 grew 13% YoY and total deposits grew by 6%. NIM increased to 1.94% in 2018 from 1.79% in2017 and 1.92% in 9M18. Total revenue reached Rmb165bn, representing 5.2% YoY growth. Net profitarrived at Rmb44.5bn and basic EPS reached Rmb0.88, representing 4.8% YoY growth, In line with ourexpectation. Its NPL ratio reached 1.77% as compared to 1.68% in 2017 and 1.79% in 3Q18. Coverageratio reached 158% as compared to 169% by end 2017 and 161% by end 3Q18. The company decidedto pay dividend of Rmb 0.23 per share, representing 26% pay out ratio.
Retail transition. With the broad deceleration of economic activities and declining asset yields in 2019,the asset side advantage may become more important than the liability side. Those banks with moreprudent asset portfolio and strong capital position may outperform. In terms of asset portfolio, CITICBank’s strategy of transitioning from a bank with strong SOE ties into a bank focused on retail businesshas started to pay off. In the past, CITIC’s strength lay in its relationship with CITIC Group, ensuringstable corporate deposits and strong relations with SOEs, but, with traditional deposits declining andasset quality risk rising, CITIC Bank has recorded declining net interest margin and asset quality. Since2H15, CITIC started to put more emphasis on retail business. In terms of asset structure, its loansexposure to more risky industries like manufacturing, mining and wholesale/retail declined from 27%in 2015 to 12% by end 2018（vs. sector average: 17%）， while its loans exposure to retail loans increasedfrom 26% to 41%（vs. sector average: 35%）。 This will make it less impacted by enterprise loans’declining demand and yield as well as weakening solvency ratio. In terms of capital position, CITICissued tier two capital bonds of Rmb 50bn in 2018 and plans to issue convertible bonds of no morethan Rmb 40bn and no more than 400mn preferred shares, which further enhance its total capitaladequacy ratio from 11.7% in 2017 to 12.5% in 2018.
Safety margin. Though we remain cautious on HK listed China banks due to narrowing NIM, increasingasset quality risk, rising capital pressure and decelerating valuation recovery momentum, we believetwo kinds of banks will be more defensive, one is those banks with prudent asset portfolio and riskmanagement as well as strong capital position like CMB and CCB, the other is those with extremelylow valuation and SOE background like BOCOM and CITIC. Currently CITIC is trading at 0.47x 19E PB, ascompared to its historical average of 0.60x and historical low level of 0.42x in Feb 2016.
Maintain Outperform. We maintain our EPS forecasts at Rmb0.91 in 19E （+4.1% YoY）， Rmb0.96（+5.1%YoY） in 20E and Rmb1.03（+7.9% YoY） in 21E. We revise up its target 19E PB to 0.55x and target pricefrom HK$5.35 to HK$5.90. With 16% upside, we maintain Outperform rating.