Investment positives
Revamped balance sheet and business operations to get on a fast track. In addition to shrugging off huge legacy NPL from China Investment Bank and replenishing its capital base, CEB has streamlined business operations, strengthened risk management and enhanced IT systems, paving the way for a rapid development.
Product innovation enhancing customer franchise and fee contribution. With capital constraints in difficult times, CEB cultivated an innovation -driven culture and pioneered various business segments. By leveraging the innovative services, it has accumulated the 2nd largest customer base in both corporate and retail banking among mid-sized banks and reaped a rapid fee income CAGR of 51.5% from 2007 to 2012. It also had the largest growth of fee income as a portion of operating income among mid-sized banks.
Implementing model-based operations to further sharpen competitive edge. CEB has launched model-based operations to provide standardized, industry-specific and client-oriented integrated solutions for its large corporate customers and their upstream/ downstream SMEs. These help CEB improve customer loyalty, diversify fee sources and build a more solid deposit base.
Financials
Estimated net profit growth of 8.0%/9.4% in 2014/15. A structural loan mix change towards high-yield SME lending and retail loans as its risk tolerance improves would give CEB room to improve NIM. Moreover, it had a relatively high ratio of LLR/total loans (2.34%) compared to H-share mid-sized banks in 1H13, implying less provisioning pressure. However, its higher portion of interbank assets in total assets could drag down its growth amid deleveraging.
Valuation and recommendation
We initiate coverage with a HOLD rating and 12-month TP of HK$3.34, based on our three stage DDM model, assuming stage II/III ROE 12.5%/10.9% and cost of equity 16%. We revised target prices of H-share mid-sized banks down by 20~30% in our annual sector report (Dark Before Dawn) in mid-January as the result of rising cost of equity and lowering stage II/III ROE.
Risks
Tightened WMP regulation hurts fee income; liquidity tightening slows interbank asset growth; interest rate liberalization hurts NIM.