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China CITIC Bank(998.HK)——Better-than-expected growth of profits and attractive price

Friday, February 25, 2011 Views13417
China CITIC Bank(998)
Recommendation on  25 February 2011
Recommendation Buy
Price on Recommendation Date $4.870
Target Price $6.980

Summary

According to 2010 profit estimation of CITIC Bank (or the Group), the Group's profits gained large increase by over 50% yoy, higher than our expectation. As at the end of Sep, net profits for the shareholders of the Group achieved to RMB17.193 billion, increased sharply approximately by 48% yoy, equivalent to EPS of RMB0.44.

The main reason that the profits increased strongly was due to the stable increase of the Group's interest incomes by the rebound of net interest margin.

Meanwhile the Group's loans also kept stable growth and its CAR increased, representing the decrease of pressures of the Group's capital.

In all, we still have confidence on the future performance of CITIC Bank, and in line with our expectation. We estimate its12-month target price of HK$6.98, 41% higher than its latest closed price, equivalent to P/E 10.9X and P/B 1.9X of 2011 respectively, and recommend to buy now due to its price declined sharply recently.

Assets scale increased stably

As at the end of Sep, total assets of CITIC Bank amounted to RMB1.95 trillion accumulatively, increased by 9.72% compared with the end of 2009.

Compared with CMBC, we noted the growth of CITIC Bank's assets scale slower, which mainly because the growth of loans slowed down in 2011. We think this is prudent strategy under the significant growth of loans during last two years that can help the bank to control the quality of loans and reduce the pressures of capital.

The Group's net loan and advances to customers amounted to RMB1.19 trillion in 2010Q3 from RMB1.12 trillion in 2010Q1, increased by 21% yoy and 12.64% higher than 2009. We estimate CITIC Bank's net loan and advances to customers would achieve to RMB1.26 trillion in 2010, increase by 20% yoy, and 60.63% of total assets.

The quality of assets continued to improve

The quality of CITIC Bank's assets improved continually, the NPL ratio maintained on the low level. As at the end of Sep, the NPL ratio of CITIC Bank was 0.81%, the same as the second quarter, we expect it would decrease to 0.75% in 2010.

Additionally, the bank's impaired loans coverage ratio achieved to 176.13%, increased by 6.21 and 26.77 percentage points compared with 2010H1 and the end of 2009 respectively. We estimate the coverage ratio of CITIC Bank would be around 205% in 2010.

Better-than-expected growth of profits

According to its announcement, the Group's profits increased significantly in 2010, its net profits would increase at least 50% yoy to RMB21.5 billion, about 6% higher than our previous expectation.

One of main reasons of large increase of profits is the obvious increase of NIM, which stimulate net profits to increase strongly. As at the end of Sep, the Group's NIM maintained on 2.65%, and net profit increased by 47.60% yoy to RMB17.193 billion. We forecast CITIC Bank's net profit would increase by 52.78% yoy to RMB21.876 billion in 2010.

The pressures of capital reduced

As at the end of Sep 2010, CAR and Core CAR of the Group were 11.66% and 8.80%, increased by 1.52 and dropped 0.37 percentage points compared with the end of 2009 respectively. We noted that decrease rate of the Group's core CAR has narrowed, which representing the pressures of the Group's capital reduced.

However we believe it will be easing the Group's capital pressures efficiently if the Right Issue with RMB26 billion announced previously would be completed in the middle of this year. Core CAR of CITIC Bank expects to up to 9% in 2010 and continue to increase to 9.5% in 2011.

Risk

NPL ratio might increase due to the growth of NPLs in the middle and long term;

Delay of Right Issue.

Valuation

We still use three-stage DDM, assuming that the ROE is 11.5%, the cost of equity is 10.5% and the long-term dividend payout ratio is 25%, value the reasonable price of the Group would be HK$7.35.

We give the 12-month target price of CITIC Bank at HK$6.98, 10% discount to its estimated price, and around 41% higher than current price of HK$4.94, equivalent to 10.9X P/E and 1.9x P/B 2011 respectively and maintain CITIC Bank on Buy rating.

Financial data

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