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China CITIC Bank（998.HK）Boosting Performance and Improved Assets Quality

Tuesday, February 19, 2008

5166

China CITIC Bank(998)

Recommendation on 19 February 2008
Recommendation	Buy
Target Price	$6.610

Weekly Special - 9618 JD.com

Summary

The report of annual performance announced in 2007 lately by China Citic Bank demonstrates a boosting gain in net profit, seeing over 100% increase than the figure of 2006. Meanwhile, the equity quality of Citic Bank remains improved. The rate of non-performance loan is around 1.5%. The provisioning coverage rate is 110% or so.

The rising performance of China Citic Bank in 2007 roughly matches with our expectation. However the business structure of the Group holds less obvious advantages in colleague companies. We have prudential estimation about its performance in the future. Yet due to the slump of its stock price recently, its value has been far lower than our TP. Thus, we give Citic Bank a “buy” rating and estimate its 12-month target price to be HK$ 6.61, 28% premium than its current price.

Rapid Increase in Assets Scale

Based on its report of 3rd quarter performance in 2007, as of September 2007, China Citic Bank ranked the last in total assets scale among those China main land banks listed in Hong Kong, value reaching around RMB 930 billion, having 31.42% jump comparing with the figure in the end of 2006. Yet due to its relevantly small scale of assets, its speed of growth tops those of other colleague companies.

Besides, the total loans and advances of clients and the total equity scale of Citic Bank maintains steady growth. The net value of loans and advances of clients after provisions for impairment losses takes up 64.2% of total assets in 2006 while in 2004 the proportion was 58.9%. We expected that such figure in 2007 will be at around 61%.

Picture 1： Increase in Total Assets of China Citic Bank during 2004-2007

Table 1：proportion of individual loans in total loans and advances of clients of China mainland banks listed in Hong Kong in the end of June 2007:

(Data source: company’s documents，Phillip Securities)

Table 2：rate of non-performance loan of China Mainland banks listed in Hongkong in 2007.

(Data source: company’s documents，Phillip Securities)

Table 3：estimated increase in 2007 net profits of all banks listed in China mainland compared with that of 2006

(Data source: company’s documents，Phillip Securities)

(Data source: company’s announcement, Phillip Securities)

Equity structure to be improved.

Benefiting by the great support from the parent company CITIC Group, Citic Bank has a steady growth in its loan business. Prominent contribution came from company loan operation. Yet the equity structure needs to be further improved, especially the proportion of retailing loan operation in the general loan business should be increased.

Company loan is the largest source of loan and revenue of Citic Bank. As of June 2007, company loan operation took up 80.9% client loans and advances, totally RMB 432.903 billion.

The raise in company loan will help increase the profitability of bank assets. However, due to the current monetary policy adopted by central government to have further deflation, to dramatically raise interest and deposit provision rate and to suppress the increase in commercial bank interest, Citic Bank will confront a great negative impact on the growth of its loan and net interest revenue. That is also one of the most important reasons that we have a prudential prospect upon the growth of Citic’s further business.

Besides, because the company loan proportion in total loan operation of Citic business is overweighed, the individual loan mainly from retailing bank services will have slow raise. Comparing with other listed bank, Citic is apparently weak in its retailing service. As of June 2007, great pressure came from its competitors. The individual loan occupied 10.60% in total loan service, far less than the average level of the banking community.

Pic. 2：Proportion of all kinds of loan services in client loan and advances operation of Citic Bank (by types of client)

(Data source:：company’s website, Phillip Securities)

Equity Quality Keeps Improving

Due to the contribution from Parent Company to Citic in hope to offset its non-performance loan of the bank and to further improve the loan quality, the non-performance loan rate keeps declining. However Citic holds a portion of America’s sub-prime bonds, according to the report of 3rd quarter in 2007, its total amount only reached USD 3 million. Thus, the total equity quality will be slightly affected by the America’s sub-prime crisis.

According to the estimation made in 2007 business report, the non-performance loan rate of Citic keeps falling. In 2007, such figure is expected to decline to 1.5%, one of the most serious-falling banks in community.

Rapid Growth of Profits

According to the business report of 2007, Citic Bank had a great jump in net profit in 2007, seeing over 100% gain comparing with that of 2006, which accords with our expectation. Based on the net profit in 2006 totaling RMB 3.858 billion, the net profit in 2007 will exceed RMB 7.716 billion by estimation. Its rate of net profit increase in 2007 according to the current announced estimation is among the highest of those listed banks.

Risks

In 2008, the central government will continue to perform its “restrict” monetary policy. As for the Citic Bank that heavily depends on the its company loan service, its loan increase potential will be suppressed as well as its cost of finance might increasing so that the profitability of equity might be impacted.

Evaluation

Generally speaking, the primary businesses of Citic Bank have less obvious competitive advantages to other listed banks. Its equity structure needs to be further improved. If the bank expands its field into retailing business and achieves obvious performance, certainly the investors will be greatly encouraged and our view towards the company will be more optimistic.

According to the results of our estimation of profits, calculated with method of relevant evaluation by 2.2 times of P/B, the reasonable price of Citic’s stock is HKD 6.45 for each share.

If we use evaluation of three-steps DDM, assuming that the return rate of stock capital is 13%, the cost of stock capital is 10% and the long-term coupon rate is 45%, the reasonable price of Citic stock is HKD 6.77 per share, which is approximately the result got by method of relevant evaluation.

We estimate the 12-month PT of Citic Bank at HKD 6.61, the average of the results from the two calculation methods aforementioned. The result sees 28% premium comparing with the current price of HKD 4.77, 24 times of EPS in 2008, equaling 2.6x P/B in 2007 and 2.3xP/B in 2008.

Table 4： Evaluation of CITIC’s Three-steps DDM

(Data source: company’s documents，Phillip Securities)

Financial Materials:

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Author

China CITIC Bank（998.HK）Boosting Performance and Improved Assets Quality

Summary

Rapid Increase in Assets Scale

Equity structure to be improved.

Equity Quality Keeps Improving

Rapid Growth of Profits

Risks

Evaluation

Financial Materials:

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