Date: October 7, 2024
Broker: CGS International
Benefiting from Policy Measures
A series of policy measures implemented in late September and early October 2024 have positively impacted investor sentiment toward China Construction Bank (CCB). These measures are aimed at alleviating concerns surrounding macroeconomic uncertainties and the exposure to the property market. The coordinated efforts from policymakers are expected to rejuvenate stocks and consumption while stabilizing the property sector. CCB is poised to benefit from these property-related measures due to its strong mortgage loan mix, which is the highest among its peers in the first half of 2024.
Improving Asset Quality Outlook
Investor concerns regarding asset quality are likely to diminish due to the recent policy measures. These efforts could stabilize CCB’s non-performing loan (NPL) ratio, which had risen in the first two quarters of 2024 after showing improvement in 2023. The correlation between NPL ratios and banking sector share prices suggests that as asset quality improves, so will CCB’s valuation. CCB’s policy risk valuation discount was reduced from 45% to 25%, indicating an improved risk outlook.
Financial Performance Adjustments
CCB has faced pressures on its pre-provision operating profit (PPOP) for the 2024-2026 forecast period. The FY24-26F EPS has been adjusted downward by 1.8-6.8%, primarily reflecting lower expectations for non-interest income and PPOP growth. The bank has been experiencing falling net interest margins (NIM) due to both local and global rate cut cycles. Despite these challenges, the FY24-26F EPS is projected to remain relatively stable.
Valuation and Rating
CCB’s target price has been revised upward to HK$11.10 from a previous target of HK$7.20. The upward revision is primarily attributed to reduced policy risks, though slightly offset by lower projected EPS. The bank’s dividend yield remains high for FY24F, which is considered a positive for investors. The key downside risks to this valuation include the continued decline in NIM and increased social responsibilities that may affect profitability.
Financial Forecasts
- Net Interest Income: Expected to decline from RMB 617,233 million in 2023 to RMB 594,985 million in 2024, before further decreasing to RMB 562,635 million in 2025.
- Non-Interest Income: Projected to decrease to RMB 123,244 million in 2024 from RMB 128,382 million in 2023.
- Operating Revenue: Forecasted to decrease from RMB 745,615 million in 2023 to RMB 718,228 million in 2024 and further to RMB 684,274 million in 2025.
- Net Profit: Slight growth expected, from RMB 327,543 million in 2023 to RMB 329,405 million in 2024, and RMB 335,254 million in 2025.
Key Financial Ratios and Metrics
- ROE: Declining trend from 12.3% in 2022 to 9.8% projected in 2026.
- Loan-Deposit Ratio: Expected to increase from 86.8% in 2023 to 93.2% by 2026.
- NPL Ratio: Projected to slightly increase from 1.36% in 2023 to 1.39% by 2026.
- Dividend Yield: Estimated to remain attractive, rising from 7.17% in 2023 to 7.56% in 2026.
ESG Highlights
In 2023, CCB received a B- combined ESG score from LSEG. The bank has made significant strides in inclusive finance, leveraging fintech and big data to support innovation-driven growth and social empowerment. CCB also achieved its goals in energy conservation, with significant reductions in electricity consumption over the past five years. The bank introduced China’s first green bond index, the CCB-Wind Green ESG Bond Index, at the Luxembourg Stock Exchange in May 2021. CCB aims to further support China’s carbon neutrality goals by enhancing its green finance system and adjusting its credit structure to support responsible financing.
Risks and Challenges
CCB faces risks tied to a slower-than-expected economic recovery in China, which could result in higher-than-anticipated pressures on asset quality. Additionally, further loan prime rate (LPR) cuts could compress the bank’s net interest margins even more, potentially affecting profitability. Regulatory risks, particularly related to social responsibilities, are another area of concern for the bank’s long-term performance.
