China Construction Bank continued to deliver impressive earnings growth for 2012. Thanks to solid returns and the issuance of CNY 40 billion subordinated debt in late 2012, CCB’s tier-one capital and tier-two capital adequacy ratios climbed to 11.3% and 14.3%. Net profit surged 14.3% from 2011 to CNY 193.6 billion, and return on equity reached 21.98%, both in line with our forecast of 14% growth in net profit. There were no real surprises in the result and we remain comfortable with our CNY 5.50 fair value estimate.
As expected, total assets grew 13.77% from 2011, in line with China’s M2 growth of 13.8%. However, total loan balances expanded even faster at 15.64%, slightly above the 15% growth in China’s total bank credit. We believe the pickup in loan growth 2011) is partly due to CCB’s response to the call by the government to support infrastructure projects and key strategic industries in the second half of 2012.
Another upside surprise from the earnings release lies in the net interest margin (NIM). Despite a slowing economy and two interest rate cuts in 2012, CCB’s NIM widened to 2.75%, from 2.70% in 2011. The widening NIM demonstrated its industry-leading funding cost advantage and strategic success in rebalancing its loan structure. Even after deposit rate deregulation in the third quarter of 2012, CCB’s inherent funding cost advantage remained roughly intact; its deposit costs merely expanded to 1.98% from 1.61%, supported by a pickup in demand deposits driven by the gradually rebounding economy. CCB’s impressive performance on the loan front to some extent alleviated our concerns that the bank may lag peers in rebalancing its assets mix. Over the year, CCB lowed its corporate lending to 66% of total loans by contracting loans to local governments and ‘overcapacity’ industries. Personal lending increased to 27% of the total loan book. Our investment thesis is intact as it is increasingly apparent CCB is focusing on its core competitive strengths in infrastructure lending and home mortgage, both reflecting impressive declines in non-performing loan (NPL) ratios. Compared with the 0.99% overall average NPL ratio, infrastructure and home mortgage NPLs improved further to 0.43% and 0.18% (versus 0.81% and 0.20% in 2011).
Exposure to loan categories for property and government platform loans shrank to 5.5% and 5.4% respectively, while lending to higher-yield small and micro enterprises, and personal credit cards increased to 9.9% and 2.4% of total loan book respectively.
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