China Everbright Bank's (CEB) attributable net profit increased 2.5% YoY in 3Q23 and 3.0% YoY in 9M23, largely in line with our expectation, against 3.3% YoY growth in 1H23. Its net interest income growth remained sluggish in 9M23, which was mainly due to mixed effects of weak growth in interest-earning assets and decrease in NIM. Its net fee and commission income dropped 11.4% YoY in 9M23, against negative growth of 9.4% YoY in 1H23. As of end-September 2023, its loans/deposits increased 5.3%/4.3% from end-2022. CEB's asset quality decreased as NPL ratio increased in 9M23. Looking ahead, we expect CEB to report small growth in net profit in 4Q23 as the bank will continue to provide financial support to the real economy. Valuation remains cheap. Maintain BUY rating.
Key Factors for Rating
Asset quality decreased in 9M23. Its NPL ratio reached 1.35% at end- September 2023, higher than 1.3% at end-June 2023 and 1.25% at end- December 2022. Meanwhile, its allowance to NPLs reached 175.65% at end- September 2023, against 188.6% at end-June 2023 and 187.9% at end- December 2022. We expect its NPL ratio to increase to 1.36% in 4Q23.
Net interest income remained sluggish in 9M23. Its net interest income decreased 4.3% YoY in 9M23, which might be mainly due to the decrease in net interest margin (NIM) and is in line with overall banking sector trend. We expect its NIM to drop 4bps in 3Q23 after declining 19 bps in 1H23. We expect its NIM to drop another 1bps in 2H23.
Net fee and commission income decreased in 9M23. Its net fee and commission income decreased 11.4% YoY in 9M23 amid weak investment sentiments. As a result, the proportion of net fee and commission income in total operating income may reach 17.0% in 9M23, against 18.4% in 9M22.
Key Risks to Rating
The bank might be under strong pressure to provide more support to the real economy if China's economy slows down significantly.
Valuation
Its H shares are now trading at 0.27x 2023E P/B, which remains quite cheap.
We expect its ROAE to reach 9.5% in 2023, lower than sector's average level.
Its 2023E dividend yield will be around 9.4%. We maintain our target price of HK$3.46, based on about 0.4x 2023E P/B. Maintain BUY rating.