Incidents:

On October 30, China Construction Bank released its 2024 three-quarter report. In the first three quarters, the company achieved revenue of 569 billion yuan, a year-on-year growth rate of -3.3%, and net profit to mother of 255.8 billion yuan, a year-on-year growth rate of 0.1%. The annualized weighted average return on net assets (ROAE) was 11.03%, a year-on-year decrease of 1 pct.

Comment:

The negative increase in revenue narrowed, and the year-on-year growth rate of performance corrected. The year-on-year growth rates of CCB's revenue, profit before provision, and net profit to mother in the first three quarters were -3.3%, -4.2%, and +0.1%, respectively. The growth rates changed by +0.3, -0.1, and +1.9pct respectively compared to 1H24. The 1-3Q net interest income and non-interest income growth rates were -5.9% and 6.8%, respectively, changing -0.7 and +4.7pct from the first half of the year; the credit impairment loss/revenue and cost to revenue ratios were 19.3% and 24.4%, respectively, down 1.9 pcts and increased 0.7 pct, respectively. Split the 1-3Q profit growth structure: scale is the main contributor, driving the performance growth rate by 14pct; judging from marginal changes, the boosting factors mainly include accelerated growth in non-interest income, increased provision and positive income tax contributions; dragging factors include increasing pressure on narrowing interest spreads and weakening positive contribution to operating expenses.

The expansion of financial statements has been accelerated, and credit growth in key public areas has been maintained at a high level. At the end of 3Q24, the year-on-year growth rates of CCB's interest-bearing assets and loans were 8.7% and 8.9%, respectively. The growth rates changed by +3 and -1.2pct respectively from the end of 2Q. Inventory expansion has accelerated, and credit investment is still at a high level of intensity.

1) Looking at the incremental structure of interest-bearing assets, 3Q single-quarter loans, financial investments, and interbank assets increased by 303.4, 448, and -119.6 billion, respectively, with year-on-year increases of 220 billion, an increase of 219.1 billion, and a decrease of 1.08 trillion, respectively. Loans at the end of the quarter accounted for 64% of interest-bearing assets, which was basically the same in the same year. The company's low yield peer asset allocation was still under pressure during the quarter, but the growth rate increased during the same period last year. Core assets such as loans and bond investments grew steadily, and the asset-side structure continued to be optimized.

2) Looking at the incremental structure of domestic loans, 1.38, 0.12, and 0.38 credits were added to public, retail, and notes respectively in the first three quarters, with increases of -80.9, 36.7, and 359.1 billion respectively in the first three quarters, with increases of 10.4%, 1.4%, and 34.1% respectively from the beginning of the year; investment in public loans maintained a high level of prosperity, and the growth in bill financing provided strong support for credit expansion. At the investment level, loans in key areas remained high. At the end of the quarter, technology-based enterprises, strategic emerging industries, and green loans increased by 13.5%, 22%, and 18% compared to the beginning of the year, all higher than the 8.1%/10.4% increase in domestic loans/public loans. Retail loans during the quarter were affected by factors such as weakening demand and early repayment, and growth was relatively weak. However, along with incremental policies such as stock mortgage interest rate cuts, the loosening of the “four limits” of real estate, and the “trade-in” of consumer goods, demand for consumer consumption and home purchases continued to recover, and retail loan investment such as mortgages and non-residential consumer loans is expected to gradually improve in the future.

Deposits continued to grow at a slow rate, and the trend of regularization continued. The year-on-year growth rates of CCB's interest-paying liabilities and deposits at the end of 3Q24 were 9.5% and 2.3%, respectively, with changes of +4.4 and -1.5 pct from the end of 2Q, respectively. 3Q single-quarter deposits decreased by 172.4 billion, a year-on-year decrease of 401 billion, and the share of interest-paying debt fell 1.8 pct to 78% from the end of the previous quarter. The pressure to “defuse” general deposits is still there. Among domestic deposits, looking at the term structure, fixed-term and current deposits increased by 72.8 billion and -239.7 billion respectively during the quarter. Time deposits accounted for 57%, an increase of 0.6 pct over mid-year, and the trend of regularization continued. By customer type, 3Q personal and corporate deposits increased by 251.5 and -418.3 billion respectively, accounting for 59% of personal deposits at the end of the quarter, up 1.3 pct from the end of 2Q, and a solid and stable retail customer base.

The margin of decline in NIM has narrowed. 1-3Q's NIM was 1.52%, 2 bps narrower than in the first half of the year. Interest spreads are still in a downward channel but the decline is slowing down. Estimates show that on the asset side, the yield on interest-bearing assets was 3.2%, down 4 bps from the first half of the year. Affected by factors such as lower interest rates on stock mortgages, rolling repricing of stock loans, and lower interest rates on newly issued loans, the downward pressure on asset-side returns is strong. On the debt side, the interest-paying debt cost ratios were 1.89% respectively, down 2 bps from the first half of the year. The effects of cost control measures such as multiple rounds of interest rate cuts in the early stages are gradually showing, but under the trend of regularization, debt costs are still showing a certain degree of rigidity. Looking back, factors such as stock mortgage interest rate cuts and multiple rounds of LPR cuts during the year will still suppress asset-side pricing. On the debt side, the China Stock Bank once again concentrated on lowering listed interest rates in October. The reduction was higher than the previous rounds. The effect of the current interest rate reduction was immediately apparent. The effects of regular interest rate cuts will gradually be released along with the rolling maturity price of products, which can partially ease the pressure on interest spreads.

Non-interest revenue grew at an accelerated pace, accounting for 22.5% of revenue. The company's non-interest revenue in the first three quarters was 128.2 billion yuan (YoY +6.8%), up 4.7 pcts from 1H, and its share of revenue fell 0.8 pct to 22.5% from the first half of the year. Among them, (1) net revenue from processing fees and commissions was 85.1 billion (YoY -10%), accounting for a decrease of 3.3 pct to 66% of non-interest income compared to the first half of the year. Rates in insurance, fund and other industries have declined, and revenue growth in agency businesses is under relative pressure. (2) Net other non-interest income of 43.1 billion billion (YoY +72%), of which investment income was 14.7 billion (YoY +0.8%), fair value changes and net exchange earnings were 4.9 billion and 7.2 billion, respectively, up 8.9 and 7.2 billion from year on year, with a significant increase in the year-on-year low base.

The non-performing rate remains low, and there are plenty of provisions for surplus food. At the end of 3Q24, CCB's non-performing rate was 1.35%, which remained the same in the same year, maintaining a low level of operation. Non-performing goods increased by 4 billion during the quarter, and the increase decreased by 2.3 billion from the same period last year. Credit impairment losses during the 2Q quarter were 21.9 billion, up 7.1 billion from year on year. Credit impairment loss/revenue for the single quarter was 12%, down 3.5 pct year on year, and the drag on performance of the provision plan was reduced. The loan ratio at the end of the quarter was 3.2%, down 2 bps from the end of the previous quarter; the provision coverage rate was 237%, down 1.7 pct from the end of the previous quarter, and the overall risk offsetting capacity was stable.

The capital adequacy ratio increased at the safe margin. At the end of 3Q24, CCB's core Level 1, Tier 1, and capital adequacy ratios were 14.1%, 15%, and 19.4%, respectively, up 9 bps, 8 bps, and 10 bps from mid-year. The pace of corporate credit investment and bank expansion has slowed down, while the asset-side structure has been adjusted and optimized, resulting in a certain capital saving effect. The company issued two Tier 2 bonds with a total amount of 50 billion in July, which can effectively supplement Tier 2 capital even after the 20 billion Tier 2 bond matures during the 3Q quarter. In August, the company issued 50 billiontLAC non-capital bonds to help meet regulatory standards, while also complementing the company's debt capital and optimizing the cost of paying interest on bonds. In the future, along with the Ministry of Finance's special treasury bond issuance support to supplement the bank's core tier 1 capital, the bank's capital safety margin will be further strengthened, laying a solid foundation for credit investment and performance growth.

At the end of August, the company announced the 2024 mid-term profit distribution plan. The dividend amount was 49.3 billion yuan, the cash dividend per share was about 0.2 yuan (tax included), and the dividend ratio was basically stable at 30%. As of the close of trading on October 30, the company's A share dividend rate was 5.05%, and the H share dividend rate was 7.34%, which was superior to comparable peers, and the dividend ratio was very attractive.

Profit forecasting, valuation and ratings. CCB is steadily advancing the three major strategies of “housing leasing,” “inclusive finance,” and “fintech.” Technology is empowering the three dimensions of B+C+G business transformation and restructuring, creating a “second growth curve”, and achieving integration and progress along the “one and two curves”. The company's revenue and profit are growing steadily, credit investment is booming, and characteristic businesses such as housing leasing, green finance, and agricultural inclusion are developing well. With the gradual recovery of macroeconomic sentiment, the restoration of effective credit demand, and the continuous improvement of the superposition balance and liability structure, it is expected that the “volume, price, and insurance” of the company's operations will be rebalanced. We maintain the company's 2024-26 EPS forecast of 1.34, 1.36, and 1.4 yuan. The current stock price corresponds to PB valuations of 0.62, 0.58, and 0.54 times, respectively, and the corresponding PE valuations are 5.91, 5.81, and 5.65 times, respectively, maintaining a “buy” rating.

Risk warning: Economic recovery falls short of expectations, and downward pressure on loan interest rates increases. If interest rates on existing mortgages are lowered in the future, it may have an impact on NIM.