Incidents:

On October 30, China CITIC Bank released its report for the third quarter of 2024. 1-3Q achieved operating income of 162.2 billion, a year-on-year increase of 3.8%, and net profit to mother of 51.8 billion yuan, an increase of 0.8% over the previous year. The annualized weighted average return on net assets was 10.14%, down 1.16pct year over year.

Comment:

The revenue growth rate increased by 1.1 pct from quarter to quarter, and the profit growth rate corrected. The year-on-year growth rates of China CITIC Bank's 1-3Q revenue, PPOP, and net profit to mother were 3.8%, 3.2%, and 0.8%, respectively, up 1.1, 9, and 2.4 pcts from 1H24.

The main components of revenue: (1) net interest income increased 0.7% year over year, and the growth rate increased by 1.5 pct compared to 24H1. While the expansion rate remained stable, interest spreads increased by 2 bps quarterly to form a strong support for interest income; (2) non-interest income increased 11.2% year over year, increasing 0.7 pct from 24H1. Among them, the decline in net fee revenue narrowed, and the growth rate of net other non-interest income decreased 4.5 pct from quarter to quarter.

Dividing the year-on-year profit growth structure, scale expansion and non-interest income were the main contributors, driving performance growth rates of 8.2 and 9.7 pct respectively; judging from marginal changes, the main boosting factors include: the decline in net interest spreads narrowed, and non-interest income and provisions contributed slightly; the main factors that dragged down mainly include: negative operating expenses were dragged down and widened.

The rate of table expansion has been steady and declining, and the intensity of credit investment in key areas is high. In 24Q3, the year-on-year growth rates of China CITIC Bank's interest-bearing assets and loans were 3.2% and 3% respectively. The growth rates decreased slightly by 0.5 and 0.9 pct respectively from the end of the previous quarter. The share of loans in interest-bearing assets fell slightly by 0.3 pct to 67% from the end of the previous quarter, up 0.9 pct from the beginning of the year. Loan investment is rising, and key areas maintain a high level of credit investment intensity. By the end of 24Q3, loan balances for medium- to long-term, strategic emerging industries in the manufacturing industry and the private economy had increased by 11.2%, 10.2%, and 6.2%, respectively, compared to the beginning of the year, all higher than the 2.4% increase in various loans during the same period. Interest income assets increased by 94.5 billion in a single quarter. Among them, loans, financial investments, and interbank assets increased by 38.1 billion, 27.9 billion, and 28.5 billion, respectively. The increase was mainly contributed by non-credit assets. In terms of the new credit structure, 3Q increased 3.4, 9.6, and 25.1 billion in public loans, retail loans, and bill discounts, respectively, and bill financing increased support for credit investment.

The growth rate of debt has remained stable, and the growth rate of deposits has corrected. At the end of 24Q3, China CITIC Bank's interest-bearing liabilities and deposits increased by 2.9% and 2.8%, respectively. The growth rate increased by 0.8 and 3.2 pct, respectively, from the end of the previous quarter. In particular, the deposit growth rate ended a trend of slight negative growth for 2 consecutive quarters. The estimate is related to the gradual fading of the impact of the centralized rectification of “manual interest compensation” deposits. 3Q interest-bearing debt increased by 151.5 billion, of which deposits increased by 94.4 billion, accounting for 60% of the incremental contribution; as of the end of 24Q3, deposits accounted for 68.3% of interest-bearing debt, which was roughly the same from month to month, up 1.8 pct from the beginning of the year. Further examining the deposit structure, 3Q added 75.4 billion and 19 billion respectively to public and retail deposits, which contributed 80% to the increase in public deposits.

The 1-3Q net interest spread rebounded 2 bps month-on-month compared to 24H1, mainly benefiting from the improvement in debt costs. The company disclosed a net interest spread of 1.79% in 1-3Q, an increase of 2 bps over 24H1. Interest spreads have improved for two consecutive quarters since 24Q2.

The estimated return on interest-bearing assets and the cost ratio of interest-bearing debt were 3.74% and 2.03%, respectively, down 4 bps and 5 bps from 24H1, respectively. Interest spreads improved month-on-month, and the effective pressure on the cost of the main beneficiary debt decreased. Looking ahead, factors such as lower interest rates on stock mortgages and multiple rounds of LPR cuts during the year will still suppress asset-side pricing, but the banking system's continued push to control debt costs will help hedge against the pressure to narrow interest spreads. On October 21, China CITIC Bank lowered the listed interest rate again. The decline was higher than in previous rounds. The effect of the current interest rate reduction was immediately apparent. The effects of the regular interest rate reduction will gradually be released along with the rolling maturity repricing of products, which can partially ease the pressure on interest spreads.

Non-interest income increased 11.2% year over year, slightly increasing the growth rate by 0.7 pct compared to 24H1. The company's 1-3Q24 non-interest revenue grew 11.2% year-on-year, up 0.74pct from 24H1, and its share of revenue fell 1.2pct to 32.2% compared to 24H1. Among them, (1) net processing fees and commission revenue fell 10% year over year to 24.3 billion, and the decline was 4.2 pcts narrower than 24H1. Fee growth continued to be under pressure. Estimates were mainly affected by factors such as capital market fluctuations, changes in investor risk appetite, and fee cuts and concessions; (2) net other non-interest income increased 39.7% year on year to 27.9 billion, down 4.5 pcts from 24H1. Among them, investment income of 22 billion (6.9 billion yuan increase over the previous year, YoY +45%) was an important booster.

The defect rate decreased by 2 bps to 1.17% from the end of the previous quarter, and the level of provision increased steadily. At the end of 24Q3, China CITIC Bank's non-performing loan ratio and attention rate were 1.17% and 1.69% respectively, which changed by -2bp and 7bp respectively from the end of 2Q. In terms of provision, the company accrued credit impairment losses of 51.4 billion in 1-3Q, a year-on-year decrease of 2.2%, of which 17 billion was calculated in 3Q. By the end of 24Q3, the provision coverage rate was 216%, up 9.2 pct from the end of 2Q, and the loan ratio was 2.53%, up 7 bps from the end of 2Q.

The RWA growth rate decreased by 1.4 pct from 2Q, and capital adequacy ratios at all levels increased steadily. The risk-weighted asset growth rate at the end of 3Q was 4.7%, a slight decrease of 1.4pct from the end of 2Q. As of the end of 24Q3, China CITIC Bank's core Tier 1, Tier 1, and capital adequacy ratios were 9.5%/11.61%/13.78% respectively, up 7/4/9 bps from the end of 2Q.

At the end of 24Q3, due to debt-for-equity swaps, the total share capital increased slightly to 53.488 billion.

Profit forecasting, valuation and ratings. Driven by the dual wheels of “stabilizing interest spreads” and “expanding income”, China CITIC Bank's revenue growth rate increased 1.1 pct from quarter to quarter in the first three quarters, and the profit growth rate recovered. According to the mid-term dividend plan, a dividend of 1,847 yuan (tax included) will be distributed for every 10 shares, totaling about 9.87 billion yuan, with a dividend ratio of 29.2%. The current dividend rate for A/H shares of the company's stock price (in the past 12 months) is 5%/7.4%, respectively, which has good “high dividend” characteristics and valuation appeal. Due to the small increase in share capital, the 2024-2026 EPS forecast will remain at 1.29/1.34/1.39. The current stock price corresponds to the PB valuation of 0.51/0.47/0.44 times, respectively. As of November 1, the proportion of CITIC bonds not converted to shares was 28.4%. It is expected that the company will continue to have strong performance to meet its demands, enhance its ability to replenish endogenous capital while promoting convertible debt-to-equity swaps, and maintain the “increase in holdings” rating.

Risk warning: If the macroeconomic downturn exceeds expectations, it may increase the potential risk of exposure to large amounts of risk.