As China's economy still faces some complexities and China Construction Bank (CCB) continued to make contribution to support the real economy, its attributable net profit dropped 2.2% YoY in 1Q24, below our expectation, against 2.3% YoY growth in 2023. Its net interest income decreased 2.2% YoY in 1Q24, against negative YoY growth of 4.1% in 2023. Its net fee and commission income continued to decrease in 1Q24 amid weak investment sentiments. As of end-March 2024, its loans/deposits increased 4.9%/6.2% from end-2023. NPL ratio dropped slightly in 1Q24 as asset quality remained solid. We believe CCB will report positive earnings growth in 2024 as NIM will only decline slowly in 2H24 and solid asset quality will be maintained in 2024. Valuation is very attractive.
Key Factors for Rating
Asset quality remained solid in 1Q24. Its NPL ratio was 1.36% at end-March 2024, down from 1.37% at end-December 2023. We expect its NPL to stay at 1.36% in 2024. Its allowance to NPLs reached 238.2% in 1Q24 against 239.9% in 2023.
NIM dropped in 1Q24. As one of the largest banks in China, CCB has made more contributions to support the real economy, which dragged its NIM in 1Q24. We noted that its NIM stood at 1.57% in 1Q24, down 13bps from 2023. We expect its NIM to drop 19bps in 2024.
Its net fee and commission income decreased in 1Q24. Its net fee and commission income decreased 8.7% YoY in 1Q24, against negative growth of 0.3% YoY growth in 2023. We expect its net fee and commission income to report small decrease in 2024.
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 0.37x 2024E P/B. Its dividend yield may reach 8.6% in 2024. Given its steady expansion in scale, solid asset quality and decent ROE, we believe the bank is undervalued. We expect its ROAE to reach 10.8% in 2024. We revised down our target price from HK$8.23 to HK$8.21, based on about 0.6x 2024E P/B. Maintain BUY rating.