建设银行:Quality growth despite some margin pressure

On 28Aug, CCB reported 1H19net profit of RMB 154.2bn, up 4.9% YoY andaccounting for 57.0%/58.4% of CMBIS/consensus full-year estimates. 1H19PPoP had a decent growth of 6.7% YoY. Net interest income rose moderatelyby 4.6% YoY as margin narrowed, yet non-interest income (incl. fees, tradinggains, and investment return) picked up 12.8% YoY. Thanks to slowerexpansion in opex and impairment charges, bottom-line earnings grew faster at5.5%% YoY in 2Q19(vs 4.2% YoY in 1Q19). 1H19annualized ROE declined1ppt YoY to 15.9%, still the highest of the Big-4banks. We initiate coverageon CCB A-share with BUY rating.n Results positive: 1) 1H19net fee income was up 11.1% YoY, driven bybank card, wealth management, and electronic banking services. As a result,CCB’s non-interest income as of total revenue increased 1.5ppt YoY to27.2%; 2) Asset quality continued to improve, as NPL ratio fell 3bp QoQto 1.43% and provision coverage climbed 3.8ppt to 218%. However, we notethat overdue loans rebounded 18.2% HoH, and we would seek formanagement’s explanation during results briefing. 3) Credit growth wasprudent. The Bank maintained a stable growth in mortgage (+5.3% HoH)while reduced personal consumption loan (-17.1% HoH). Lending to utilityand construction segments, and discounted bills accounted for near 50% ofnew corporate loans. 4) Capital position remained strongest in thesector, as CET 1/total CAR only slid 13bp/8bp QoQ to 13.7%/17.1% due toappropriation of cash dividend in 2Q19.n Results negative: 1) 2Q19NIM contracted 4bp QoQ to 2.25%, as liabilitycost went up faster than asset yield. Given higher proportion of depositfunding, CCB may not benefit as much as most joint-stock peers duringmonetary loosening, but we believe the weaker margin trend was withinexpectation. 2) Proportion of demand deposit fell 0.5% HoH to 53.1%,leading to rising deposit cost thereby smaller net interest spread. 3) Assetgrowth slowed to 0.8% in 2Q19from 4.2% in 1Q19, as interbank assetspulled back 17% QoQ.n Initiate CCB-A with BUY rating and RMB 8.8TP. We expect a positiveshare price reaction to 1H19results. CCB-A currently trades at 0.83x FY19EP/B, in line with its past 5-year mean. Our TP of RMB 8.8is based on GGMderived target P/B of 1.05x and FY19E BPS of RMB 8.3.