China CITIC Bank (998 HK):Duckling now a swan

Maintain Outperform rating and raise target price from HK$5.20 to HK$5.50. CITIC Bank, keen to stay ahead of the curve in internet financing, is collaborating closely with Alibaba and Tencent. Meanwhile, fee income growth has become the bank’s main earnings driver as it contends with the effects of interest rate liberalization. Our HK$5.50 target price is equivalent to 0.8x 2014F P/B.

Pioneer in internet financing. CITIC Bank has responded quickly to the challenges from internet companies. For instance, it is the only custodian bank for internet money market funds (MMF) and it was the first to introduce MMFs that support ATM cash withdrawals. The recent suspension by the PBOC of the bank’s initiative to issue virtual credit cards does not seem to have cooled its ambition to stay at the leading edge of internet financing.

Resilient 1Q14 results on strong fee income. CITIC Bank reported 1Q14 net profit of RMB10.7b, up 16.1% YoY on stronger-than-peers fee income growth of 71.4% YoY. ROE and ROA were 18.73% and 1.16%, still lower than comparable peers though ROE is slowly recovering.

Greater investment in non-standard assets. Similar to many of its peers, the bank’s investment receivables surged RMB175b or 58% QoQ in 1Q14 on higher investment in specific asset management plans (products similar to trust loans). We are keeping an eye on the liquidity risks attendant on increased investment in this area.

Credit costs to come down after spike in 1Q14. Credit costs were up 37bp YoY to 93bp in 1Q14 after the bank applied a profit-smoothing accounting treatment. We expect credit costs to normalize over the remainder of the year.