On the cusp of reversing a 8-year downtrend

■ We like CITIC, as we believe that it is well on track in FY21F for its first rise in ROE since FY13, which we see as a key ingredient for a P/BV re-rating.
■ CITIC has successfully shifted its loan portfolio to higher-margin consumer lending and away from corporate lending, which we view as a key positive.
■ Reiterate Add rating.TP cut to Rmb5 as we lift the corporate NPL ratio assumption in our stress-test adjusted GGM by 1.5% pt to 10.5%.

Elevated investor concerns over asset quality & policy risks

We think rising asset quality pressures are manageable from an EPS point of view for China CITIC Bank (CITIC), given its reasonably conservative provisioning coverage ratio (1H21: 189%) and non-performing loan (NPL) recognition ratio (NPLs/ loans that are more than 90 days overdue) of 126% in 1H21. Nevertheless, we think bank share prices could struggle to perform as we think both property sector’s stress and macroeconomic indicators are not likely to materially improve over the next few months. This could see investor concerns over asset quality and policy risks (such as ‘surrendering’ profits, which occurred in 2020. See Between a rock and a hard place, dated 18 Jun 2020) remain elevated, and thus make it difficult for these banks to materially re-rate in the near term.


Incorporating concerns via a 10.5% corporate NPL ratio assumption

We incorporate elevated investor concerns about the macroeconomy and asset quality by raising the corporate NPL ratio assumption that we use in our stress-test adjusted Gordon Growth Model (GGM), which is the basis of our target prices. Our new corporate NPL ratio assumption used in this stress test is 10.5% (vs. 9% previously).

Reiterate Add rating; TP cut to Rmb5

We value CITIC-A using a stress-test adjusted GGM, after factoring in historical A-H share valuation premiums. There are no changes to our FY21F-23F EPS estimates. However, due to a 1.5% pt higher corporate NPL ratio assumption used within our stress test, our TP is cut to Rmb5 from Rmb6.40. Potential re-rating catalysts are improving asset quality and economic recovery. Key downside risks: a worse-than-expected NIM trend and greater social responsibilities.