Returning to an era of predictability
- 1H22 net profit was up by 5.4% yoy (2Q22: 3.9%; 1Q22: 6.8%), supported by a lower effective tax rate and credit costs.
- This marks a return to a predictable era of low-mid single-digit net profit growth seen over the FY15–FY20 period.
- 1H22 PPOP growth yoy slowed to 1% (2H21: 3%; 2Q22: 0%; 1Q22: 2%), due to lower NIM, weaker fee income and rising cost-to-income ratio.
- Reiterate an Add rating. Unchanged TP of HK$8.
1H22 saw a return to stable profits, after a strong FY21
1H22 net profit was up by 5.4% yoy (2Q22: +3.9%; 1Q22: +6.8%), supported by a lower effective tax rate (1H22: 15.9%, -0.5%-pts yoy) and lower credit costs (1H22: 1.07%, – 19bp yoy). Payments to holders of preference shares and perpetual bonds did not impact 1H22’s net profit growth, unlike peers. We believe that this marks the return to a predictable era of low-mid single-digit net profit growth that we had seen over the FY15– FY20 period, with FY21’s double-digit net profit growth an anomaly. 1H22 net profit comprised 50% of our FY22F estimate.
What we liked about the 2Q22 results
i) 2Q22 non-performing loan (NPL) ratio was 1.4%, flat qoq. 1H22 mix of loans over 90 days overdue was 0.63%, -5bp hoh. However, 1H22 mix of loans under 90 days overdue was 0.34%, +8bp hoh. 1H22 special mention loans ratio was 2.63%, -6bp hoh; ii) NPL recognition standards tightened further, with 1H22’s NPL recognition ratio (NPLs/loans over 90 days overdue) at 223%, +14% pts hoh and +22% pts yoy; iii) 2Q22 core Tier 1 ratio was 13.4%, +17bp yoy and the highest of the banks under our coverage; iv) 1H22 credit costs were 1.07%, -19bp yoy; v) 1H22 effective tax rate was 15.9%, -0.5%-pts yoy.
What we did not like about the 2Q22 results
i) 2Q22 net interest margin (NIM) was 2.05%, -10bp qoq & -10bp yoy; ii) 1H22 cost-to-income ratio was 4.3%, up 1.2% pts yoy; iii) 2Q22 net fee income fell yoy by 2% (1Q22: 0%; 1H22: -1%); iv) 2Q22 pre-provisioning operating profit (PPOP) fell yoy by 0.5% yoy (1Q22: +2.2% yoy); v) 2Q22 loan-to-deposit ratio (LDR) was 84.1%, +3%-pts qoq; vi) 1H22 demand deposit mix was 51.1%, -2.5%-pts yoy and -1.8%-pts yoy.
What else we thought was interesting about the 2Q22 results
i) 2Q22 provisioning coverage ratio was 243%, -3% pts qoq; ii) 1H22 mortgage mix was 31.9%, -218bp hoh. 1H22 mortgages rose 1.5% hoh and 6.1% yoy; iii) 1H22 domestic corporate loans rose 10.5% hoh and 14.4% yoy; iv) 2Q22 loan growth yoy was 12.3% (1Q22: 11.7%); v) 1H22 ROE was 12.6%, -51bp yoy.
Reiterate Add rating; Unchanged TP of HK$8
We value CCB using a stress-test adjusted GGM. Potential re-rating catalysts are improving asset quality and economic recovery. Key downside risks: a worse-than-expected NIM trend and greater social responsibilities.