China Citic Bank Earnings: Asset Quality Improves Further; Fee Income Growth Weakens

China Citic Bank’s 601998 first-quarter revenue contracted at a larger-than-peer pace of 5% year on year, dragged by the 0.9% and 11.5% declines in net interest income and fee income, respectively. The contraction in net interest income was largely in line, as the 8% year-on-year loan growth was offset by a 15 basis point decline in net interest margin.

We retain our fair value estimate of CNY 5.20 per A-share and HKD 5.70 per H-share. While we see the H-shares as undervalued, trading at 0.3 times 2023 price/book value, we prefer China Merchants Bank and Ping An Bank for their leadership positions in retail banking. We retain our thesis that Citic has room to support resilient earnings growth in 2023 thanks to its improved asset quality. Longer-term, the bank should be able to reap increasing synergies from its parent group in customer engagement, wealth management, and comprehensive financing business.

The fee income decline looked weaker than peers’ and we believe Citic experienced significant challenges in the first-quarter sales of bank wealth management products and mutual funds. According to the Asset Management Association of China, the total number of stock and hybrid funds distributed through Citic declined 15% year on year. The challenges were industrywide, as first-quarter issuance of total mutual funds declined 15% while the issuance of stock and hybrid funds contracted 52% year on year.

Positively, the bank experienced resilient growth in customer wealth, with retail assets under management and size of bank wealth management products growing 2.5% and 7.8% from end-2022. We expect improvement in investor sentiment and household consumption to support Citic’s custody and agency fees, as well as card fees, which are the two largest contributors to the bank’s fee and commission income. Thus, we expect Citic’s fee income growth to bottom in the first half and gradually recover in second-half 2023.