China Construction Bank’s 2022 Profit Growth Stronger Than Expected on Lower Provisioning Costs

China Construction Bank’s 601939 net profit growth for full-year 2022 came in at 7.1%, accelerating from the 6.5% growth in the first nine months and higher than we expected. With the dividend payout ratio steady above 30%, the 6.9% year-on-year increase in 2022′s dividend to CNY 0.389 per share is another positive. However, the earnings growth was primarily driven by declines in provision expense, which was down 50% year on year in the fourth quarter and 8% for the full year. Preprovision operating profit declined 1.9% for the year while total revenue declined 0.2%. Net interest margin was slightly weaker than our expectation of a high-single-digit decline from 2021. Full-year NIM contracted 3 and 11 basis points, respectively, from the first three quarters and 2021, as the average loan rate fell 8 basis points while the average deposit rate rose 6 basis points from 2021. The contracting NIM was also due to an unfavorable loan mix change. As retail loan demand collapsed in the last quarter of 2022, CCB allocated 86% of new loans to low-yield discounted bank notes.

With only minimal changes to our assumptions, we have retained our fair value estimate at CNY 6 per A share and HKD 6.20 per H share. The stock appears undervalued, trading at a historically low 0.4 times 2023 price/book value and 8.8% dividend yield. The bank has a solid record of increasing dividends with a steady payout ratio above 30% since 2016. We expect its prudent underwriting, leading position in infrastructure project financing, and strong funding cost advantage will translate to resilient average net profit growth of 6% during our forecast period. Rental housing, inclusive finance, and technology are CCB’s three top strategic focuses, and we expect such initiatives to provide better growth momentum for the bank in the long run.