Q4 Results: Citic Reports Improving Asset Quality and NIM Despite Market Challenges

China Citic Bank’s 601998 2022 results were slightly better than our expectations. Total revenue and net profits in 2022 grew 3.3% and 11.6% respectively from 2021. Growth in fourth-quarter revenue and preprovision operating profits were resilient at 3.3% and 1.5% respectively, flat from the level in the first three quarters and despite mounting industrywide challenges in the fourth quarter. We believe stronger-than-expected earnings growth was underpinned by two positive trends, including a quarter-on-quarter increase in net interest margin and improved credit quality outlooks as management noted the speed of bad debt formation has peaked thanks to its efforts of cleaning up the loan book during 2019 to 2022, and China’s policy easing. The bank’s NPL ratio and NPL formation rate both declined to a new low of 1.27% and 1.22% respectively since 2014. The NPL balance contracted 3.3% from 2021. In contrast to flat or declining provision coverage ratios of its peers in a challenging 2022, Citic reported a 20-percentage-point increase to 201% from 2021. The corporate NPL ratio improved 33 basis points to 1.72%, with NPL ratios of property and construction loans declining 55 and 107 basis points respectively from 2021.

We retain our fair value estimate of CNY 5.20 per A-share and HKD 5.70 per H-share as the positive factors were largely offset by our more conservative view on NIM in the first half of 2023. H-shares are undervalued; the 2023 P/B ratio is trading at nearly the historical trough of 0.26 times. We expect its improved credit quality and reduced exposure to the property sector should help ease the market’s concerns. New management’s asset derisking efforts over the past four years showed positive progress and we expect this trend will continue to support Citic’s asset quality in 2023. The results also highlight the bank is gaining increasing synergies from its parent group in customer engagement, wealth management, and comprehensive financing businesses.