Solid fee income drives CITIC Bank's 8.1% y/y 1H14 bottom line growth

Steady net interest income also significantly contributed.

China CITIC Bank's bottom line growth of 8.1% y/y in 1H14 was mainly supported by strong fee income (+60.5% y/y) and steady net interest income (+12.7% y/y), but offset by aggressive provisions, where the credit cost was 1.08% in 1H14 (vs. 0.54% in 1H13 and 0.70% in 2H13).

According to a research note from Barclays, meanwhile, reserves/loans improved slightly to 2.3% while reserves/NPLs was flat at 193%.

Net fee income reached RMB 12.8bn in 1H14, up a strong 60.5% y/y (or +51.6% y/y in 2Q14), mainly driven by broad-based growth, with special strong growth momentum seen in bank card fees (+50.5% y/y in 1H14), consultancy & advisory fees (+47.5% y/y), and wealth management fees (+86.6% y/y).

Fee income became the growth engine for the bottom line and accounted for 20.6% of the total revenue (vs. 16% in 2013).

Here's more from Barclays:

Total deposits at end-1H14 amounted to RMB 3.1tn, +15.1% in 1H14 (or +9.1% in 2Q14), mainly driven by time deposits (+16.5% in 1H14), while demand deposit growth was also decent (+13.2% in 1H14).

The bank’s deposit growth was much faster than system deposit growth (8.8% in 1H14 and 1.5% in 2Q14) and its bank peers. Total loans grew by 9.2% in 1H14 (or 3.7% in 2Q14 vs. +5.3% in 1Q14) to RMB 2.1tn, mainly driven by retail & wholesale (+9.2% in 1H14), developer loans (+13.9% in 1H14), public utility sector (+20.5% in 1H14), construction (+19.2% in 1H14) and other personal loans (+30.7% in 1H14).

Under our calculation, CITIC Bank’s NIM further declined to 2.31% in 2Q14, down by 6bps q/q (after the large drop of 27bps q/q in 1Q14), probably due to the lower loan-to-deposit ratio (-3.6ppts q/q to 69.4% at end-2Q14) and higher deposit cost.

On an h/h basis, the bank’s NIM fell by 27bps h/h to 2.36% in 1H14, mainly due to:

1) Higher deposit cost (+22bps h/h in 1H14 vs. +10bps h/h in 2H13), which was mainly driven by higher costs on corporate time deposits (+21bps h/h in 1H14 vs. +4bps h/h in 2H13) and personal time deposits (+25bps h/h in 1H14 vs. +48bps h/h in 2H13).

2) Surging interbank funding costs: In 1H14, the daily average balance of the bank’s interbank liabilities ( including deposits and placement from other FIs) increased by 45% to RMB 792.2bn in 1H14 (22% of total interest bearing liabilities), and the cost also increased, +72bps h/h to 5.36% in 1H14 (vs. +113 bps h/h in 2H13). Total interbank borrowings grew by 37.6% in 1H13 to RMB 838.7bn, now accounted for 17.1% of the bank’s total liabilities (down slightly by 0.8ppts h/h).

3) Declining investment yield (-13bps h/h in 1H14 vs. +40bps h/h in 2H13).

On the positive side, the bank’s loan pricing power improved in 1H14, +5bps h/h to 6.31% in 1H14 (vs. +10bps h/h in 2H13), thanks to higher personal loan yield (+25bps h/h in 1H14 vs. +2bps h/h in 2H13). However, corporate loan yield slightly dropped by 2bps h/h to 6.32% in 1H14 (vs. +7bps h/h in 2H13).

Reverse repos +34% in 1H14 to RMB 384.4bn, 95.6% of which were maturing within 3 months. Looking at the breakdown, reverse repo collateralized by bills grew by 16.5% in 1H14 to RMB 262.2bn, accounting for 68.2% of total reverse repo.

The bank’s investment receivables (IR) amounted to RMB 563.7bn, up 87.8% in 1H14, of which targeted asset management products grew by +204.9% in 1H14 to RMB 350.6bn (accounting for 62.2% of the total IR), trust products rose 23.3% to RMB 119.6bn (21.2% of total IR), WMPs up 38.5% to RMB 90.8bn (16.1% of total IR).

However, investment in corporate bond declined by 95.2% in 1H14 to RMB 1bn, now only 0.2% of total IR.

Under the new capital rules, the bank’s Tier-1 ratio and total CAR reduced by 13bps and 11bps in 2Q14 to 8.77% and 10.98%, respectively.

We believe the decline in tier-1 ratio was mainly due to the one-off deduction of its FY13 full year dividend and its higher risk weighted assets growth.

CITIC Bank now has one of the lowest capital ratios among its China bank peers under our coverage.