Thanks to strong fee income growth.
According to CCB International, CITIC Bank reported FY13 net profit of RMB39.2b, up 26.2% YoY on strong fee income growth of 50% YoY. Annualized ROE and ROA were 18.5% and 1.2%, indicative of a recovery though both results were lower than comparable peers.
We expect more stable NIM and NPLs in 2014F. By the end of 2013, the impact on NIM of rate cuts in 2012 had worn off causing NIM to decline 21bp. Management seems to have adopted a conservative approach to classifying NPLs. They were well recognized in 2013, jumping 29bp to 1.03%, higher than market average.
Greater investment in non-standard assets. The bank’s investment receivables surged RMB103b or 52% QoQ in 4Q13 due to investment in trust beneficiary rights (TBR).
The smaller banks have a strong incentive to invest in TBRs because of their higher yield and lower RWA weighting (25% vs. 100% for ordinary loans). We need to keep an eye on the liquidity risks attendant on increased investment in TBRs.
Falling credit costs positive to earnings recovery. In pursuit of the CBRC’s 2.5% LLR/loan ratio requirement, CITIC allowed credit costs to spike in 2012. By 2013, credit costs had normalized, declining 20bp to settle at 63bp, in the process removing an overhang on earnings growth.
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