China Construction Bank’s strong growth momentum continued into the first quarter, outperforming other stateowned banks, with year-on-year revenue and net profit growth of 14.5% and 15.7%, respectively. Peer-beating net interest income growth of 12.4% and a healthy 18.9% jump in fee income fueled the top-line performance. Similar to peers, CCB’s cost/income ratio fell 116 basis points, to 24%, partially offset by a 28% increase in provision charges. Despite faster growth in provision charges, t he improving operating efficiency resulted in a 15.7% surge in the bottom line.
Analysts believe the key competitive strengths for the secondlargest Chinese bank–cost advantages in funding and operating expenses, and strong bonds with high-quality, large enterprises – remain intact. Analysts’ very high uncertainty rating reflects its substantial lending to large scale infrastructure and construction projects. These infrastructure loans are typically vulnerable to fluctuations in economic cycles, and have relatively low visibility on overall loan quality, given diminishing marginal effects of new credit in boosting economic growth.
Looking into 2013, analysts expect CCB will continue its robust growth, thanks to better loan growth potential as a result of low deposit/loan ratio and strong capital position, and greater profit visibility, owing to stable funding costs and little provision pressure. CCB’s funding cost advantage was reflected by its 65% loan/ deposit ratio, a 5.8% deposit growth and a six basis-point increase in NIM, to 2.71% in the first quarter. Customer deposits are an additional strength, representing nearly 82% of CCB’s total assets, a level only exceeded by Agriculture Bank of China.
Similar to peers, CCB’s bad debt costs increased during the quarter, with bad debt balance up 4.2%, a pace slower than peers. The bad debt ratio remained flat at 0.99%. Investors were also pleased to see CCB maintain an industry-leading bad debt reserve level. A 28% growth in provision charges outpaced the 14.5% revenue increase, though still trailing the robust 4.6% uplift in CCB’s total loan book. As a result, CCB’s reserves covered 271% of bad debt, and represented 2.68% of total loan books by end of March.
Due to fast loan expansion, CCB’s Tier 1 capital adequacy ratio fell 20 basis points to 11.1%, and fell further to 10.92% due to new capital rules effective from 2013. This leaves CCB’s Tier 1 capital ratio second only to ICBC, which as at end March stood at 11%. Given the robust 24.5% equity returns and 1.67% assets returns, CCB’s shareholders’ equity grew 6.5% from the beginning of the year.
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