China Construction Bank: Net Profit Accelerated but Revenue Remains Weak

We retain our fair value estimate of China Construction Bank 601939, or CCB, at HKD 6.20 per H share (CNY 6 per A share). We think CCB’s 3.4% year-on-year net profit growth in the first half of 2023 is positive and in line with expectations, helped by lower provision expenses on a largely stable credit outlook, which we think should help appease some concerns over the weakening economy and worries over rising credit risks. We remain buyers of CCB, which we view to be undervalued, trading at a historically low 0.3 times 2023 price/book value and over 10% dividend yield.

Despite growing concerns about Chinese bank’s property exposure, CCB’s credit quality remained stable, with the nonperforming loan, or NPL, ratio improving to 1.37% from 1.38% in the first quarter. The provision coverage ratio improved to 244.5% despite a 15% year-on-year contraction in provision expense. The special mentioned loan ratio also declined 2 basis points to 2.5% from 2022. The property developer NPL ratio increased 40 basis points to 4.76% from 2022. We expect the peak of the property developer NPL formation rate has passed after the 138-basis-point increase in developer NPL ratio in the second half of 2022. Though industrywide property credit quality will remain pressured as increasing property bonds are expected to reach maturity in the first three quarters of 2023, we believe CCB’s property credit risks are manageable given limited exposure and over 90% of its property borrowers enjoy high credit ratings, with property NPL ratios well below industry level.