China Construction Bank -A:Solid retail loan growth;stable asset quality

NPAT up 1% yoy from better control on cost-income ratio

    CCB reported H116 NPAT of Rmb133.4bn, up 1% yoy, tracking 61% and 59% of our& consensus 2016E estimates. Q216 NPAT was Rmb65.5bn up 1% yoy. PPoP in Q216dropped by 1% yoy with (1) NII declined by 9% yoy mainly due to continual NIMcontraction (-17bp qoq), (2) loan growth at 10% yoy (3% qoq), (3) fee income droppedby 3% yoy, (4) annualized credit cost fell 3bp qoq to 0.98%, (5) cost income ratio was27.3% vs 26.3% in Q116 or 33.2% in 2015. According to the disclosure, its interestincome from loans decreased by 12.6% yoy in H116, mainly due to the: (1) loan repricing,and (2) business tax to value-added tax reform. Its effective tax rate came in at21.2% in H116, down from 23.3% in 2015, mainly because its interest income fromgov’t bonds was tax-exempted.

    Solid retail loan growth; stable asset quality

    CCB’s retail loans grew by 24% yoy, which are mostly contributed by residentialmortgages (i.e., 82% of total retail loans as of H116). Its NPL balance increased 3%qoq while NPL ratio was well maintained at 1.63%, lower than the industry average of1.75%. Coverage ratio was 152%, and provision-to-loan ratio increased 1bp qoq to2.48%.。

    Capital position remains strong

    CCB’s capital strength continues to stand in a strong position amid Chinese banks; itsCET1 ratio, T1 CAR and total CAR came at 13.06%, 13.24% and 15.09%, respectively,as of H116. We believe CCB will be positioned later in the queue for capital-raising andfaces limited risks of DPS and EPS dilution.

    Valuation: Maintain Rmb6.10 PT and Buy rating

    CCB-A is currently trading at 0.85x our 2016 P/B estimate. We derive our price targetbased on the PB/ROE valuation method. Our target P/BV of 0.98x is based on a longtermsustainable ROE of 10.4%, a cost of equity of 10.5% and a long-term growth rateof 5%. We view the current valuation as still attractive and maintain our Buy rating.