China Construction Bank (939 HK) 1Q25 Earnings Miss Drags Stock to HOLD Amid NIM Pressure & Fee Weakness

UOB Kay Hian Wednesday, 30 April 2025
China Construction Bank (939 HK) 1Q25 Analysis: Earnings Miss on NIM Squeeze & Fee Weakness, Tariff Risks Eyed

CCB’s 1Q25 Performance: A Disappointing Start

China Construction Bank (CCB), a leading state-owned enterprise (SOE) bank in China, reported disappointing financial results for the first quarter of 2025 (1Q25). Net profit saw a year-on-year (yoy) decline of 4.0%, primarily impacted by ongoing Net Interest Margin (NIM) compression and sluggish fee income generation. Compounding the pressure, revenue growth could no longer rely on trading gains as bond yields rebounded during the quarter. On a positive note, asset quality showed resilience, with management highlighting sequential improvements. Despite concerns, the bank assessed potential tariff risks as manageable. Following these results, the recommendation for CCB has been downgraded to HOLD, with a revised target price.

1Q25 Financial Highlights: Below Expectations

CCB’s net profit for 1Q25 came in at Rmb83.4 billion, a 4.0% decrease compared to 1Q24, representing 24% of UOB Kay Hian’s full-year forecast and lagging behind its SOE peers. The primary drivers for this underperformance were:
Revenue Decline: Operating income fell by 4.8% yoy to Rmb186.0 billion, stemming from prolonged NIM compression and weak fee income.
NIM Contraction: Net interest income dropped 5.5% yoy to Rmb141.9 billion, with the Net Interest Margin decreasing by 16 basis points (bp) yoy to 1.41%.
Fee Income Weakness: Net fee income decreased by 4.6% yoy to Rmb37.5 billion.
Trading Gains Impact: Revenue was further impacted as trading gains diminished due to rising yields in 1Q25.
Mitigating Factors: The profit decline was somewhat softened by a marginal decrease in operating expenses (-1.1% yoy) and a 5 percentage point (ppt) fall in the effective tax rate.
Stable Provisions: Impairment levels (provisions) remained steady yoy at Rmb48.1 billion, reflecting a slight 1bp yoy decline in credit cost to 19bp (annualized credit cost was 0.75%, down 0.04ppt yoy).
1Q25 RESULTS SUMMARY

Source: China Construction Bank, UOB Kay Hian

Stock Impact: Loan Growth Outperforms, but Margins Suffer

Loan and Deposit Dynamics

• Loan Growth: CCB’s loan book expanded robustly, growing 7.9% yoy and 4.6% quarter-on-quarter (qoq), outpacing the system’s average growth of 7.4% yoy. This was driven by a strong 7.0% yoy increase in corporate lending and a significant jump (near doubling) in discounted bills.
• Retail Lending: Retail loans increased 1.9% qoq and 2.7% yoy. Growth in consumer and operating loans offset subdued performance in the mortgage and credit card segments. Management aims to maintain a similar loan growth target level as in 2024.
• Deposit Growth: Deposits grew 3.6% yoy and 6.0% qoq. Notably, corporate deposits recovered, rising 3.7% qoq.
• Loan-to-Deposit Ratio: The LDR improved, dropping 1.2ppt qoq to 88.8%.

NIM Under Pressure

• Significant Contraction: Despite solid loan growth, NII fell 5.2% yoy due to a 16bp yoy drop in NIM to 1.41%. This contraction was steeper than peers, largely attributed to the significant impact of mortgage repricing in 1Q25, given CCB’s higher mortgage exposure.
• CASA Ratio Decline: The Current Account Savings Account (CASA) ratio fell 2ppt qoq to 42%, contributing to NIM pressure.
• Funding Costs: However, interest expenses decreased 5.2% qoq and 11.3% yoy, benefitting from previous deposit rate cuts.
• Yield vs. Cost: Management noted that overall asset yield contracted by 46bp yoy, while liability cost only reduced by 30bp yoy.
• Outlook: Management reiterated expectations that the downward pressure on NIM should moderate in the upcoming quarters.

Non-Interest Income Challenges

• Overall Decline: Non-NII decreased 3.3% yoy, weighed down by both fee income and trading gains.
• Fee Income: The 4.6% yoy contraction in fee income was mainly due to lower bank card fees and settlement fees. Management remains optimistic about achieving positive fee income growth, citing potential policy support for consumption and improved market sentiment.
• Tariff Impact on Fees: Management acknowledged potential pressure from tariffs on settlement and clearing fees but deemed the impact manageable, as these fees constitute only about 10% of total net fee income.
• Other Non-NII: This component rose only 5.3% yoy. A significant 78.3% yoy plunge in bond trading gains (due to unfavourable yield movements) was largely offset by a 575.2% yoy surge in other operating income. Management noted yields declined again following the onset of the US-China trade war and expects rates to remain low to support the economy.

Asset Quality: A Silver Lining

• NPL Improvement: The non-performing loan (NPL) ratio edged down slightly by 1bp qoq to 1.33% in 1Q25.
• Coverage Ratio: The provision coverage ratio improved, rising 3.2ppt qoq to 236.8%.
• Easing Pressure: The modest decline in credit cost suggests asset quality pressure has eased.
• Segment Improvement: CCB noted that net formation of NPLs within both retail loans and property developer loans declined qoq in 1Q25.
• Tariff Risk Management: The bank has enhanced risk management for the export-oriented sector, which could be affected by tariffs. Management stated that stress tests on potential tariff impacts concluded the associated risk is limited. This is due to overseas business contributing less than 8% of total revenue and relatively low client exposure to global trade.

KEY FINANCIAL INDICATORS

Source: CCB, UOB Kay Hian

Earnings Revisions and Risks

UOB Kay Hian has revised its earnings forecasts for CCB downwards for the period 2025-2027. The adjustments are -6.0% for 2025F, -4.2% for 2026F, and -1.6% for 2027F. These revisions primarily factor in lower Net Interest Margin (NIM) assumptions and expectations of weaker fee income growth.

Valuation and Recommendation: Downgrade to HOLD

Reflecting the earnings adjustments, the recommendation for China Construction Bank (939 HK) is downgraded to HOLD. The target price is lowered from HK$7.50 to HK$7.00.
This new target price implies a 0.49x Price-to-Book (P/B) ratio for the forecasted 2025 fiscal year (2025F). The valuation is derived using a dividend discount model (DDM) based on the following assumptions:

• Long-term Return on Equity (ROE): 11.5%
• Cost of Equity (COE): 8.9% (revised from 8.6% previously)
• Terminal Growth Rate: 3.0%

The market is expected to react negatively to the results, anticipating potential downward revisions to earnings per share (EPS) consensus due to the weakening NIM performance.
KEY FINANCIALS FORECAST

Source: China Construction Bank, Bloomberg, UOB Kay Hian

Company Overview and Stock Data

China Construction Bank is a premier SOE bank in China, offering a wide array of commercial banking services, including retail, corporate, and treasury banking.

• GICS Sector: Financials
• Bloomberg Ticker: 939 HK
• Shares Issued (m): 240,417.3
• Market Cap (HK\$m): 1,728,329.6
• Market Cap (US\$m): 222,754.5
• 3-mth Avg Daily Turnover (US\$m): 317.9
• Share Price (as of report date): HK\$6.79
• 52-week High/Low: HK\$5.90 / HK\$4.24
• Major Shareholder: Central Huijin Investment (57.1%)
• FY25 BVPS (Rmb): 12.70
• FY25 CAR Tier-1 (%): 14.23