China Cons Bank 2008 results

Overview
It is the 3th largest bank by total deposit and 2nd largest bank by total net loan in China, with the highest net interest margin among peers (6 banks listed @ HKSE) as of 2007.CCB's 86% income is generated from tradition borrowing business, only 14% genereated from fees. Unlike China Merchant Bank where 40% of its business generated from Pearl River Delta, CCB has a well diversify loan & deposit based among varies region in China.

2008 Result (vs 2007)
1. Operating income up 22.2% to RMB $270B
- Interest income up 25.1% to RMB $356.5B;- Interest expenses up 43.0% to RMB $131.6B;
- Net interest margin up to 3.24% from 3.18%;
- Q: Why is the interest expenses up 43% while the income up only 25.1% & net margin looks flat?
- Net fee income up 22.8% to RMB $38.5B;

2. Reported EPS up 33.3% to RMB $0.40
- Loan provision up significantly by 84.2% to RMB $50.8B and allowance on loan ratio up to 2.91% from 2.72%;
- Operating expenses up only 7.7% to RMB $99.2B, due to non-recurring early retirement expenses get charge in 2007;
- Operating expenses exclude the retirement expenses up 19%, consistent with the income side;
- Tax rate cut to 25% from 33%;3.

Balance Sheet
- Book value up 10.5% to RMB $2.0
- Total deposits up 19.6% to RMB $6.4T
- Total net loans up 15.7% to RMB $3.7T
- That answers the question in section 1, interest expenses up more than income because deposit up more than loanCash flow from operation up 34.3% to RMB $190.9B, that means without loan provision, CCB's results looks great.

Risk
- Loan provision may continue to go up as China economy slow down;
- Net interest margin may continue to go up as government continue interest rate cut;

Comments
CCB will benefit from the $4T China government stimulus plan.The operating income will continue up at a nice pace in 2009 & 2010 as the loan to deposit ratio go up (which will partially offset by the net interest margin down).Buy, fair value HK$6.86.