6 reasons behind China Construction Bank's overweight stock rating

Find out why Barclays prefers CCB.

Barclays upgraded CCB to an Overweight rating from Equal Weight, and lifted its 12-month price target to HK$7.47 from HK$7.04, based on the updated three-stage dividend discount model.

"We raise our profit forecasts for 2012 and 2013 mainly due to our higher NIM and lower credit cost assumptions."

Here are Barclays' 6 reasons for upgrading CCB to Overweight:

 The stock is one of the laggards in this round of the sector rally, having only gained 26% since 5 September, compared to the more than 40% sector average gain. We believe CCB is a defensive stock, with a high dividend yield of 5.7% in 2013E.

 CCB has a strong profit growth track record, and we believe the bank will likely deliver a reasonable set of results in the upcoming full-year 2012 results season.

 We believe CCB will maintain its conservative growth strategy and sound deposit base (low 65% LDR at end-3Q12) and strong capital level (Tier 1 at 11.35% at end-3Q12), which should be sufficient to support its future growth.

 The bank reported a NIM rebound in 2Q12 and 3Q12 (+8bps q/q and +10bps q/q), after a 14bps q/q drop in 1Q12, owing to lower interbank borrowings and long-duration high-cost deposits, especially negotiated deposits.

We believe CCB’s NIM will stabilise after 1Q13 compression (due to one-off mortgage book repricing on 1 Jan), and its full year NIM contraction in 2013 might be smaller than the market is expecting, thanks to the bank’s asset mix improvement.

 CCB has prudent risk management; one example would be the bank’s slower than peers’ growth in its LGFV loans in 2009-2010.

 The bank has an overseas expansion plan in the high-growth Asia Pacific region. For example, there was a recent news report (Global Banking News, Feb 22, 2013) that CCB was targeting to bid for Rabobank’s Indonesia unit.

We believe the overseas expansion plan will help CCB mitigate the long-term negative impact from China’s interest rate deregulation process.

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