Earnings sustainability and asset quality remain under pressure

Transcription

1 Bank of Chongqing (1963 HK; TP H KD6.85; H OLD) Bank of Chongqing (1963 HK) Equity Research Earnings sustainability and asset quality remain under pressure Huatai Research 30 October 2017 Equity China Banking HOLD TP HKD6.85 Downgrading from Buy Strong earnings, but high uncertainty; downgrade to HOLD Bank of Chonqing (BOCQ) suspended trading in the morning of 27 October due to results delay, but resumed in the afternoon. In 3Q17, net profit growth was 12.6% yoy, up from 10.8% in 1H17, and slightly faster than we expected. The growth was helped by 3.2pp yoy decline in cost-to-income ratio, strong NIM and lower effective tax rate. NIM (+10bp qoq) was the key positive factor, but fee income (-18.7% yoy) and asset quality were disappointing. The bank may have moved some staff cost to 1H17 to smooth expense, resulting in lower cost-to-income ratio, in our view. Valuation at 0.6x 2017E PB seems attractive given 14% ROE (to be diluted by A- share listing), but business sustainability and asset quality remain uncertain. We raised FY17E/FY18E/FY19E earnings by 2/3/4% due to better NIM but cut FY21- FY23E earnings growth by 2pp to 8% considering potential asset quality deterioration. Reduce target price by 5.2% to HKD6.85, and downgrade to HOLD. High-yield cash loan business may not be sustainable BOCQ reduced its effective tax rate by 6pp yoy to 19.6% due to its investment in non-taxable treasury bonds. Even so, it still managed to boost NIM by 10bp qoq, likely driven by the surge in high-yield consumption loans (up 189% hoh in 1H17, accounting for 12.6% of gross loan), in our view. BOCQ not only provides auto loans, pay day loans, and some cash loans by itself, but also cooperates with other banks, brokers, and internet companies (eg, Tencent, Fenqile.com) to provide stock-pledged loans and different kinds of cash loan and consumption instalment loan. However, cash loan business has already drawn the regulator s attention due to its too-high-to-afford yield and potential harm to students and other low-income borrowers. We expect a growth slowdown and a regulatory yield cap (eg, 36%) on cash loan business. Whether banks will be encouraged to take part in the business remains uncertain. Asset quality is the biggest concern NPL ratio rose 23bp qoq to 1.48%, likely a consequence of the 51bp qoq increase in 90 day overdue loan ratio. This confirms our view that BOCQ s asset quality has been deteriorating, likely due to its larger exposure to SMEs and personal business loans in both Chongqing and in other provinces. Our calculated net NPL formation ratio for BOCQ has declined from 2.41% in 2Q17 but remained high at 1.83% for 3Q17, implying still-high asset quality pressure in the future. Shujin CHEN, CFA Analyst chenshujin@htsc.com Alfred HE Analyst alfredhe@htsc.com Yetta YANG Analyst yettayang@htsc.com Key data Target price (HKD) 6.85 Previous target price (HKD) 7.23 Closing price (HKD as of 29 Oct) 6.39 Upside +/- 7 Mkt cap (USDmn) 1,293 6m avg daily val (USDmn) wk price range (HKD) 6.97/6.09 BVPS (RMB) 7.61 Share performance (HKD) (20) Oct-16 Feb-17 Jun-17 Oct-17 Source: FactSet Share price Rel. to HSI (rhs) (8) Financials YE 31 Dec FY15 FY16 FY17E FY18E FY19E PPOP (RMBmn) 5,402 7,066 7,574 8,805 10,078 yoy% Net profit (RMBmn) 3,170 3,502 3,920 4,344 4,811 yoy% NPL ratio Core tier 1 CAR Tier 1 CAR Total CAR ROE EPS (diluted, RMB) PB (x) PE (x) Dividend yield estimates Huatai Financial Holdings (Hong Kong) Limited is abbreviated as Huatai HK throughout this report. 1 Please refer to end pages for analyst certification and required disclosures.

2 Fig.1. BoCQ 3Q17 results 3Q16 4Q16 1Q17 2Q17 3Q17 yoy% qoq% P&L (RMBmn) Net interest income 1,919 1,831 2,028 2,005 2, Net fee income (18.7) (10.4) Other income 4 (17) (14) (481.0) (118.0) Total income 2,407 2,308 2,552 2,524 2, (2.1) Overhead expenses (595) (795) (580) (547) (533) (10.5) (2.6) Pre-provision profit 1,811 1,513 1,973 1,976 1, (2.0) Asset loss provisions (563) (790) (509) (655) (669) Associates' contribution n.a. 33 Pretax profit 1, ,467 1,363 1, (2.9) Tax (318) (183) (372) (198) (260) (18.4) 30.9 After tax profit ,095 1,165 1, (8.6) Net profit ,095 1,154 1, (9.3) EPS (RMB) (0.39) (230.9) (205.4) Key balance sheet items (RMBbn) Loan Deposit (0.1) Asset Shareholders' equity Key financial ratios Fee as % of income (4.2pp) (1.5pp) Cost to income (3.2pp) (0.1pp) NIM (14bp) 10bp Credit cost (bp) bp (3bp) ROA (0.0pp) (0.1pp) ROE pp (2.1pp) NPL (RMBbn) NPL ratio bp 23bp NPL prov. cov (91.7pp) (24.3pp) Provision/loan bp 13bp Core tier 1 CAR (150bp) 8bp Tier 1 CAR (148bp) 9bp CAR (4bp) (7bp) estimates 30 October

3 Fig.2. Net interest margin (NIM) Fig.3. Pre-provision profit (PPOP) growth 2.7 (yoy%) % % Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 0 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Fig.4. Non-performing loan (NPL) ratio Fig.5. Net NPL formation ratio % % Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q (0.5) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 30 October

4 Full financials Income statement YE 31 Dec (RMBmn) FY15 FY16 FY17E FY18E FY19E Interest income 15,508 16,226 18,362 20,772 23,243 Interest expense (8,506) (8,549) (10,192) (11,392) (12,701) Net interest income 7,002 7,677 8,171 9,380 10,542 Fee income 1,589 2,021 1,914 2,102 2,403 Fee expense (77) (95) (211) (231) (264) Net fee income 1,512 1,926 1,704 1,871 2,139 Other operating income 78 (0) Total operating income 8,593 9,603 10,055 11,444 12,887 Total operating expense (3,190) (2,537) (2,481) (2,638) (2,809) Pre-provision profit 5,402 7,066 7,574 8,805 10,078 Impairment losses (1,135) (2,411) (2,769) (3,481) (4,180) Associate contribution Pretax income 4,270 4,659 4,925 5,457 6,044 Income tax (1,100) (1,156) (985) (1,091) (1,209) Minority interests Net income 3,170 3,502 3,920 4,344 4,811 Net inc. to common 3,170 3,502 3,620 4,044 4,511 Balance sheet YE 31 Dec (RMBbn) FY15 FY16 FY17E FY18E FY19E Assets Cash Interbank assets Net loans Gross loans Corporate loans Personal loans Discounted bills Other loans Allowances (3) (4) (5) (5) (6) Investments Intangible assets Other assets Total assets Liabilities Interbank liabilities Total deposits Demand deposits Time deposits Other deposits Certificates of deposit Debt securities issued Other liabilities Total liabilities Equity Common equity Convertible bonds Preferred stock Reserves Retained earnings Total shareholder equity Minority interests Total equity Valuation & profitability YE 31 Dec FY15 FY16 FY17E FY18E FY19E PB (x) PE (x) ROE ROA RORWA Return on tier-1 capital Dividend yield Dividend payout Note: *RORWA - Return on risk weighted assets Per share data YE 31 Dec (RMB) FY15 FY16 FY17E FY18E FY19E EPS yoy% 11.7 (4.1) 3.4 (0.7) 0.4 DPS BVPS Growth & profitability YE 31 Dec FY15 FY16 FY17E FY18E FY19E Growth in net profit Growth in PPOP* Cost-to-income ratio Net interest margin Growth in net interest inc Growth in IEA** Loan-to-deposit ratio Growth in loans Growth in deposits Net fee inc. / operating inc Growth in net fee income (5.3) Note: *PPOP - Pre-provision operating profit; **IEA - Interest-earning assets Capital YE 31 Dec (RMBbn) FY15 FY16 FY17E FY18E FY19E Net core tier 1 capital Net tier 1 capital Net capital base 2,350 2,847 4,093 5,101 5,521 RWA* yoy% Core tier 1 CAR Tier 1 CAR Total CAR Note: *RWA - Risk weighted assets Asset quality YE 31 Dec FY15 FY16 FY17E FY18E FY19E NPL ratio NPL coverage ratio Provisions to loan ratio Credit cost estimates 30 October

5 Analyst Certification The views expressed in this report accurately reflect the personal views of the analyst(s) about the subject securities or issuers; and no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the inclusion of specific recommendations or views in this report. Shujin CHEN, CFA; Alfred HE; Yetta YANG Important Disclosures Huatai Financial Holdings (Hong Kong) Limited is regulated by the Securities and Futures Commission in Hong Kong and is the wholly owned subsidiary of HTSC (A joint stock company incorporated in the People s Republic of China with limited liability under the Chinese corporate name 华泰证券股份有限公司 and carrying on business in Hong Kong as HTSC). Huatai Financial Holdings (Hong Kong) Limited and/or its affiliated companies has acted, currently is acting and/or may act as market maker in the bond securities of the companies mentioned or recommended in the report. 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