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 +852 3658 6231 Analyst chenshujin@htsc.com Alfred HE +852 3658 6275 Analyst alfredhe@htsc.com Yetta YANG +852 3658 6234 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) 1.00 52wk price range (HKD) 6.97/6.09 BVPS (RMB) 7.61 Share performance (HKD) 7.0 6.8 6.5 6.3 6.0 (20) Oct-16 Feb-17 Jun-17 Oct-17 Source: FactSet Share price Rel. to HSI (rhs) 30 18 5 (8) Financials YE 31 Dec FY15 FY16 FY17E FY18E FY19E PPOP (RMBmn) 5,402 7,066 7,574 8,805 10,078 yoy% 15.5 30.8 7.2 16.3 14.4 Net profit (RMBmn) 3,170 3,502 3,920 4,344 4,811 yoy% 12.1 10.5 11.9 10.8 10.8 NPL ratio 0.97 0.96 1.65 1.62 1.57 Core tier 1 CAR 10.49 9.82 10.22 12.31 12.24 Tier 1 CAR 10.49 9.82 12.02 13.93 13.72 Total CAR 11.63 11.79 14.81 16.55 16.33 ROE 17.0 15.5 14.4 12.9 11.9 EPS (diluted, RMB) 1.17 1.12 1.16 1.15 1.15 PB (x) 0.8 0.7 0.6 0.6 0.5 PE (x) 4.7 4.9 4.7 4.7 4.7 Dividend yield 4.8 5.3 6.0 5.3 5.9 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.
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 2,092 9.0 4.3 Net fee income 483 494 410 439 393 (18.7) (10.4) Other income 4 (17) 115 80 (14) (481.0) (118.0) Total income 2,407 2,308 2,552 2,524 2,470 2.6 (2.1) Overhead expenses (595) (795) (580) (547) (533) (10.5) (2.6) Pre-provision profit 1,811 1,513 1,973 1,976 1,937 7.0 (2.0) Asset loss provisions (563) (790) (509) (655) (669) 18.8 2.1 Associates' contribution - 3 3 42 55 n.a. 33 Pretax profit 1,248 725 1,467 1,363 1,324 6.0 (2.9) Tax (318) (183) (372) (198) (260) (18.4) 30.9 After tax profit 930 542 1,095 1,165 1,064 14.4 (8.6) Net profit 930 542 1,095 1,154 1,047 12.6 (9.3) EPS (RMB) 0.30 0.17 0.35 0.37 (0.39) (230.9) (205.4) Key balance sheet items (RMBbn) Loan 147 151 157 164 170 15.8 3.7 Deposit 225 230 232 239 239 5.8 (0.1) Asset 355 373 399 408 409 15.2 0.1 Shareholders' equity 24 24 25 25 26 9.6 4.3 Key financial ratios Fee as % of income 20.1 21.4 16.0 17.4 15.9 (4.2pp) (1.5pp) Cost to income 24.7 34.4 22.7 21.7 21.6 (3.2pp) (0.1pp) NIM 2.29 2.31 2.22 2.05 2.15 (14bp) 10bp Credit cost (bp) 155 212 132 163 160 5bp (3bp) ROA 1.07 0.60 1.13 1.15 1.04 (0.0pp) (0.1pp) ROE 16.13 9.14 18.02 18.62 16.53 0.4pp (2.1pp) NPL (RMBbn) 1.42 1.44 1.81 2.06 2.52 77.5 22.6 NPL ratio 0.97 0.96 1.15 1.25 1.48 51bp 23bp NPL prov. cov 281.3 293.4 246.0 213.9 189.6 (91.7pp) (24.3pp) Provision/loan 2.72 2.80 2.82 2.68 2.81 9bp 13bp Core tier 1 CAR 10.79 9.82 9.71 9.21 9.29 (150bp) 8bp Tier 1 CAR 10.79 9.82 9.72 9.22 9.31 (148bp) 9bp CAR 12.85 11.79 13.70 12.88 12.81 (4bp) (7bp) estimates 30 October 2017 2
Fig.2. Net interest margin (NIM) Fig.3. Pre-provision profit (PPOP) growth 2.7 (yoy%) 40 2.6 35 2.5 2.4 2.3 2.2 2.2% 30 25 20 15 10 7.0% 2.1 5 2.0 1Q15 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 1.6 1.5 1.4 1.3 1.5% 3.0 2.5 2.0 1.8% 1.2 1.1 1.0 1.5 1.0 0.9 0.8 0.7 0.6 4Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q17 0.5 0.0 (0.5) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 30 October 2017 3
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) 180 193 206 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 3 4 120 133 147 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 0 0 20 22 25 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 38 43 39 39 43 Interbank assets 46 56 58 64 69 Net loans 122 147 170 195 220 Gross loans 125 151 175 200 226 Corporate loans 84 105 108 117 125 Personal loans 36 41 65 82 98 Discounted bills 4 5 2 2 2 Other loans 0 0 0 0 0 Allowances (3) (4) (5) (5) (6) Investments 106 119 138 154 165 Intangible assets 0 0 0 0 0 Other assets 8 8 9 10 10 Total assets 320 373 415 463 507 Liabilities Interbank liabilities 73 60 51 54 57 Total deposits 199 230 239 258 281 Demand deposits 66 78 81 87 95 Time deposits 109 135 141 152 166 Other deposits 25 16 17 18 20 Certificates of deposit 0 0 0 0 0 Debt securities issued 18 55 86 102 117 Other liabilities 7 5 5 6 6 Total liabilities 299 349 381 420 461 Equity Common equity 3 3 3 4 4 Convertible bonds 0 0 0 0 0 Preferred stock 0 0 5 5 5 Reserves 10 11 11 18 18 Retained earnings 8 10 12 15 17 Total shareholder equity 21 24 32 41 45 Minority interests 0 0 1 2 2 Total equity 21 24 33 43 46 Valuation & profitability YE 31 Dec FY15 FY16 FY17E FY18E FY19E PB (x) 0.8 0.7 0.6 0.6 0.5 PE (x) 4.7 4.9 4.7 4.7 4.7 ROE 17.0 15.5 14.4 12.9 11.9 ROA 1.1 1.0 1.0 1.0 1.0 RORWA 1.7 1.6 1.5 1.5 1.5 Return on tier-1 capital 17.1 15.6 13.8 11.4 10.8 Dividend yield 4.8 5.3 6.0 5.3 5.9 Dividend payout 22.6 26.0 28.1 25.1 27.7 Note: *RORWA - Return on risk weighted assets Per share data YE 31 Dec (RMB) FY15 FY16 FY17E FY18E FY19E EPS 1.17 1.12 1.16 1.15 1.15 yoy% 11.7 (4.1) 3.4 (0.7) 0.4 DPS 0.26 0.29 0.33 0.29 0.32 BVPS 6.8 7.6 8.5 9.3 10.2 Growth & profitability YE 31 Dec FY15 FY16 FY17E FY18E FY19E Growth in net profit 12.1 10.5 11.9 10.8 10.8 Growth in PPOP* 15.5 30.8 7.2 16.3 14.4 Cost-to-income ratio 37.1 26.4 24.7 23.1 21.8 Net interest margin 2.52 2.38 2.18 2.24 2.27 Growth in net interest inc. 12.4 9.6 6.4 14.8 12.4 Growth in IEA** 25.4 16.3 16.1 11.6 11.0 Loan-to-deposit ratio 62.6 65.8 73.4 77.7 80.3 Growth in loans 17.2 21.0 16.0 14.3 12.6 Growth in deposits 18.7 15.2 4.0 8.0 9.0 Net fee inc. / operating inc. 18.5 21.0 19.0 18.4 18.6 Growth in net fee income 63.0 27.2 (5.3) 9.8 14.3 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 21 24 28 38 41 Net tier 1 capital 21 24 33 43 46 Net capital base 2,350 2,847 4,093 5,101 5,521 RWA* 202 241 276 308 338 yoy% 23.1 19.4 14.5 11.5 9.7 Core tier 1 CAR 10.49 9.82 10.22 12.31 12.24 Tier 1 CAR 10.49 9.82 12.02 13.93 13.72 Total CAR 11.63 11.79 14.81 16.55 16.33 Note: *RWA - Risk weighted assets Asset quality YE 31 Dec FY15 FY16 FY17E FY18E FY19E NPL ratio 0.97 0.96 1.65 1.62 1.57 NPL coverage ratio 243.98 293.35 180.01 163.76 161.22 Provisions to loan ratio 2.37 2.80 2.97 2.66 2.53 Credit cost 0.98 1.75 1.70 1.85 1.96 estimates 30 October 2017 4
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. Guide to Huatai Financial Holdings (Hong Kong) Limited Investment Rating Huatai Financial Holdings (Hong Kong) Limited investment ratings are according to analysts expectations of stock performance within six months vs relevant market benchmark, as indicated below. Market Benchmark for Hong Kong is Hang Sang Index (HSI) Stock Rating Definitions BUY: The analyst expects the stock to outperform more than 15% vs the relevant market benchmark. HOLD: The analyst expects the stock to perform within -10%~15% vs the relevant market benchmark. SELL: The analyst expects the stock to underperform below -10% vs the relevant market benchmark. Rating suspended: The rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Not rated: Stocks are not in regular research coverage. Investors should not expect continuing or additional information from Huatai relating to such securities and/or companies. 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a http://www.htsc.com.hk/ Bank of Chongqing (1963 HK) Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future distribution of returns. The facts described in this publication, as well as the opinions, estimates, forecasts and projections expressed in it are as of the date hereof and are subject to change without notice. No representation or warranty, express or implied, is made as to and no reliance should be placed on information contained in this publication. Huatai Financial Holdings (Hong Kong) Limited accepts no liability whatsoever for any direct, indirect or consequential losses or damages arising from or in connection with the use or reliance of this publication or its contents. This publication is not intended to provide, and should not be relied upon as professional advice (including without limitation, accounting, legal or tax advice or investment recommendations) and is not to be taken in substitution for your exercise of judgment. Huatai Financial Holdings (Hong Kong) Limited does not act as an adviser and assumes no fiduciary responsibility or liability for any consequences, financial or otherwise. Investors shall consider whether any information or recommendation in this publication is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Investors should consider this publication as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Huatai Financial Holdings (Hong Kong) Limited produces a number of different types of research product including, among others, fundamental analysis, quantitative analysis and short term trading ideas; recommendations contained in one type of research product differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise. Huatai Financial Holdings (Hong Kong) Limited, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, options or other derivative instruments based thereon, of issuers or securities mentioned herein. Huatai Financial Holdings (Hong Kong) Limited may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this publication, perform services for or solicit business from such issuers. Huatai Financial Holdings (Hong Kong) Limited may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, other investment banking services, significant advice or investment services in relation to the investment concerned or a related investment. Huatai Financial Holdings (Hong Kong) Limited may also act as market maker or liquidity provider in the financial instruments of the issuers. Huatai Financial Holdings (Hong Kong) Limited manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. 2017 Huatai Financial Holdings (Hong Kong) Ltd. All rights reserved. Legal Entity Disclosures China: HTSC is approved by the China Securities Regulatory Commission under a qualification to carry out securities investment consulting business. Business license no: Z23032000. Hong Kong: Huatai Financial Holdings (Hong Kong) Limited holds a license issued by the Securities and Futures Commission in Hong Kong to carry out advising on securities business. License no: AOK809. Unit 5808-12, 58/F, The Center, 99 Queens Road Central, Central, HONG KONG Tel: +852 3658 6000 Fax: +852 2169 0770 Email: research@htsc.com 30 October 2017 6