20161027-美银美林-重庆农村商业银行-03618.HK-Bottom-line_growth_mainly_driven_by_provision_cuts_11页_697kb

Chongqing Rural Commercial Bank Summary

Core Content

Chongqing Rural Commercial Bank (CQRB) is a major rural commercial bank in China, ranking third in terms of assets and being the largest in Chongqing. It was established in 2008 and listed on the H-share market in 2010. The bank's financial performance in 3Q16 showed a net profit increase of 9.0% YoY to RMB6.3bn, but this growth was primarily driven by a sharp reduction in provisions rather than strong top-line performance. The pre-provision profit (PPP) increased by only 4.1% YoY to RMB10.1bn, indicating weak revenue growth.

The net interest margin (NIM) fell by 8bp QoQ to 2.65%, and the net interest income dropped by 0.9% QoQ and 2.5% YoY. Fee income plummeted by 22% QoQ, mainly due to lower wealth management product (WMP) fees. Total revenue declined by 4.8% QoQ but was up 0.8% YoY. Cost control remained solid, with the cost-income ratio decreasing by 2ppt YoY to 37.8%.

Key Financial Metrics

• Net Interest Income: RMB14.54bn in 9M16, down 2.5% YoY.
• Net Fee Income: RMB1.625bn in 9M16, up 46.3% YoY but down 21.7% QoQ.
• Total Non-Interest Income: RMB1.75bn in 9M16, up 41.6% YoY.
• Total Operating Income: RMB16.29bn in 9M16, up 0.8% YoY.
• Operating Expenses: RMB6.154bn in 9M16, down 4.2% YoY.
• Pre-Provision Profit: RMB10.135bn in 9M16, up 4.1% YoY.
• Provisions Expense: RMB3.449bn in 9M16, up 15.8% YoY.
• Net Profit: RMB6.313bn in 9M16, up 8.9% YoY.
• EPS: RMB0.67 in 9M16, up 9.0% YoY.
• BVPS: RMB5.52 in 9M16, up 13.2% YoY.

Asset Quality

• NPL Volume: Decreased by 3.2% QoQ in 3Q16 and was up only 9.2% YTD.
• NPL Ratio: Remained low at 0.96%.
• Credit Cost: Declined from 82bp in FY14 to 61bp in 3Q16.
• NPL Coverage: Dropped to 405% YTD, a decline of 15ppt.
• Loan Reserve Ratio: Fell to 3.88% YTD, down 23bp.
• Impaired Loans: Increased by 18.6% YoY to RMB2.871bn.
• Net NPL Formation: Negative 13bp in 3Q16, possibly due to write-offs.

Valuation and Estimates

• Price Objective: HKD5.36 (as of 2016).
• Current Price: HKD4.64.
• P/E Ratio: 5.1x in 2014A, 5.0x in 2015A, and 5.1x in 2016E.
• Dividend Yield: 5.39% in 2014A, 5.14% in 2015A, and 5.10% in 2016E.
• Pre-Provision PE: 5.16x in 2014A, 5.15x in 2015A, and 5.26x in 2016E.
• Price / Book: 0.909x in 2014A, 0.805x in 2015A, and 0.720x in 2016E.
• RoE / PB: 19.34x in 2014A, 20.34x in 2015A, and 20.73x in 2016E.
• Price / Pre-Provision Profit: 3.03x in 2014A, 2.82x in 2015A, and 2.76x in 2016E.

Investment Opinion

The bank is rated as Underperform. The analysis suggests that the stock price may further de-rate due to potential increases in provisions, earnings cuts, and NPL risks. However, there is potential for upside if the bank adopts more prudent provision policies, improves risk control, and achieves higher growth and a positive margin trend.

Key Concerns

• The decline in NPL size and credit cost is considered unsustainable in the current macroeconomic environment.
• The bank's exposure to shadow banking remains a key concern.
• The NIM has continued to fall, indicating margin pressure.
• The fee income growth has weakened, and the net fee income dropped significantly in 3Q16.

Investment Rationale

• The bank's financial performance is primarily supported by a sharp cut in provisions.
• The report highlights that while cost control has been effective, the top-line growth has been weak.
• The bank's profitability is under pressure, with a declining RoE and RoA.
• The bank's capital adequacy and leverage ratios are under review, with the capital adequacy ratio at 12.04% and gearing at 15.6x.

Summary

CQRB's financial performance in 3Q16 was driven by a reduction in provisions rather than strong revenue growth. The bank faces challenges in maintaining top-line growth, with a weak sequential revenue trend and margin pressure. While the cost-income ratio improved, the net interest income and fee income both declined significantly. The bank's asset quality shows a decline in NPL coverage and loan reserve ratios, suggesting potential risks. Despite these challenges, the report highlights possible upside from improved risk control and more prudent provision policies. The bank is rated as Underperform, and its valuation is considered low relative to its peers.