20130829-DBS_Group-China_Minsheng_Bank__90_day_overdue_loans_doubled_11页_247kb

DBS Group Research: China Minsheng Bank (CMBC) Summary

Core Content

DBS Group Research has issued a BUY rating for China Minsheng Bank (CMBC) with a 12-month price target of HK$10.20, up from the previous target of HK$10.06. This report is an update on the EPS and DPS forecasts, and it highlights potential catalysts such as improvements in macroeconomic indicators. While the bank's earnings for the second quarter of 2013 exceeded estimates, the analysts note that the share price may not react strongly due to lingering concerns about future earnings and asset quality.

Key Financial Highlights

• Earnings Performance: CMBC's 2Q13 net profit reached Rmb11.7bn, which is 8% higher than the Bloomberg survey forecast and 19% higher than 2Q12. The 1H13 net profit was 20.4% higher than 1H12 and 33% above the previous full year forecast.
• EPS and DPS: The EPS for FY13F is HK$1.92, with a projected increase to HK$2.15 in FY14F and HK$2.35 in FY15F. The DPS is expected to rise from HK$0.57 in FY13F to HK$0.70 in FY15F.
• Valuation Metrics: The current P/E ratio is 4.3, and the P/BV ratio is 0.9. The analysts have updated their DDM-based target price due to revised forecasts.
• Capital Adequacy: The bank's core CAR was at 7.86% as of June 2013, indicating a weak capital position. This may impact net interest margin or RWA upside.
• Overdue Loans: <90-day overdue loans increased significantly to 1.22% of total loans in 1H13, compared to 0.65% at the start of the year. This is much worse than peers, especially due to higher exposure to SMEs and Eastern China.
• NPLs: The NPL ratio rose to 0.78% in 1H13, up from 0.69% in 1H12. The NPL provision coverage decreased slightly to 320.4% from 324.5% in 1H12.

Key Assumptions

• Loan Growth: Expected to remain stable at around 15% for FY13F and FY14F.
• Net Fee Growth: Projected to grow at 63% in FY13F and 19% in FY14F.
• Cost-to-Income Ratio: Expected to decrease to 30.8% in FY13F and 29.5% in FY14F.
• Credit Cost: Projected to rise to 109.9 bps in FY13F and increase further to 124.5 bps in FY14F.
• ROE and ROA: Expected to decline slightly to 23.5% and 1.2% respectively in FY13F, and continue to trend downward in subsequent years.

Peer Comparison

• ICBC - H: Buy rating, target price HK$6.57, upside 30%.
• CCB - H: Buy rating, target price HK$7.81, upside 39%.
• BOC - H: Buy rating, target price HK$4.28, upside 33%.
• ABC - H: Buy rating, target price HK$4.63, upside 41%.
• BoCom - H: Buy rating, target price HK$6.75, upside 32%.
• CMB - H: Buy rating, target price HK$19.00, upside 38%.
• CNCB - H: Buy rating, target price HK$4.96, upside 35%.
• CMBC - H: Buy rating, target price HK$10.20, upside 26%.

Analysts

• Alexander LEE CFA: +852 2971 1930 | alexander_lee@hk.dbsvickers.com
• Nicole WU: +852 2820 4919 | nicole_wu@hk.dbsvickers.com

Summary

• Earnings: CMBC's 2Q13 net profit beat estimates by 8%, with a strong non-interest income growth of 84%.
• Dividend: The bank declared an interim DPS of Rmb0.158cts, which is 0.57 HK$ for FY13F.
• Valuation: The current price is at a discount, with a target price of HK$10.20.
• Capital: The core CAR is low at 7.86%, and the bank's capital position remains weak.
• Asset Quality: The bank faces higher risks of NPL formation and credit costs due to its exposure to SMEs and Eastern China.
• Recommendation: Maintain BUY, but prefer large-cap banks due to lower dilution risks. CMBC's low valuations make it a BUY despite concerns about asset quality, which may ease in the second half of 2013 with macroeconomic improvements.

Key Trends and Analysis

• Loan and Deposit Growth: Loan growth was 13.9% in 1H13, while deposit growth was 20.1%. The bank's asset growth was 31.5%.
• Operating Efficiency: The cost-to-income ratio improved to 35.0% in 1H13, with operating income rising to Rmb58,123m.
• Macroeconomic Outlook: The analysts believe that macroeconomic improvements will be a key catalyst for CMBC's share price.
• Sensitivity Analysis: Changes in NIM and credit cost have a direct impact on net profit, with NIM +/- 10bps affecting net profit by +/-7.7% and credit cost +/-10bps affecting net profit by +/-3.5%.

Conclusion

The report suggests that while CMBC has strong earnings performance and growth in non-interest income, the bank faces challenges in asset quality and capital adequacy. The analysts recommend a BUY due to the already low valuations and potential for improvement in macroeconomic indicators. However, they also suggest that large-cap banks may be more attractive in the initial stage of a sector rebound.