20140228-大和证券-Initiation__micro_loan_momentum_not_yet_priced_in_32页_753kb_753kb

Bank of Chongqing (BoCQ) Summary

Core Content

• Company Overview: Bank of Chongqing (BoCQ) is a commercial bank in Chongqing, ranked 5th in terms of total assets as of June 2013. It operates through its head office, a small enterprise loan centre, and 106 branches and sub-branches across Chongqing, Sichuan, Shaanxi, and Guizhou provinces. BoCQ is a pioneer in small and micro enterprise financing in the region.

• Market Position: BoCQ's market share in Chongqing is 6.1% in total assets, 4.4% in total loans, and 5.4% in total deposits as of end-1H13. It is a significant beneficiary of the growth of small and micro enterprises in the region.

Main Points

Small and Micro Enterprise Loan Growth

• BoCQ has been capitalising on the rise of the private economy in Chongqing, expanding its small and micro enterprise loan business to 31.5% of its total loan book as of end-1H13.
• These loans are a key part of its corporate banking segment, contributing 64% of its total operating income during 1H13.
• The bank has developed tailored products for small and micro enterprises, such as micro business loans and “Wei Qi Tong,” which are supported by government subsidies.
• The net interest spread on small and micro enterprise loans is 40% higher than on other loans, enhancing its net interest margin (NIM).

Fee-Based Income Growth

• BoCQ has seen rapid growth in fee income, rising by 263% YoY in 1H13.
• Fee income now accounts for 12.4% of its total operating income in 1H13, similar to the proportion of national state-owned and joint stock banks.
• The bank is developing a fee-based income strategy, which is expected to reinforce its capital ratios and mitigate NIM headwinds.

Asset Quality and NPL Ratio

• BoCQ has maintained strong asset quality, with the lowest NPL ratio (0.38%) among all listed China banks as of end-1H13.
• Its small and micro enterprise NPL ratio is 0.35%, slightly lower than its overall NPL ratio, indicating effective risk management.

Valuation and Target Price

• The current share price of BoCQ is 17% below its IPO price of HKD6.00.
• The fair value is estimated at a 2014E PBR of 0.7x, implying a fundamental valuation of HKD8.20/share.
• After factoring in a 30% haircut for LGFV exposure (HKD2.8/share), the target price is set at HKD5.40, with an upside of 8.9%.

Key Information

Investment Case

• BoCQ is initiated with an Outperform rating and a target price of HKD5.40.
• The market has not fully priced in the bank's growing small and micro enterprise lending business and fee income growth.
• The bank is expected to deliver upside surprises in earnings due to NIM and fee income growth, which are seen as catalysts for share price performance.

Financial Highlights

• Net Profit Growth: Forecasted to grow at a CAGR of 17% for 2013-15, driven by both interest and fee income.
• EPS Growth: Expected to increase from CNY1.021 in 2013E to CNY1.145 in 2015E.
• PBR: 0.7x in 2014E, 0.6x in 2014E (based on forecasts), and 0.5x in 2015E.
• Dividend Yield: Expected to rise from 2.2% in 2013E to 2.9% in 2015E.
• DPS: Projected to increase from CNY0.085 in 2013E to CNY0.115 in 2015E.

Risk Factors

• LGFV Exposure: BoCQ has significant exposure to local government financing vehicles, which could lead to slower interest income growth and declining capital ratios if regulators tighten measures.

Catalysts

• The growing small and micro enterprise lending business and fee income growth are expected to drive earnings growth and positive share price performance.
• BoCQ's strong asset quality and effective risk management are key strengths.

Competitive Landscape

• Chongqing's banking sector is dominated by large state-owned and joint stock banks, which hold 63% of total loans and 64% of total deposits.
• BoCQ's market share is relatively smaller compared to its major competitors, such as CRCB, ICBC, ABC, and CCB, but it has a stronger focus on small and micro enterprises.

Supporting Policies

• The Chongqing government has implemented several policies to support small and micro enterprises, including fiscal subsidies, tax reductions, and interest subsidies.
• These policies have helped BoCQ expand its lending to this sector and improve its financial performance.

Summary of Financials

Profit and Loss (CNYm)

Key Ratios

Balance Sheet (CNYm)

Conclusion

BoCQ is well-positioned to benefit from the growth of small and micro enterprises in Chongqing, with a strong focus on this segment and a growing fee-based income stream. Its strong asset quality and low NPL ratio further support its financial stability. Despite the risks associated with LGFV exposure, the bank's current valuation offers an opportunity for investors, and its growth prospects are viewed positively by the analysts.