20140228-大和证券-Initiation__local_government_lending_casts_a_shadow_26页_757kb

Huishang Bank (3698 HK) Summary

Core Content

Huishang Bank, a city commercial bank in Anhui Province, is being initiated with an Underperform (4) rating and a 6-month target price of HKD3.15. The bank is heavily exposed to local government lending, which poses significant risks to its asset quality, profitability, and transparency. Additionally, its deposit base is weak, leading to liquidity issues and higher funding costs. The bank's revenue is overly dependent on interest income, with fee-based income remaining in early stages, making it vulnerable to interest rate deregulation and tighter capital requirements.

Main Points

• Local Government Exposure:

  • Huishang has a large lending business tied to local governments, which lacks commerciality and transparency.
  • The bank's loan portfolio includes a significant portion of local government financing vehicle (LGFV) loans, with 12.9% of total loans allocated to LGFVs as of 1H13, the second-highest among H-share-listed Chinese banks.
  • The provision coverage and loan loss reserve (LLR) ratios for LGFV loans are below industry standards, indicating potential credit risks.
  • Most LGFV loans are directed to lower-level local governments, which have weaker financial positions and higher repayment risks.

• Liquidity and Funding Challenges:

  • The bank failed to meet CBRC's liquidity requirements in 2012 and 1H13 due to a weak deposit funding base.
  • This has led to higher funding and operating costs to improve liquidity ratios.
  • There is a mismatch between deposit growth and loan growth, with deposit growth slowing down compared to loan growth.

• Revenue Diversification Issues:

  • Huishang's revenue is heavily reliant on interest income, with fee income contributing only 5.4% of total operating revenue in 2013.
  • The bank has limited success in expanding its SME lending business, and its fee-based income is still in the preliminary stage.

• Valuation and Target Price:

  • The fair value is based on a 2014E PBR of 0.66x.
  • The Gordon Growth Model suggests a blended 2014E PBR of 0.9x, leading to a fair value of HKD4.10.
  • A 30% haircut is applied for LGFV exposure, resulting in a target price of HKD3.15, implying a 2014E PER of 0.66x.

Key Financial Highlights (2013E - 2015E)

Catalysts for Downside

• Local Government Financing Problems in Anhui Province, particularly in LGFVs, could lead to further deterioration in asset quality and capital.
• Regulatory Tightening on local government-related lending could increase pressure on the bank's financial performance.

Risks

• Upside Risk: If the bank successfully grows its fee income beyond expectations.
• Downside Risk: Continued asset quality issues, regulatory pressures, and liquidity constraints.

Company Profile

• Established in 2005 through the merger of Anhui's city commercial banks and urban cooperatives.
• The largest city commercial bank in Central China in terms of total assets, loans, and deposits.
• Has a strategic distribution network with 199 branches, 97% located in Anhui Province.
• As of 1H13, state-owned enterprises hold 61% of its shares, indicating strong government ties.

Shareholding Structure

Loan Maturity and Risk Profile

Indirect Local Government Exposure

• Wealth Management Products (WMPs): Huishang invested CNY8.3bn in WMPs as of 1H13, representing 37% of its total equity.
• Directional Asset Management Plans (DAMPs): The bank increased DAMP investments to CNY5.1bn in 2012, accounting for 23% of total equity.
• Interbank Investments: Used as another method to extend credit indirectly to local governments.

Summary of Investment Case

• Weak Deposit Base: Leads to liquidity risk and higher funding costs.
• High LGFV Exposure: Increases asset quality and capital risk.
• Low Fee Income: Limits revenue diversification and makes earnings growth vulnerable to interest rate changes.
• Target Price: HKD3.15, with a 10.8% downside from the 27 Feb price of HKD3.53.
• Rating: Underperform (4), due to the above-mentioned risks and limited upside potential.