EUR 850.00 For Business Accounts Only

Morningstar | China Minsheng Bank's Asset Quality Remains our Concern

China Minsheng Banking Corp., or CMBC, is a leader in China’s micro- and small enterprise, or MSE, financing market. In the past, its differentiated strategy in the underpenetrated MSE sector has rewarded investors with enviable results via growth in shareholders' equity and net profits. However, the fragility of private economy translated to a painful business restructuring for CMBC from 2014 onward. These difficulties are compounded by ongoing regulatory tightening to crack down on shadow bank credits and reduce wholesale funding.Riding the wave of surging financing needs from China’s private sector since 2009, CMBC's net interest margin and asset expansion have previously benefited from rapid growth in this market. However, the company reached an inflection point as Chinese private companies could no longer afford high interest rates on loans during the economic slowdown. This resulted in a sharp decline in CMBC’s average lending rate and NIM level. Facing these challenges, the bank relied on fast growth in interbank liabilities and off-balance-sheet lending to maximize capital efficiency.To cope with mounting pressure in its credit quality and capital position, in 2015 CMBC launched a third round of strategic transformation, known as the Phoenix Plan, aiming to restructure the retail, corporate, and wholesale banking segment in the next three to five years. Though CMBC's financial results remained among the weakest for Chinese banks we cover, we've seen a trend of slowing bad-debt formation and the bottoming-out of NIM for CMBC's recent quarters, along with Chinese bank peers. Besides, CMBC saw growth in small-business lending in 2018, after a four-year restructuring and reduction in its related loan balance to clear up its loan quality issues. The private sector's improving profitability also bodes well for the resumption of growth in this market. However, we expect significant headwinds from regulatory tightening, given CMBC's weak deposit base and higher-than-peer exposure to shadow bank lending. Besides, the ongoing shareholder battle and management changes have weakened the strategy's execution, and we have yet to see meaningful achievement.