EUR 850.00 For Business Accounts Only

Morningstar | CMBC’s Weaker-Than-Expected 4Q Earning Alerts Indicated Rising Credit Quality Risks; Reduced FVE. See Updated Analyst Note from 01 Feb 2019

Following no-moat China Minsheng Bank Corp's fourth-quarter preliminary results, we reduced our fair value estimate to CNY 5.50 from CNY 5.90 per share for its A shares, and HKD 6 from HKD 6.50 per share for H shares, as we increase our credit costs assumption in the near term to factor in higher credit quality risks for the bank. The bank’s H shares are fairly valued, trading at 0.57 times 2018 price/book value with 11% net assets growth in 2018. The bank is trading at the low end of the valuation range for Chinese banks. Despite its cheap valuation level, we believe the price discount is not adequate to compensate for the bank’s high uncertainties given its heavy reliance on interbank funding, higher-than-peer exposures to shadow bank and small business. Furthermore, the bank’s complicated crossholding and lending links with Huarong Asset Management and China Minsheng Investment Group, CMIG, are also concerns. Former chairman of Huarong was prosecuted for corruption, while CMIG is cash strapped and recently defaulted on principal payment of its RMB 3 billion private placement bond.

Net profit growth of 1% was lower than our expectation of a 4% increase for 2018, and this has slowed from 6.1% for the first three quarters. Total revenue growth was largely steady at 8.7%, versus the 9.2% growth in the first three quarters. With fourth-quarter operating profits merely half of the previous quarter, we suspect this was dragged by increased operating expenses that tend to rise at the year-end and a surge in bad debt provisioning. As bad debts merely covered 75% of loans overdue more than 90 days by mid-2018, CMBC faces significant pressure to adopt stricter bad debt classification standards.

Another pressure for provisioning might come from increased lending to micro and small business to achieve higher loan yield. Such loans represented about 13% of total loans while credit risks are high. According to officials at the PBOC, bad debt ratio of micro and small business with borrowing amount below CNY 5 million averaged at 6.5%, much higher than the average 1.2% and 2.5% bad debt ratios for loans of large-sized and mid-sized enterprises respectively. We estimate provisioning charges rose to around CNY 16.8 billion, versus CNY 10.7 billion in the previous quarter. Thus full-year provisioning charges increased 77% from 2017. Despite significant increase in credit costs, bad debt ratio increased by five basis points to 1.76% from 1.71% in 2017, indicating larger-than-peer credit risks for the bank.