EUR 850.00 For Business Accounts Only

Morningstar | 600016 Updated Forecasts and Estimates from 20 May 2019

No-moat China Minsheng Bank Corp's, or CMBC’s, first-quarter results posted a strong 19% rebound in revenue in the first quarter, up from 9% in 2018, driven by both net interest margin, or NIM, expansion and fee income growth recovery. Along with an accelerating top line growth, the bank also achieved the strongest improvement in operating efficiency among listed Chinese banks we cover, cost/income ratio declined 346 basis points to 21.3%. While that ratio is one of the lowest among our Chinese banks coverage, we’re not very impressed with it given the bank has a smaller branch network and heavily focuses on corporate and wholesale banking, which has high operating efficiency and is higher risk in nature. Despite the strong rebound, we expect rising headwinds including climbing funding costs and provision pressure for the bank in coming quarters, given the recent regulatory trend to further lift the standards for bad debt classification. Given the results were largely in line with our expectation, we retain our fair value estimate of CNY 5.50 per share for China A-shares and HKD 6 for H-shares.

H-shares are fairly valued, trading at 0.55 times 2019 price/book value, assuming 8% net assets growth in 2019. Despite its cheap valuation level, we believe the bank has higher uncertainties given its heavy reliance on interbank funding and large exposures to shadow banks and small business. In 2018, management embarked on a three-year plan to transform it into a customer-focused bank, with an emphasis on private enterprises, financial technology, and the provision of comprehensive services. After a shrinking retail deposit balance in 2016 and 2017, we’re pleased to see a stronger growth in retail deposits since 2018 continued into the first quarter. Retail deposit grew 21% and 17%, respectively, in the first quarter and 2018, versus the 6% and 5% growth in corporate deposits. Retail deposit share expanded to 19% of total deposit from 12% in 2017. We expect retail deposit will continue to deliver stronger growth than corporate deposits while this present NIM pressure goes forward.

Credit quality remained weaker than peers despite CMBC’s elevated efforts in bad debt disposal. Bad debt ratio fell one basis point to 1.75% while bad debt balance rebounded 2% from 2018 on seasonality. CMBC increased credit cost to 1.84% from 1.2% in the year-ago period. However, provision coverage remained low at 138%. Small business loans has resumed growth since 2017, after a three-year restructuring with shrinking balance. Share of such loan now represented 14% of total loans versus 12% in 2017. Although the underserved private enterprise banking market is likely to boost CMBC’s income in the near term, we are concerned about the bank’s ability to manage such credit risks. Furthermore, recent efforts by large banks to tap into such underserved market and the regulator’s call to lower loan pricing to small business owners will put pressure on CMBC’s underwriting profitability.