EUR 850.00 For Business Accounts Only

Morningstar | CMBC Top-Line Growth Rebounds on NIM Expansion, Deposit Base and Provision Coverage Remain Weak

No-moat China Minsheng Bank Corp., or CMBC, posted an 8.7% rebound in revenue in 2018 versus the 7% decline and 0.5% growth respectively in 2017 and 2018, driven by net interest margin, or NIM expansion. Owing to a 158 basis point improvement in cost to income ratio, the increase in pre-provisioning operating profits accelerated to 11%. Net profit growth slowed to 1.0% as a result of increased provision coverage. The results were blemished by a larger-than-peer increase in deposit costs and significant deterioration in credit quality. This also confirmed our view that CMBC’s weak deposit base and high credit risks are major challenges for its prolonged business restructuring.

Given the results were largely in line with our expectation, we retain our fair value estimate of CNY 5.50 per share for A shares and HKD 6.0 for H shares. H shares are fairly valued, trading at 0.5 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 into a customer-focused bank, with an emphasis on private enterprises, financial technology and the provision of comprehensive services. 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. And we are disappointed there are little commentaries over how management plans to enhance its weaker-than-peer deposit base.

The 11% decline in net interest income was because a change in accounting rules, which forced CMBC to classify income from financial assets as measured at fair value through profit and loss into investment income instead of interest income. Regardless of such an effect, the net interest margin expanded 23 basis points to 1.73% in 2018, helped by a 48 basis point increase in average loan pricing and 52 basis point increase in average yield in interest-earning assets. The bank also boosted NIM by increasing the proportion of deposits and loans. But some of the positive impact were offset by a 41 basis point increase in average deposit costs and 23 basis points in average funding costs. We expect CMBC’s NIM will see greater-than-peer benefits from the lower wholesale funding rate in 2019. However, the boost is likely to be offset by higher deposit costs, leading to our expectation for a slight reduction in NIM.

Credit quality remained weak despite CMB’s elevated efforts in bad debt disposal. The bad debt ratio climbed 5 basis points to 1.76% and the bad debt balance increased 12% to CNY 54 billion in 2018. The bad debt formation rate surged to 1.98% from 1.28% in 2017, the highest level over the last few years. On stricter bad debt classifications, bad debt balance now covers 103% of loans overdue more than 90 days. Although CMBC increased credit costs to 1.58%, we believe such a provision level is insufficient, as provision fell to 132% from 156%, lower than the 150% regulatory requirement. The balance in leading indicators, including special-mentioned loans and overdue loans, contracted by 9% and 11% from 2017, while the growth in loans overdue within 90 days rose 14%, indicating a mixed credit quality outlook for the bank. We expect CMBC will continue to face higher-than-peer credit cost pressure over the next three years.