EUR 850.00 For Business Accounts Only

Morningstar | China Minsheng Banking's Core Earning Growth Remained Weaker Than Peers in the Third Quarter

No-moat China Minsheng Bank Corp's third-quarter results were largely in line with our expectations, with total revenue and net profits improving 8.9% and 6.1% from the year-ago period, versus the 6.7% and 5.4% respective growth rates in the first half. Net profit growth was in line with peers, but core earnings growth including fee income and net interest income continued to underperform. Third-quarter net interest income declined 8.7% while fee income grew 1.2% from the year-ago period, indicating significant pressures for the bank’s prolonged business transformation given stricter financial regulations and a slowing economy. Representing 81% of our CNY 51.9 billion full-year net profit forecast, the results were on track to meet our 4.0% growth in full-year forecast net profit, and we made no changes to key assumptions. We thus retain our fair value estimate for China Minsheng Banking of CNY 5.90 per share for A shares and HKD 6.50 for H shares. Its H shares are slightly undervalued, trading at 11% to our fair value estimate and 0.46 times 2018 price/book value assuming 10% 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, and its complicated crossholding and lending links with Huarong Asset Management, whose former chairman was recently prosecuted for corruption.

Net interest income fell 14.5% over the past three quarters, while our estimated net interest margin expanded by around 8 basis points from the previous quarter thanks to increasing allocation into loans and bond investment. We suspect the net interest income contraction was attributable to the implementation of IFRS 9 where part of interest income is now reported as investment return, and a shrinking scale of principal-guaranteed bank wealth management products to comply with new asset management rules. We expect NIM will narrow in the coming quarter given intensifying deposit competition.

Credit quality was mixed, with bad debt ratio increasing 3 basis points to 1.75% from mid-2018. Bad debt formation rate fell to 1.13% from 1.22% in the year-ago period. Credit costs climbed to 1.40% from 1.36% in 2017, leading to a 6-percentage-point increase in provision coverage ratio at 162%, only a few percentage points higher than the 150% minimum regulatory requirement. As bad debts merely covered 75% of loans overdue more than 90 days by mid-2018, we expect CMBC will need to speed up bad debt recognition and increase credit costs from the current 1.40 level. This will pressure its future earnings growth.