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Morningstar | CMBC 1H Results Remained Weak with Mixed Credit Quality Outlooks. See Updated Analyst Note from 02 Sep 2018

No-moat China Minsheng Bank Corp's, or CMBC's, first-half results posted a rebound in net interest income and fee income growth in the second quarter, in line with most listed peers. While top line growth remained weaker than peers and suffered from greater negative impact from the adoption of the new accounting standard, indicating the bank remained in painful transformation, which was compounded by slowing economic activities and intensifying deposit competition. As expected, the 5.7% net profit growth was in line with peers but core earning growth including fee income and net interest income continued to underperform. The results were on track to meet our CNY 51.9 billion, or 3.7% growth in full-year forecast net profit and we made no changes to key assumptions.

We adjust our fair value estimate for China Minsheng Banking to CNY 5.90 from CNY 5.92 due to rounding. And we lower our H-share fair value estimate to HKD 6.50 from HKD 7.33 to reflect the latest CNY/HKD exchange rate.  Its H shares are undervalued, trading at 14% to our fair value estimate and 0.45 times 2018 price/book value assuming 10% net assets growth in 2018. Despite its cheap valuation level, we believe the bank has higher uncertainties given its heavy reliance on interbank funding and relatively large exposures to shadow bank and small business. Growth in net interest income and fee income fell 17.6% and 0.6% from the year-ago period. Excluding the change in accounting rules which required CMBC to classify income from financial assets as measured at fair value through profit and loss into investment income instead of interest income, net interest income grew 13%.

Second-quarter fee income achieved the first positive growth at 5% since 2017, while it was not enough to offset the 6% decline in the first quarter and resulted in a 0.6% decline in the first half. This was attributable to a 27% growth in bank card fee which representing nearly half of total fee income. Custody and agent sales related fee dropped 41% and 21% on strict regulations and these two categories represented 16% and 19% of total fee income. As contribution from bank card fee further improves, we expect fee income growth will improve to low-single digits in 2018. Net interest margin expanded 24 basis points to 1.64%, the lowest level among listed banks. CMBC expanded loans by 7% and increase average loan yield by 43 basis points, with corporate loan and retail loans growing 8% and 4% respectively. Deposit base was weakening and deposit costs rose 23 basis points, with retail and corporate deposits dropping 6% and 1% respectively. The bank increased interbank deposit by 19% and the funding costs rose 76 basis points.

Credit quality was mixed, with bad debt ratio seeing slight rebound to 1.72% and total amount of bad debts plus accumulated write-offs grew 9% from 2017, versus the 14% growth in the year-ago period. Special mentioned loan was flat from 2017, while overdue loans grew 8% from 2017, driven by a 14% growth in loans overdue within 90 days on weakening economy. Provision coverage fell 11 basis points to 161% from the first quarter. As bad debts merely covered 75% loans overdue more than 90 days, we expect CMBC will need to speed up bad debt recognition and increase credit costs from the current 1.33% level. This will pressure its future earning growth.