Positives: Less interbank and shadow, better fees; negatives: NIM, NPL, capital
China CITIC Bank （CNCB） reported 2Q17 results with net profit of Rmb12.6bn,up 1.8% yoy. This was driven by a PPoP growth of 2.3% yoy offset by higherprovisions. Most notably CNCB proactively shrank asset base by 2% qoq insecond consecutive quarter, cutting down interbank assets （-18% qoq） andshadow banking （-21%）。 Despite near-term earnings impact, the balance sheetde-risking is welcomed as it lowers regulatory risks and paves the way for NIMexpansion. However, we do not see the 2Q17 results as a fundamentalturnaround, as concerns are still lingering on its weak capital, muted depositgrowth and rising overdue loans. Maintaining Hold rating.
　　Key operation trends in 2Q17/1H17
　　Balance sheet contraction continues: total assets kept declining by1.7% qoq in 2Q17 （versus -3% qoq in 1Q17）， due to contraction ofreceivable investment （-21% qoq） and interbank assets （-18% qoq）。
　　Liability also dropped by 1.9% qoq （vs -3.4% qoq in 1Q17） on lessinterbank funding.
　　On-B/S shadow banking （receivable investment） remained high at14.9% of total assets in 2Q17. Given insufficient provision （0.3% vs.
　　2.53% of loans）， the bank is likely to face rising pressure from bookingmore provisions.
　　NIM dropped by 7bps qoq but at a slower pace vs. down 16bps qoq in1Q17. Unlike a minor qoq increase in 1Q17 （+3bps）， asset yield hasseen paralleled increase （+14bps） with funding cost （+15bps） in 2Q17.
　　Fee income grew by 16.5% yoy in 2Q17 and 1H17 fee income grew by6.9% yoy, underpinned by strong bank card fee growth （+63% yoy），while agency and wealth management fee remained weak, decliningby 34% yoy and 20% yoy, respectively.
　　Asset quality: NPL formation rate stayed elevated at 145bps in 1H17vs. 169bps in 1H16 and 149bps in 2H16. While NPL ratio improved to1.65%, overdue more than 90 day increased by 13% hoh to make up128% of NPL, suggesting still weak NPL classification.
　　Weak capital adequacy: bank’s CET1 ratio remained weak at 8.61%,down 25bps qoq; RWA density surged by 3.2% qoq to 72.1%. T1 andtotal CAR ratio came at 9.6% and 11.8%, respectively, as of 2Q17.
　　Retail division recorded PPoP growth of 40% yoy, leading to PBTcontribution of 32% in 1H17 vs. 20% in 2016. Retail loans grewstrongly by 41% yoy, driven by credit card （+52%）， and mortgage（+42%）。