What surprised us
ABC reported 1H16 NPAT of Rmb 105.1bn, up 0.48% YoY, or 59%/60% ofGHe/Bloomberg consensus FY16E. 1H16 PPOP was up 19% HoH thanks tonon-interest income, offsetting higher credit cost. Key trends: 1) 2Q NIMshrank by 15 bps qoq to 2.18% hurt by lower asset yields and sticky termdeposit cost by our estimate. 2) Revenue mix continued to improve asnet fee income (+7.3% yoy) rose to 24% of 1H revenue on the back ofstrong fee growth, driven by agency service fees and E-banking. 3) Shiftsin asset structure. While asset growth was modestly up 5% hoh, held-tomaturity(HTM) assets grew by 15%, where ABC added investment intomuni bonds, offering favorable tax/capital adjusted return. 4) Loan mixcontinued to shift to retail, during 1H 65.4% of new loans was allocatedto consumer (mostly mortgage), lifting the share of outstanding retailloans to 32.5% in 1H16. Management expects corporate loan demand toremain weak in 2H. 5) 2Q net NPL formation rate was 0.93%, down43bps QoQ by our estimate, mainly thanks to active NPL write-off.Annualized credit cost was flat at 0.78%, overdue loan formation ratedecreased by 13bps HoH to 1.39%. A majority of corporate NPLs are frommanufacturing (5.93% NPL ratio) and wholesale (13.88% NPL ratio). 6) Tier1 CAR remained at a comfortable 10.75% level after dividend payout vs.10.96% at YE15. Management expects to maintain stable payout.
What to do with the stock
We maintain our Buy rating on ABC H (Neutral on A shares) givenattractive valuation (6% div. yield and P/B at 6% discount to H sectoraverage in 2016E). Our 12-month RIM-based target prices remainHK$3.48/Rmb3.30. Key risks: better/worse-than expected NIM and NPL.