Topline growth weakened by counter-cyclical provision. ABC’s 1Q19 netprofit rose 4.3% YoY to RMB 61.2bn, accounting for 28.4% of our and consensusfull-year estimate. 1Q19 earnings growth recovered from the dip in 4Q18, yetwas below FY19E’s 6.4%. This was mainly due to a prudent impairment charge（+25.1% YoY）， despite a healthy PPoP （+11.2% YoY） on robust non-interestincome.
Results positives: 1） Loan and deposit growth accelerated to 6.1%/6.3% QoQ,vs 4.0%/4.1% QoQ in 1Q18; 2） Net fee income was up strongly by 24.9% YoY,likely driven by bank card and wealth management businesses; 3） CIR declined0.5ppt to 32.5% on decent cost control; 4） Asset quality kept improving, withNPL ratio down 7bps QoQ to 1.52% and provision coverage up 12ppts to 264%（highest among the Big-4 banks）。
Results negatives: 1） NIM narrowed 8bps QoQ to 2.21% by our estimate, likelydue to loan yield pressure and rising funding cost for deposit competition in1Q19. Meanwhile, lower market rates and increased allocation to interbankassets （+41% QoQ） should drag overall asset yields. As a result, net interestincome was only up 1.4% YoY, much lower than 9.9% YoY growth of interestearningassets; 2） CET-1/Tier-1 ratio slid 16bps/19bps QoQ to11.39%/11.94%, as RWA growth outpaced internal capital generation amidfront-loading of new loans.
Maintain BUY and HK$5.30 TP. ABC’s 1Q19 results look mixed, as fast creditexpansion was overshadowed by NIM squeeze. Yield pressure is likely to lingerin FY19, given regulatory guidance for lower lending rate to MSE/private sector. However, the magnitude of contraction may abate in coming quarters, as marketrates appear to stabilize in April. Despite the margin headwind, we remainpositive on the stock over longer run, given its strong funding base and solidprovision buffer against macro uncertainty. ABC is currently trading at 0.62xFY19E P/B, 21% lower than its historical mean of 0.78x since listing in 2010.