Stable margin and asset quality in 4Q16; annual results beaton lower-than-expected provisions
Domestic shares issuance to raise RMB4bn and boost coretier-1 ratio by 0.7ppt
Remain Buy rating and target prices lifted by 7% to HKD6.10from HKD5.70; fine-tune earnings by 3%
2016 profit growth was 10% y-o-y, above our forecast and slightly picking up from 9%in 9M16. The faster-than-expected profit growth was mainly due to lower provision growthin 2H16, which declined by 31% y-o-y. 4Q16 profit grew as fast as 14% y-o-y.What we liked: (i) NPL ratio was flat q-o-q at 0.96% as of 4Q16. Loan loss reserve was4.1% (+22bp q-o-q); meanwhile NPL coverage increased 23ppt to 428% in 4Q16, muchhigher than peers. (ii) NPL recognition ratio (defined as NPL / overdue 90D loans)improved by 25ppt h-o-h to 105% in 2016. (iii) 4Q NIM was largely stable on a q-o-qbasis, down only 2bp to 2.62%. 2016 NIM was 2.74%, down 46bp y-o-y. (iv) Cost toincome ratio improved 2.5ppt y-o-y in 2016 to 39% mainly due to VAT reform.What we disliked: Fee income growth was 42% y-o-y in 2016, driven mainly byagency fee (73%) and wealth management fee (49%). However, 2H fee growth wasonly 16% y-o-y, with wealth management fee growing only 7%.Other points of interest: (i) Core tier-1 ratio went down 6bp q-o-q to 9.85%, offeringa 235bp buffer to requirement. Despite decent capital strength, the board of directorsapproved a private placement of 700m domestic shares (7% of enlarged share base)at a price no less than 2016 BVPS. According to our calculation, the placement couldraise as much as RMB4bn and boost core tier-1 ratio by 0.7ppt. (ii) Non-standardcredit assets (shadow bank) investments were at 20.5% of assets in 2016, up 0.3ppth-o-h. (iii) Loan growth was 12% y-o-y, 1ppt higher than 2015. There was almost noloan growth in 2H16, as most new loans were front-loaded in the first half. The loanmix among corporate and retail remained large the same h-o-h.Remain Buy, TP raised to HKD6.10 as we fine-tuned earnings up 3% for 2017-18e onlower credit cost. We also introduce our 2019e forecasts. See pg 2 for valuation andrisks. Investment thesis: we expect the bank to continue to benefit from fast economicgrowth in Chongqing City which could lead to a better asset quality trend. Also, the bankcould benefit from a higher interbank rate with its strong and liquid balance sheet.