Management positive on NIM given higher pricing power overcorporate loans as well as interbank lending
Outstanding WMP scale declined q-o-q due to pressure fromMPA, which in turn affected fee income
Maintain Buy rating and HKD6.20 target price
Chongqing Rural Commercial Bank (CQRCB) attended HSBC’s 2017 ChinaConference held in Shenzhen on 11-12 May.
Net interest margin: With tightening liquidity, CQRCB saw NIM expand by 4bp q-o-qin 1Q17. The bank also saw higher pricing power over both corporate loans andinterbank lending currently, and thus expects NIM to increase on a yearly basis.Loan allocation: In 1Q17, the bank’s new loans primarily went to the corporatesector, while retail loans declined 1% q-o-q. Mortgages, the largest category withinthe retail segment, saw limited growth due to large repayments. Nonetheless,CQRCB will put more effort into mortgages and expects decent growth this year.Wealth management product (WMP) and non-standard credit (NSCA):
Outstanding WMP scale came down by the low teens in 1Q17 q-o-q, mainly due tothe impact of Macro Prudential Assessment (MPA) implementation. The underlyingassets of WMP are primarily allocated in bonds and money markets, with very little inNSCA. On-balance-sheet NSCA investment is about RMB30bn currently, with littlechange from last year. Management said the bank has the same credit standard forNSCA as for loans, thus the risk should be controllable.
Fee income: Fee income was flat y-o-y in 1Q17 excluding the impact of VAT.Management expects fee income to remain under pressure due to the declining scaleof WMP. Nonetheless, the bank is developing new fee income businesses, e.g. bondunderwriting and fund custodian, which could be the growth driver in 2H17.Maintain Buy rating and HKD6.20 target price. Investment thesis: we expect thebank to continue to benefit from fast economic growth in Chongqing City which couldlead to a better asset quality trend. Also, the bank could benefit from a higherinterbank rate with its strong and liquid balance sheet. We use an adjusted GordonGrowth Model to reach our HKD6.20 TP, which implies 21.1% upside, and we ratethe stock Buy. Key downside risks: Economic downturn in Chongqing, which couldlead to deterioration in asset quality; regulation tightening in receivables investment,which could affect capital ratios.