Asset quality remained benign with NPL coverage far higher
than peers; stable outlook unchanged
QoQ NIM decline surprised to the downside; expected to
stabilise in 2H and remain the highest among peers
Maintain Buy rating and target price unchanged at HKD6.40;
cutting earnings by 1% on average for 2017-19e
　　2Q17 profit growth was 9.3% y-o-y, slightly lower than 10.7% in 1Q17. 1H17 profitgrew 10%, largely in line with our full year estimates. The bank proposed an issuanceof 700mn domestic shares at RMB5.75 per share. Once completed, CET1 could beboosted by RMB4bn or c60bps by our estimation.
　　What we liked: (i) NPL ratio was largely stable at 0.97%, up 1bp q-o-q. Loan lossreserve increased 6bp q-o-q to 4.12% in 2Q17. NPL coverage remain unchanged at425% in 2Q17, the highest among peers. (ii) Cost-to-income ratio improved 5ppt y-oyin 2Q17 to 32.4%, mainly helped by lower operating cost (-6% y-o-y).
　　What we disliked: (i) 2Q17 fee growth was 4% y-o-y, up from an 8% decline in1Q17. In 1H17, fee income declined 2% y-o-y, as decline in settlement fees (-27% yo-y)and bank card (-23% y-o-y) offset the increase in agency fees (+21% y-o-y). Feeincome accounted for only 10% of operating income in 1H17, up from 9% in 2H16.
　　Other points of interest: (i) NIM was 2.52% in 2Q17, down 14bp q-o-q while up22bp y-o-y. Despite this, the bank’s NIM remained the highest among banks underour coverage. 1H17 NIM declined 4bp h-o-h to 2.59%, with a rise in asset yield(+14bp h-o-h) offset by higher funding cost (+16bp h-o-h). The higher funding costwas mainly driven by rising cost on interbank liabilities (+51bp h-o-h) and bonds(+73bp h-o-h). (ii) Tier-1 ratio fell 25bp q-o-q to 9.68%, offering a 118bp buffer abovethe required level. The bank proposed the issuance of 700mn domestic shares atRMB5.75 per share, totalling RMB4bn. Once completed, the bank’s CET1 and tier-1ratio could be boosted by c60bp on our calculations. (iii) Non-standard credit assets(shadow bank) investments grew 13% h-o-h in 1H17, accounting for 22% of assets(2H16: 21%). (iv) NPL recognition ratio (defined as NPL / overdue 90D loans)deteriorated by 20ppt h-o-h to 85% in 1H17.
　　We maintain our Buy rating on CQRCB and our target price for the H-shares ofHKD6.40 despite lowering 2017-19e earnings by -1% on lower NIM forecast androllover to 1H18e BVPS. See page 3 for valuation and risks.