NIM trend
Management expects NIM to expand in 4Q17 and in 2018, due to stable retailfunding. Chongqing Rural Commercial Bank （CRCB）’s deposit rates are alreadythe highest in rural Chongqing vs. other peers, so the threat from depositcompetition would be insignificant.
Loan
Management sees new loan amounts in 2018 as likely to remain stable. In thepast few years, CRCB has lent out all the annual loan quota approved by theregulator, given intact loan demand in Chongqing district. Sector-wise, loans tomanufacturing, infrastructure and water resources are still the main focus of2018. Although consumption loan demand has risen in Chongqing recently, thecontribution may be small, given the relatively smaller scale.
Asset quality
Its overdue loan ratio, which surged to 2.92% in 1H17 vs. 1.53% at end-2016, wasmainly from a few SOEs’ delayed payment. Management indicated the ratio hasdeclined, with those SOEs' interest/principal repayment. It was also mentionedthat overall asset quality in Chongqing is stable. As of 3Q17, the bank's coverageratio came in at 435%, the second highest among listed banks. Management isstill looking to building up reserves, to weather any potential downturn.
Other highlights （IFRS9, fundraising, regulation）
Management expects to see further tightening of scrutiny of the overall financialsector; financial de-leverage will be further focused and strengthened, in relationto which some smaller banks will notably suffer. Normalised credit cost will see ayoy decline in 2018 if excluding the impact from IFRS 9. CRCB has already appliedfor A-share listing on 5 January 2018, targeting to issue RMB1,357m shares.
Duetsche Bank view
We upgraded CRCB to Buy on 2nd January 2018, as: 1） we see it as a keybeneficiary of higher market rates, due to its solid deposit franchise; 2） capitalconcern was recently removed on the back of the completion of a privateplacement; and 3） the valuation is attractive at 0.7x PB against 15% ROE.