CRCB reported 1Q18 loans growth of 12.3% YoY and deposits growth of 9.4% YoY. Net interestmargin （NIM） was 2.7% （2017: 2.6%）。 Net interest income increased 14.9% YoY, while fees andcommission income fell 4.2% YoY. Net profit reached Rmb2.6bn （+5.2% YoY） and EPS hit Rmb0.26, 5%below our expectation. This is mainly due to its rising asset quality risk and credit cost. We revisedown our EPS forecasts from Rmb1.02 to Rmb0.95 in 18E （+7% YoY）， from Rmb1.18 to Rmb1.08 in19E （+13% YoY） and from Rmb1.38 to Rmb1.22 in 20E （+14% YoY）。 We lower our target price fromHK$7.60 to HK$7.08 （0.8x 18E PB）， and with 17.0% upside, we downgrade our rating from BUY toOutperform.
NIM on track but NPL is still under pressure. Backed by its strong funding capability due to its ruralpositioning, CRCB has been prudent in asset allocation, which makes it less impacted by the ongoIngregulations. Interbank liabilities fell by 5ppts in 2017 to 13% （sector: 16%）。 Retail deposits reached74% of total deposits （sector: 34%）。 Loans remained low at 36% of total assets （sector average: 42%）。
Its loan-to-deposit ratio remained stable at 57% in 2017 （sector average: 74%）。 Looking forward, webelieve the government’s current urbanisation drive in lower-tier cities will lift loan demand, and itslow base and potential A share listing will provide larger upside for loans growth. And we expect itsNIM to improve due to stronger pricing power and rising risk appetite. However, due to weaker thanexpected economy recovery momentum in central west China, its asset quality improvement lagsbehind its peers and leads to rising credit cost. This may hurt its earnings momentum but we believethe risk is controllable given its prudent asset portfolio and sufficient coverage ratio.
Capital position boosted. In Sep 2017, CRCB raised RMB 4bn by issuing 700mn new domesticshares（representing 7% of enlarged share capital） to three Chongqing SOE companies at RMB5.75（HK$ 6.75, representing 36% premium to its last closing price） with lock up period of three years.
The domestic share private placement enhanced its core tier 1 CAR and total CAR from 9.7% and12.4% in 1H17 to 10.6% and 13.5% in 3Q17. Moreover, after announcing to prepare for A share listingin Apr 2016, CRCB has submitted application materials to CSRC and received CSRC’s acceptancenotice in Jan 2018. Assuming CRCB could issue 1357mn new A shares（representing 11.95% ofenlarged share capital） at 1x 2018E BPS or RMB 7.23（HK$ 8.93）， its core tier 1 CAR and total CARcould reach 11.9% and 14.1% in 2019, which could support its asset growth in coming years.
Downgrade to Outperform. We revise down our EPS forecasts from Rmb1.02 to Rmb0.95 in 18E（+7% YoY）， from Rmb1.18 to Rmb1.08 in 19E （+13% YoY） and from Rmb1.38 to Rmb1.22 in 20E （+14%YoY）。 The stock is trading at 0.7x 18E PB. We lower our target price from HK$7.60 to HK$7.08 （0.8x18E PB）， and with 17.0% upside, we downgrade our rating from BUY to Outperform.