Results miss. CRCB reported 2018 results on Tuesday. Total loans as of 2018 grew by 12% YoY andtotal deposits grew by 8%. NIM decreased to 2.45% in 2018 from 2.62% in 2017 and 2.71% in 1H18.
　　Total revenue reached Rmb26bn, representing 9% YoY growth. Attributable net profit arrived atRmb9.1bn, representing 1.4% YoY growth. Basic EPS reached Rmb0.91, 4% lower than ourexpectation. The company decided to pay dividend of Rmb 0.2 per share, representing 22% pay outratio.
　　NIM contraction. We believe its funding advantage is becoming less important amid declininginterbank liability costs. In 2017, a steady stream of interbank regulations lead to a rising interbankrate, but since 2018, monetary policy adjustements have improved liquidity in the interbank market.
　　The weighted average interbank repo rate increased by 122bps in 2017 and declined by 51bps in2018. However, while CRCB’s stronger deposit base and lower proportion of interbank liabilitiesoffered protection in 2017, upside was limited in 2018. Its NIM decreased to 2.45% in 2018 from2.62% in 2017 and 2.71% in 1H18. Going forward, given the challenging economic outlook anddeclining asset yields, we expect further NIM contraction for the bank.
　　Lower asset growth potential and weakening asset quality. We believe its asset growth may becurbed by a lacklustre economic environment. Against the backdrop of an improving economy in2017, CRCB enjoyed rapid loan growth due to its low loans to deposit ratio. Its loan growth reached12.5% and 12% in 2017 and 2018, as compared to sector average level of 10% and 9.9%. Lookingforward, however, the broad deceleration of economic activities and rising exposure to private aswell as small firms will lead to market concerns about rising credit and liquidity risks, which will curbthe potential for asset growth for banks and lead to rising asset quality risk. Its NPL ratio reached1.29% by end 2018 as compared to 0.98% by end 2017 and 1.34% by end 3Q18. Coverage ratioreached 348% as compared to 431% by end 2017 and 333% by end 3Q18.
　　Downgrade to underperform. In light of NIM contraction and lower asset growth potential, we revisedown our EPS forecasts to Rmb0.94 in 19E （+3.3% YoY）， Rmb0.99 in 20E （+6.1% YoY） and Rmb1.07 in21E （+8.1% YoY）。 The stock is currently trading at 0.54x 19E PB. We give it a target 19E PB of 0.5x andrevise down target price from HK$4.87 to HK$4.41. With 10% downside, we downgrade our ratingfrom Hold to Underperform.