Positives: better retail, NIM, fees. Negatives: NPL, asset shrinkageChina Everbright Bank （CEB） reported 2Q17 results with net profit to commonshareholders of Rmb7.3bn （after deducting preferred shares dividend）， up 5.3%yoy, due to lower provisions offset by a PPoP decline of 3.5% yoy. Notably,CEB’s asset balance declined by 2.3% qoq, as it cut off shadow banking assetsand interbank liabilities. To offset the earnings pressure, the bank grew itscredit card business aggressively, with revenue up 35% yoy, to contribute 28%of group revenue in 1H17. However, being one of the most wholesale-fundedbanks, with weak deposit growth and a rebound in NPL formation, we expectfurther deleveraging pressure, and we maintain a Sell rating.
　　Key operation trends in 2Q17/1H17
The balance sheet shrank by 2.3% qoq due to a contraction of receivableinvestment （down 20% qoq） or, specifically, interbank WMP （down 84%hoh in 1H17）。 Nevertheless, shadow banking exposure remained elevated,with receivable investment accounting for 13% of total assets. In contrast,loan growth in 2Q17 was strong, at 15.5% yoy.
On the funding side, the bank scaled back interbank borrowings, butdeposit growth was still weak （up 4% yoy）。 As such, LDR rose to 86.5%（84.5% in 1Q17）。 CEB remained one of the most wholesale-funded banks,with interbank liabilities making up 28% of total liabilities （we estimate）。
The retail division recorded PPoP growth of 55% yoy, leading to a PBTcontribution of 35% in 1H17, vs. 24% in 2016. Retail loans grew strongly,by 27% yoy, driven by mortgages （+47%） and credit cards （+29%）。 OtherJSBs （such as CITIC, BoCom） all promoted their credit card businessnotably, which may explain the strong growth in short-term consumptionloans in China （China’s consumer debt boom, dated 17 August 2017）。
NIM stabilised in 2Q17, given the shrinkage of the lower-margin interbankbusiness, up 2bps, at 1.53%, per our calculation.
Fee income grew by 11% yoy in 2Q17, driven by agency fees （up 59% yoyin 1H17）， bank card fees （up 46%） and settlement & clearing （up 27%）。
Asset quality showed mixed trends. The NPL formation rate rebounded to107bps in 2Q17 from 78bps in 1Q17. The NPL ratio rose by 4bps qoq to1.58%, while the coverage ratio dropped by 5.5ppts to 152%. The SMLratio improved by 46bps hoh to 3.32%, and overdue more than 90 dayloans dropped 3% hoh, accounting for 111% of the NPL balance in 1H17.
Capital improved slightly, with the CET-1 ratio up 10bps qoq to 8.35%.
　　CBRC approved CEB’s Rmb27bn private placement plan in July, whichshould boost its CET-1 ratio by 1ppt to 9.3%, per our estimate.