1Q19 earnings beat, despite heavy provisions. CEB’s 1Q19 net profit rose 7.5%YoY to RMB 9.7bn, accounting for 27.1%/28.1% of CMBI/consensus full-yearestimate. 1Q19 earnings growth was above FY18’s 6.7% YoY and beat consensusFY19 forecast of 2.9% YoY. PPoP growth was well ahead of peers at 36.9% YoY,on robust net interest income （+51.2% YoY） and fee income （+24.9% YoY）。 Thisenabled the Bank to proactively top up impairment charges by 86.2% YoY.
Results positives: 1） NIM widened 36bps QoQ/56bps YoY to 2.28% in 1Q19,partly due to reclassification of credit card fees into interest income. That said,we believe CEB’s margin also benefited from lower cost of interbank funding, andmay expand further in coming quarters should liquidity condition stayaccommodative; 2） Net fee income was up 24.9% YoY, likely driven bysettlement, bank card, and wealth management businesses. CEB’s was one of thefirst joint-stock banks to receive approval for wealth management subsidiary on19 Apr; 3） Operating efficiency improved, as CIR down 1.8ppts YoY to 27%; 4）Deposit growth was strong at 10.5% QoQ, outpacing loan growth of 3.6% QoQ,thus lowering LDR by 6.1ppts to 88.3%; 5） Asset quality remained benign, asNPL ratio was unchanged at 1.59%, and provision coverage inched up 2.5ppts to179%.
Results negatives: 1） Return on security investments declined 33.7% YoY,more than offsetting the forex gain; 2） Capital ratio dropped slightly, as CET-1/Tier-1/total CAR were down 3bps/7bps/9bps QoQ to 9.11%/10.03%/12.92%,on faster RWA growth （+4.0% QoQ）。 CEB plans to issue RMB 35bn preferenceshare and RMB 40bn perpetual bond （pending for regulatory approval）。
Upgrade to BUY with HK$4.60 TP. CEB is trading at 0.55x FY19E P/B, 26%discount to sector average. Current valuation has yet to fully price in the Bank’sstronger-than-peers earnings momentum, in our view, and its buoyant NIM andfee trend is likely to outshine a relatively thin provision buffer. In addition, webelieve that management has incentive to achieve solid operating results in FY19,in order to facilitate the conversion of RMB 30bn CB （could boost CET-1 ratio by90bps after conversion to equity）。 As such, we raised our mid-term ROEassumption to 11.2% from 10.2% and lift TP to HK$4.60 from HK$3.70. Upgradethe stock to BUY from Hold.