Rating:ACCUMULATE(Initiation) 

Target price: RMB6.86 

Share price (9 Sep): RMB5.77 

Market Cap (RMBm): 88,784.3 

Up/downside: 18.9% 

Hua Xia Bank is restructuring its retail finance model under a three-step strategy as it moves toward becoming a wealth management bank. 1H net profit lifted 17.6% yoy, 6.96ppt above 1Q21 growth. Asset quality continued to improve while asset expansion slowed. We initiate coverage with an ACCUMULATE call on this stock and a target price of RMB6.86. 

Credit impairment accrual declined yoy and profitability accelerated 

1H21 revenue increased 1.12% yoy, up 1.05ppt from 1Q21, and net profit increased 17.6% yoy, 6.96ppt more than in 1Q21. Net profit grew faster than revenue, mainly due to a decrease of 14.17% yoy in the provision of credit impairment losses. 

1H21 NIM decline narrowed; higher proportion of medium and long-term loans  

Net interest margin (NIM) was 2.41% in 1H21, down 18bp yoy from full-year 2020 and down 4bp from 1Q21. 1H yield on interest-bearing assets fell 10bp from full-year 2020, with yields on major loans down 16bp.  

The average balance of loans with relatively high 1H returns as a percentage of interest-bearing assets increased 0.54ppt to 62.93% vs the whole of last year. The bank focused on its commercial and investment banking model. It launched an annual review loan product designed to provide medium and long-term financing for manufacturing customers, and accelerated the provision of medium and long-term loans. In terms of average loan balance in 1H, the proportion of medium and long-term loans increased 4.35ppt to 65.56% from the whole of 2020. Of the average loan balance, retail sales rose 1.77ppt to 29.02% from 2020, with more retail investment in housing-related loans. 

The bank strengthened asset and liability management, focused on expanding low-cost debt sources and reducing deposit costs. Deposit cost ratio was 1.86% in 1H, down 0.05ppt yoy and down 0.02ppt from 2020. 

Asset quality continued to improve and asset expansion slowed 

At the end of 2Q21, the non-performing loan (NPL) ratio decreased 1bp qoq to 1.78% and the focus rate decreased 10bp to 3.27%, reducing the pressure on hidden NPL generation. The overdue rate at the end of 2Q increased 8bp to 2.04% from the end of 2020. Provision coverage decreased 4.21ppt qoq to 157.4%. 

The bank stepped up efforts in risk resolution. In retail loans, NPL ratio at the end of 2Q fell 10bp from the end of 2020. In corporate loans, NPLs were mainly concentrated in the manufacturing, wholesale and retail industries. At the end of 2Q, total NPL balance in the two segments accounted for 43.55% of total NPLs, a decrease of 4.90ppt from the end of 2020, and NPL ratio decreased 5bp and 82bp respectively from 2020. In terms of regional distribution, the Beijing-Tianjin-Hebei, central-eastern and northeastern regions had more risk exposures. NPL ratio in Beijing-Tianjin-Hebei dropped 5bp to 2.78% from the end of 2020. Affected by the consumer vs public sector NPL generation differential, NPL ratio in northeast China increased 45bp from the end of 2020. 

The expansion of the bank's assets slowed down and credit lending slowed down. At the end of 2Q, total assets increased 7.72% yoy, 3.91ppt lower than 1Q21, with loans and advances shrinking 4.40ppt to 6.16%. At the end of 2Q, core Tier 1 capital adequacy ratio fell 4bp qoq to 8.62%, with asset expansion under some pressure. 

Valuation and risks 

Under the bank's new five-year development plan, the retail business would serve as a stabilizer for its business development and provide a new growth engine. In 1H21, retail AUM increased 8.02% from the end of 2020. The bank comprehensively promoted the restructure of retail finance based on its three-step strategy toward becoming a wealth management bank. We forecast profit growth of 8.38%/9.21%/9.37% in 2021/22/23E, given our 0.45x PB target valuation in 2021E, with our corresponding target price at RMB6.86. We initiate coverage with an ACCUMULATE rating.Risks include: pandemic resurgence; economic downturn exceeding expectations; policy regulation releases exceeding expectations; and fluctuations in asset quality. 

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