Earnings were slightly better than expected. In the first half of the year, Harbin Bank realized a net profit of 100 million yuan attributable to shareholders of the parent company, up 15.0% year on year; earnings of 0.22 yuan per share; profit was slightly better than our expectations of 1.4%. Mainly because income tax was slightly lower than expected, the effective tax rate for the first half of the year was only 22.3%, down 3.3 percentage points from the previous year. Mainly due to a sharp reduction in non-deductible expenses, the simultaneous increase in tax-free income (mainly including interest income from Chinese treasury bonds and interest income from small farmers' loans). The increase in profit was mainly due to scale (contribution), cost savings (11.9%), and processing fees (5.7%), but was partially offset by increases in expenses (-23.9%). The average ROA for the first half of the year was 1.07%, down 0.09 percentage points from the previous year; the average ROE was 14.36%, up 0.36 percentage points from the previous year. The cost and revenue ratio for the first half of the year was 24.85%, down 3.33 percentage points from the previous year.

Total assets/loans and deposits were 4779.65/1927.19/3306.73 billion yuan, an increase of 7.4%/29.6%/7.8% over the end of the previous year. The increase in assets came mainly from loans (contribution of 9.6%), followed by bond investment and deposit of central bank funds (contribution of 3.0% and 2.3%), but was partially offset by a decrease in buy-back sales (impact -10.0%), while the increase in debt came mainly from deposits (contribution 5.8%). Since this year, the central bank has implemented the regulation of generalized credit loans, and the Bank of Kazakhstan has drastically reduced buybacks and increased its investment in loans. The year-end deposit-to-loan ratio increased 9.8 percentage points from the beginning of the year.

Bad generation and overdue growth have accelerated, and efforts to raise funds for non-target investments have been stepped up. The non-performing balance was 2,963 million yuan, an increase of 42.5% over the end of the previous year; the non-performing rate was 1.54%, up 0.14 percentage points from the end of the previous year; the generation rate of bad balance was 1.32%, up 0.06 percentage points from the previous year, up 0.59 percentage points from the previous year. Concerned categories accounted for 2.46%, down 2 basis points from the end of the previous year. Overdue growth was faster. The year-end balance was 7.135 billion yuan, an increase of 38.1% over the end of the previous year, an increase close to the full-year growth rate of last year; 51% of the overdue increase were loans overdue for 90 days; overdue accounted for 3.70%, an increase of 0.20 percentage points over the end of the previous year, with overdue loans within 90 days accounting for 2.1%. Overdue for more than 90 days/bad rate was 105.8%, up one percentage point from the beginning of the year. The bad score is still cautious. Looking at the structure, 37% of the bad increase in the first half of the year came from personal consumption loans, 9% from small business natural person loans, 30% from wholesale and service businesses, and 7% from agriculture, forestry, animal husbandry and fishing. The non-performing rate of manufacturing loans in the first half of the year fell to 2.22% from 2.79% at the beginning of the year. Credit costs in the first half of the year were 1.34%, up 0.47 percentage points from the previous year; the loan reserve ratio at the end of the period was 2.46%, up 0.03 percentage points from the end of the previous year; the loan coverage rate was 159.73%, down 14.10 percentage points from the end of the previous year.

The impairment charge for other assets in the first half of the year was 544 million, exceeding the level for the full year of 2015. The forecast was mainly due to the provision of investment accounts receivable. The receivables investment balance at the end of the period was 959 million yuan, an increase of 482 million yuan over the end of the previous year; the reserve ratio was 1.03%, up 0.50 percentage points from the end of the previous year.

Thanks to debt cost control and increased deposit-to-loan ratios, interest spreads were relatively stable in the first half of the year. The net profit margin for the first half of the year was 2.49%, up 6 basis points from the previous year. The net interest yield was 2.68%, which was basically the same as the previous year, down only 1 basis point from the second half of last year. The main benefit was that the company acted as an interbank bank, benefiting from a sharp drop in interbank interest rates. The company also took the initiative to strengthen debt management, appropriately reduce the share of high-cost liabilities, and actively absorb low-cost current deposits (year-end current account ratio was 39.6%, down 1.2 percentage points from the beginning of the year).

Interest spreads on deposits and loans have narrowed, but loans with high interest rates have increased as a share of assets, low-cost deposits have increased as a share of debt, and the share of high-cost bonds issued has declined, and the cost of debt is relatively well controlled.

The growth of China's revenue has accelerated, and the scale of non-target financial management is very small. The momentum for the development of Russian-specific businesses and subsidiary businesses is good. Net revenue from fees and commissions was realized in the first half of the year of the year to 1,263 million yuan, an increase of 33.5% over the same period last year. The growth rate was 19.8 percentage points faster than the same period last year, mainly due to the increase in consulting and advisory fees, settlement fees, and agency and trusteeship business processing costs; handling and commission income accounted for 18.4% of net operating income, an increase of 1.2 percentage points over the previous year. The balance of asset management products was 106.406 billion yuan, an increase of 27.14% over the end of the previous year, including 54.258 billion yuan for non-capital protected property products; the balance of non-target assets invested in property products was 120 million yuan, accounting for 0.11% of the balance of investment in property products and 0.03% of total assets at the end of 2015. In the first half of the year, Russia's financial business operating profit was 116 million yuan, an increase of 25.7% over the previous year; the total leased assets of the Bank of Kazakhstan increased compared to the beginning of the year, achieving a net profit of 112 million; all 24 holding village banks realized profits, with a total net profit of 201 million yuan, an increase of more than 20% over the previous year.

The contribution of retail finance has increased, and the share of personal consumption loans has increased significantly. Retail finance revenue increased year over year, accounting for 25.7% of revenue, up 5.5 percentage points year over year. The pre-tax profit of retail finance was 557 million yuan, accounting for 17.6%. Retail wealth management fees and commission revenue was $38 million, double that of the same period last year. Retail deposits accounted for 31.8%, up 0.6 percentage points from the beginning of the year; retail loans accounted for 44.6%, up 3.1 percentage points from the beginning of the year. Looking at the loan structure, the balance of microcredit loans was 144.649 billion yuan (including small business corporate loans and natural person loans), an increase of 29.3% over the end of the previous year, accounting for 75.1%, and a slight decrease of 0.2 percentage points from the beginning of the year; among them, small business corporate loans and natural person loans accounted for 10.0%, down 3.3 and 1.9 percentage points from the beginning of the year. Personal consumption loans accounted for 28.2%, up 5.1 percentage points from the beginning of the year. Agricultural loans accounted for 21.3%, down 1.4 percentage points from the beginning of the year. Of these, farmers' loans accounted for 6.4%, a slight decrease of 0.1 percentage points from the beginning of the year. Loans to the public accounted for 53.8%, a decrease of 4.4 percentage points from the beginning of the year, mainly the share of loans from wholesale and service industries, real estate, transportation, warehousing, and postal services, and manufacturing industries.

Maintain long-term buying ratings. Since 2016, as of July 13, Huaxia Life has purchased 100 million shares three times, reaching a shareholding ratio of 4.43%, making it the 7th largest shareholder. Currently, the shareholding ratios of the top two major shareholders, East Harbin Economic Development and Investment Company and Harbin Science and Technology Innovation Investment Co., Ltd. are 19.65% and 6.55%. The current shareholding ratio of Huaxia Life Insurance is not far different from the second largest shareholder. It is not ruled out that Huaxia Life Insurance will continue to increase its holdings in the future. The profit forecast for 16 years was basically maintained, with a slight increase of 1.8% in 17. The estimated profit growth rate for 16-17 was 7.6%/12.6%. Currently, PE/PB in 2016 is 5.0/0.65 times. Maintain the long-term buying rating and maintain the target price of HK$2.56.