Net profit grew strongly in the first half of 15, but asset quality concerns emerged; maintain neutral rating

Non-standard assets soared in the first half of 15 years, and their higher yield helped net profit increase by 28.1% year-on-year to 3.2 billion yuan (the same below), higher than our forecast of 19.7%.

Asset quality shows signs of deteriorating. Although the non-performing rate dropped to 0.40% in the first half of 15 years, the balance of non-performing loans rose 11.6% month-on-month, while concern loans and overdue loans also surged 117.7% and 130.5% respectively.

Credit costs climbed to 0.95% in the first half of 15 years, raising the loan-to-loan ratio and provision coverage to 1.79% and 440.92%, respectively.

High-yield non-standard asset investment contributes to the rapid growth of net profit

The net profit in the first half of 2015 reached 3.2 billion yuan, an increase of 28.1% over the same period last year, higher than our forecast of 19.7%. Although pre-provision profit in the first half of the year was dragged down by a 12.2% year-on-year drop in fee income, it still grew rapidly by 38.7% year-on-year, mainly driven by a 21.8% year-on-year increase in net interest income.

Positive factors: (1) non-standard assets grew rapidly in the first half of 15 years, including asset management plans and trust beneficial investment, the former by 182.0% year-on-year to 115.3 billion yuan, while the latter by 207.9% to 42.6 billion yuan. The high rate of return on non-standard assets has led to a rapid increase in Shengjing's interest income. (2) although the net interest margin in the first half of 15 years narrowed by 14 basis points compared with the same period last year, the net interest income still maintained a rapid growth rate of 21.8% over the same period last year. (3) the total amount of loans increased by 20.9% month-on-month, higher than the industry average growth rate of 8.7%. (4) Credit cost climbed to 0.95% in the first half of 15 years, thus increasing the loan-to-loan ratio and provision coverage to 1.79% and 440.92%, respectively.

Negative factors: (1) the commission income in the first half of the 15th year decreased by 12.2% compared with the same period last year, including agency and trusteeship business and bank card business fee income decreased compared with the same period last year. (2) there are signs of deterioration in asset quality. Although the non-performing rate dropped to 0.40% in the first half of 15 years, the balance of non-performing loans increased by 11.6% month-on-month, and concern loans and overdue loans also rose sharply by 117.7% and 130.5% respectively. (3) in the first half of 15 years, total deposits increased by 12.3% month-on-month, slower than the industry average growth rate of 15.7%. As a result, the deposit-to-loan ratio rose to 54.06%. (4) time deposits increased by 20.2% month-on-month in the first half of 15 years, while demand deposits decreased by 15.3% month-on-month, making deposit costs 10 basis points higher than the previous month. (5) the capital adequacy ratio decreased month-on-month due to the rapid growth of non-standard assets, and the core tier one capital adequacy ratio / tier one capital adequacy ratio / total capital adequacy ratio decreased by 1.05 / 1.15 percentage points respectively.

Valuation

Based on the closing price on August 17, 2015, Shengjing Bank is currently valued at a 15-year forecast price-to-book ratio of 0.98 times and a 15-year forecast price-to-earnings ratio of 6.61 times. Reiterate the neutral rating with a target price of HK $8.65.