The performance is in line with expectations. China Minsheng Banking Corp's loan balance and deposit balance grew by 4.3 per cent and 8.5 per cent respectively at the end of 2019 compared with the same period last year.
The net interest margin rose to 2% from 1.73% at the end of 2018. Net interest income and non-interest income increased by 15.8% and 19.0% respectively compared with the same period last year. Operating income reached 87.1 billion yuan, an increase of 17.2% over the same period last year. The return net profit reached 31.6 billion yuan, a year-on-year growth rate of 6.77%. Basic earnings per share is 0.72 yuan. The defect rate reached 1.75%, compared with 1.76% at the end of 2018 and 1.75% at the end of the first quarter of 2019, and the provision coverage rate increased to 142% from 134% at the end of 2018 and 138% in the first quarter of 2019. The core tier one capital adequacy ratio and capital adequacy ratio were adjusted to 8.9% and 12.81% from 8.93% and 11.57% at the end of 2018.
Survival of the fittest. We think the two types of banks may stand out in the future. One is the banks with strong financing capacity on the debt side and prudent allocation on the asset side, which will be less affected by the slowdown in economic activity and increased competition for deposits. The other is the banks with retail brand advantages and strong customer base. Banks with debt-side retail advantages can fully tap customers' potential needs and reasonably control risks based on their long-term accumulated customer base and user information. It has laid a solid foundation for its prudent asset allocation and risk management ability as well as strong profitability and capital quality.
Financing capacity still needs to be improved. In the process of deleveraging and capacity deleveraging, the company has been carrying out retail transformation, but the transformation of the retail business on the debt side is more difficult than on the asset side. Banks can increase the investment of consumer loans by increasing the tolerance of non-performing loans and risk preference, but can not significantly increase the proportion of debt-side retail business in the short term. The proportion of retail business in China Minsheng Banking Corp's total loans is 42%, the industry average is 41%, and the average level of joint-stock commercial banks is 46%. The proportion of retail business in total deposits is only 18%, and the industry average is 42%. The average level of joint-stock commercial banks is 19%. This leads to its weak financing capacity and high deposit-to-loan ratio. The proportion of deposits and interbank liabilities of China Minsheng Banking Corp's total liabilities is 57% and 21%, the industry average is 74% and 13%, and the average of joint-stock commercial banks is 62% and 19%. The three-year compound growth rate of China Minsheng Banking Corp's total loans is 15%, the industry-wide average is 12%, and the average level of joint-stock commercial banks is 15%, while the three-year compound growth rate of its total deposits is only 5%. Compared with 9% of the industry average and 7% of joint-stock banks. China Minsheng Banking Corp's loan-to-deposit ratio is 94%, the industry-wide average is 75%, and the average level of joint-stock commercial banks is 93%. China Minsheng Banking Corp's interest-paying debt cost ratio and net interest margin are 2.89% and 1.73% respectively, the industry-wide average is 2.28% and 2.16%, and the average level of joint-stock commercial banks is 2.69% and 2.00%. High-risk asset allocation leads to weak asset quality and capital strength. China Minsheng Banking Corp's non-performing loan ratio and overdue loan ratio for more than 90 days reached 1.76 per cent and 1.70 per cent respectively, compared with 1.50 per cent and 1.20 per cent for the industry as a whole, and 1.66 per cent and 1.53 per cent for joint-stock commercial banks. The provision coverage rate and the ratio of non-performing loans to overdue loans over 90 days reached 132% and 103% respectively, compared with 206% and 125% for the industry as a whole, and 191% and 109% for joint-stock commercial banks, respectively. China Minsheng Banking Corp's core tier one capital adequacy ratio and capital adequacy ratio are 8.62% and 11.75% respectively, the industry-wide average is 11.1% and 14.4%, and the average level of joint-stock commercial banks is 9.5% and 13.0%. The three-year compound growth rate of core tier one capital and risk-weighted assets were 10.6% and 11.6% respectively, compared with 11.1% and 10.2% for the industry as a whole, and 12.6% and 11.4% for joint-stock commercial banks.
Remain neutral. We downgrade our EPS forecast for 2019-2021 to RMB 1.21, 1.27, 1.36, an increase of 6.3%, 5.3% and 6.6% over the same period last year. At present, the company corresponds to 0.42 times 2019 PB, and we give the company a target PB of 0.40 times, a target price of HK $5.02 and a downside of 4%, maintaining a neutral rating.