On August 30, China Minsheng Banking Corp announced the results for the first half of 2019. Net profit rose 6.8% year-on-year to 31.6 billion yuan, accounting for 60.4% of our / market consensus forecast for full-year net profit. 61.2%. Operating income grew strongly in the second quarter, with a year-on-year growth rate of 15.1%, mainly due to the good growth momentum of net interest income and net fee income from the same period last year, with growth rates of 29.6% and 8.1% respectively. Operating expenditure was flat compared with the same period last year, and profit before provision increased by 20.0 per cent year-on-year. However, credit impairment losses surged 37.6 per cent from a year earlier, dragging net profit growth down to 7.9 per cent (5.7 per cent in the first quarter), which was higher than the average growth rate of 5.2 per cent for the five major banks, but significantly lower than the average growth rate of 11.2 per cent for listed joint-stock banks.
Positive factors: 1) net interest margin rose 3 basis points to 1.87% (unadjusted) in the second quarter, mainly due to a decline in the cost of interbank capital in the context of loose liquidity. China Minsheng Banking Corp's interbank liabilities (including interbank certificates of deposit) account for 30.7% of the total liabilities. At the same time, loan yields rose 12 basis points from the beginning of the year, more than 8 basis points higher than deposit costs, mainly because the growth rate of credit card and real estate development loans (6.0% and 18.7% respectively) was higher than that of total loans (4.2% in the first half). 2) in the first half of the year, cost and income decreased by 3.3 percentage points to 22.1% compared with the same period last year, and general operating and administrative expenses decreased by 8.4%, offsetting the 11.3% increase in labor costs compared with the same period last year. 3) deposits increased by 8.4% over the beginning of the year, higher than the 4.2% growth rate of loans over the same period; as a result, the loan-to-deposit ratio fell 3.8 percentage points from the beginning of the year to 92.2%. 4) the capital adequacy ratio increased by 106bp compared with the beginning of the year, although the core Tier 1 capital adequacy ratio fell by 3 basis points, mainly due to the issuance of RMB 40 billion secondary capital bonds and RMB 40 billion perpetual bonds in the first half of the year.
Negative performance factors: 1) Asset quality indicators still lag behind the same industry. The balance of non-performing loans increased by 1.1% month-on-month in the second quarter, and the non-performing loan ratio was 1.75%, unchanged from the previous quarter, the highest level among our covered banks. Provision coverage increased by 4.5 percentage points month-on-month to 142.3%, but it was still lower than the sector's average of 190.6%. The ratio of non-performing loans to loans overdue for more than 90 days is 104.7%. If the Bancassurance Regulatory Commission implements stricter standards for non-performing recognition (such as including loans more than 60 days overdue as bad), China Minsheng Banking Corp will face more pressure. 2) the deposit structure is weak, and the proportion of demand deposits decreased by 4.4 percentage points to 36.5% compared with the beginning of the year.
Maintain the "hold" rating and lower the target price to HK $5.9. China Minsheng Banking Corp is currently valued at 0.45 times the projected price-to-book ratio for 2019, 22% below its own five-year historical average of 0.58 times. We left our profit forecast unchanged, but lowered our target price from HK $6.20 to HK $5.90, mainly because we raised the cost of equity (COE) assumption to 16.8% and adjusted the Hong Kong dollar exchange rate assumption against the RMB to 0.897.