On 30 Aug, MSB reported 1H19 net profit of RMB 31.6bn, up 6.8% YoY and accounting for 60.4%/61.2% of CMBIS/consensus full-year estimates. 2Q19 revenue growth was strong at 15.1% YoY, as net interest and net fee income maintained relatively fast growth of 29.6% YoY and 8.1% YoY, respectively. Opex stayed flat, leading to a solid PPoP growth of 20.0 YoY. However, impairment charges surged 37.6% YoY, denting bottom-line earnings growth to merely 7.9% YoY in 2Q19 (vs 5.7% YoY in 1Q19), which was faster than 5.2% YoY for Big-5, but slower than 11.2% YoY for listed JSBs.
- Results positive: 1) 2Q19 NIM widened 3bp QoQ to 1.87% (unadjusted), mainly due to lower interbank funding cost amid liquidity loosening. MSB’s interbank liability (incl. NCD) accounted for 30.7% of total liabilities. Meanwhile, loan yield (+12bp HoH) picked up more than deposit cost (+8bp HoH), as growth in credit card (+6.0% HoH) and property development loan (+18.7% HoH) surpassed overall loan growth (+4.2% HoH); 2) 1H19 CIR declined 3.3ppt YoY to 22.1%, as falling general & admin expenses (-8.4% YoY) largely offset rising staff cost (+11.3% YoY). 3) Deposit growth was decent at 8.4% HoH, vs loan growth of 4.2% HoH, therefore sending LDR down by 3.8ppt to 92.2%; 4) Total CAR rose 106bp HoH though CET1 slid 3bp HoH, as the Bank issued RMB 40bn Tier-2 capital bonds and RMB 40bn perpetual bonds in 1H19.
- Results negative: 1) Asset quality indicators still lagged behind sector peers. NPL balance was up 1.1% QoQ, and NPL ratio remained unchanged at 1.75%, the highest among banks under our coverage. Provision coverage climbed 4.5ppt QoQ to 142.3%, yet still well below sector average of 190.6%. The ratio of NPL to >90day overdue loan stood at 104.7%. Thus, MSB may face pressure if CBIRC implements stricter recognition standard (i.e. classifying >60day overdue loan to NPL); 2) Deposits mix weakened, as the proportion of demand deposit fell 4.4ppt HoH to 36.5%.
- Maintain HOLD and lower TP to HK$5.9. MSB currently trades at 0.45x FY19E P/B, 22% below its past 5-year mean of 0.58x. We maintain earnings forecast unchanged, but trim our TP to HK$5.9 from HK$6.2, given a higher COE assumption of 16.8% and adjusted HK$/RMB exchange rate of 0.897.
