On 30 Aug, ABC reported 1H19 net profit of RMB 121.4bn, up 4.9% YoY and accounting for 56.3%/57.8% of CMBIS/consensus full-year estimates. 2Q19 PPoP was largely flat YoY, as net interest income growth was subdued (+1.9% YoY) on narrowing NIM. Thanks to lower opex (-10.2% YoY) and provision charges (-4.7% YoY), bottom-line earnings growth picked up to 5.5% YoY in 2Q19 (vs 4.3% YoY in 1Q19). We initiate coverage on ABC A-share with BUY rating.
- Results negatives: 1) 2Q19 NIM contracted 10bp QoQ to 2.11%, based on our estimate. Asset yield only rose 2bp HoH, yet deposit cost surged 17bp HoH. As an interbank net lender, ABC’s NIM was also squeezed by falling market rates. 2) Deposits growth was muted in 2Q19 at 0.4% QoQ, while the proportion of demand deposit slid 0.6ppt to 57.0%. 3) 1H19 annualized ROE declined 1.3ppt to 14.7%, given the uninspiring earnings growth of 4.9% YoY.
- Results positives: 1) 1H19 net fee income was up 16.6% YoY, mainly driven by strong fees from consultancy and advisory, bank card, and e-banking services. ABC’s non-interest income as of total revenue increased to 22.4% from 18.3% in FY18; 2) 1H19 CIR declined 0.8ppt YoY to 28.4% on lower general operating and administrative expenses; 3) Loan growth topped Big-4 peers at 8.8% HoH, with balanced expansion in retail (+9.1% HoH) and corporate (+8.6% HoH) segments. Higher-yield credit card loan saw a rapid growth of 19.4% HoH, and default rate remained well controlled so far. 4) Asset quality continued to improve, as NPL ratio fell 9bp QoQ to 1.43%, and provision coverage climbed 14.4ppt to 278.4%. Overdue and special mention loans saw double-decline as well. Credit cost retreated 48bp QoQ to 0.90% and is likely to stay low in 2H19, so as to cushion weaker revenue momentum.
- Initiate ABC-A with BUY rating and RMB 4.9 TP. ABC-A currently trades at 0.68x FY19E P/B, 9% below its past 5-year mean of 0.75x. Our TP of RMB 4.9 is based on GGM-derived target P/B of 0.99x and FY19E BPS of RMB 4.97.
