CEB’s net profit declined 29.7%/10.2% YoY in 2Q/1H20, primarily due to heavy provisions (+54.9% YoY) amid kitchen-sinking in 2Q20. We expect manageable asset quality risk ahead, given lower overdue/SML ratio and sequential pick-up in provision coverage. Net interest income growth was decent at 10.3% YoY, on solid credit expansion and largely stable margin. As the first Chinese joint-stock bank to set up wealth management subsidiary in Sep 2019, CEB saw achieved a strong recovery in wealth management service fee (+450% YoY), leading to 17.3% YoY total fee income growth in 1H20.
- Results positives: 1) Deposit growth was solid at 4.0% QoQ. LDR retreated 2.4ppt QoQ to 79.6%, the lowest among joint-stock banks under our coverage. 2) Asset quality improved. NPL ratio remained flat at 1.55%, and provision coverage climbed 4.6ppt QoQ to 186.8%. As the leading indicators for asset quality trend, both overdue loan and SML ratio declined moderately, suggesting easing NPL pressure ahead. 3) Net fee income rose 17.3% YoY in 2Q20, mainly driven by wealth management and settlement & clearing businesses. 4) Cost-income ratio fell 0.7ppt YoY to 27.8% in 2Q20.
- Results negatives: 1) Loan growth slowed to 0.9% in 2Q20, from 6.7% in 1Q20. Corporate loans and personal mortgage increased 11.4%/6.4% in 1H20, but growth in credit card and other retail loans stay muted due to COVID-19’s impact. 2) 2Q20 NIM narrowed 2bp QoQ to 2.29% based on our estimate. Corporate loan and investment yields slid 8bp/6bp in 1H20, but that of retail loans was largely stable. On liability side, interbank funding cost fell 31bp HoH during monetary loosening, more than offsetting deposit cost hike of 8bp HoH. 3) Capital position weakened, as CET1/total CAR dropped 36bp/35bp QoQ to 8.68%/12.74% on soft earnings and cash dividend payout. The outstanding RMB30bn CB could boost capital ratio by 80bp after full conversion.
- Maintain BUY with lower TP of RMB5.0. We cut FY20/21 earnings forecasts by 13-14%, to reflect lower NIM/fee income and higher credit cost assumptions. Our revised TP of HK$4.0 is based on 0.78x (from 0.84x) target P/B and FY20 BVPS of RMB6.45.
