MSB’s net profit declined 25.4%/10.0% YoY in 2Q/1H20, largely due to soaring impairment charges of 60.9% YoY in 2Q20. Topline growth (revenue +9.9% YoY; PPoP +8.8% YoY) was still decent, albeit a sequential moderation. Same as most nationwide bank peers, MSB also accelerated NPL recognition and boosted risk reserves during the industry downturn. We like the banks’ robust credit expansion and fast recovery of retail loans, but relatively thin provision buffer and below-average capital adequacy ratio are major overhangs.
- Results positives: 1) Healthy loan and deposit growth of 2.7%/3.8% QoQ. It was encouraging to see a pick-up in retail loan growth of 5.2% in 2Q20, vs 1.8% in 1Q20. Mortgage and personal business loans were key drivers, and credit cards also saw a positive growth of 2.6% in 1H20. 2) Net interest income grew strongly by 20.1% YoY, on solid expansion of interest-earnings assets and YoY margin widening. 3) Effective tax rate dropped 3.8ppt YoY, given rising investments to tax-free government bonds.
- Results negatives: 1) 2Q20 NIM narrowed 3bp QoQ to 1.92% based on our estimate. This was due to 13bp HoH loan yield contraction and 5bp HoH increase in deposit cost, more than offsetting the 40bp drop of interbank funding cost in 1H20. 2) Asset quality under pressure. NPL ratio surged 14bp QoQ to 1.69%, and provision coverage slid 3.6ppt QoQ to 152%, one of the lowest in the sector. However, the bank tightened NPL recognition standards, as NPLs covered 125% of >90-day overdue loans as of 2Q20, up from 114% as of 4Q19. 3) 2Q20 cost-income ratio increased 0.7ppt YoY; 4) Investment return declined 12.9% YoY, on bond trading and exchange losses. 5) Capital position weakened. CET1/total CAR dropped 72bp/38bp QoQ to 8.24%/12.72% on sluggish earnings and cash dividend payout. RWA density rose 2.7ppt QoQ to 78.7%.
- Maintain HOLD and lower TP to RMB6.40. We cut FY20/21 earnings forecasts by 15-17%, to reflect lower NIM/fee income and higher credit cost assumptions. Our revised TP of RMB6.40 is based on 0.58x (from 0.64x) target P/B and FY20 BVPS of RMB10.96.
