China Minsheng Banking Corp. (1988 HK):Walking on thin ice

1Q14 earnings good at first glance... Minsheng reported 1Q14 net profit of RMB12.7b, up 15.1% YoY on strong fee growth of 25% YoY and lower credit costs (91bp in 1Q14 vs. 113bp in 1Q13). PPOP was up 8%, much lower than bottom-line growth. Annualized ROE and ROA for 1Q14 were both resilient at 24.8% and 1.56%.

…but the devil is in the details - poor macro situation leads to suspension of micro-lending. Minsheng’s micro-loans increased RMB303m in 1Q14, which is bad but not as bad as 4Q13 when they declined by RMB190m. Slower GDP growth means it will be harder for SMEs to repay their debts, a precarious circumstance for China’s smaller banks, which have since become more cautious about SME lending. We expect Minsheng’s MSE lending to pick up in 2014F as micro-lending is still the bank’s core strategy.

Bills business sluggish, but more investment in TBRs. Ever since the credit squeeze at end-June 2013, Minsheng has been gradually stepping back from the low-yield bills business. More promising is investment receivables, which almost doubled QoQ to RMB72.4b because Minsheng invested heavily in high-yield trust beneficiary rights in 1Q14.

Maintain Outperform rating and HK$10.80 target price. Minsheng’s results paint a grim picture of what may be in store for the smaller banks engaged in micro-lending, an area rife with NPLs. The bank, wary of macro uncertainty, has adopted a cautious attitude towards micro-lending. Its saving grace is that it has responded nimbly to changes in the economic landscape, most recently by moving into community banking and internet financing, two of its most recent franchises.