民生银行:Solid credit growth;Asset quality and capital underperformed

MSB’s net profit declined 25.4%/10.0% YoY in 2Q/1H20, largely due to soaringimpairment charges of 60.9% YoY in 2Q20. Topline growth (revenue +9.9%YoY; PPoP +8.8% YoY) was still decent, albeit a sequential moderation. Sameas most nationwide bank peers, MSB also accelerated NPL recognition andboosted risk reserves during the industry downturn. We like the banks’ robustcredit expansion and fast recovery of retail loans, but relatively thin provisionbuffer and below-average capital adequacy ratio are major overhangs.n 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% in2Q20, vs 1.8% in 1Q20.

Mortgage and personal business loans were keydrivers, and credit cards also saw a positive growth of 2.6% in 1H20. 2) Netinterest income grew strongly by 20.1% YoY, on solid expansion ofinterest-earnings assets and YoY margin widening. 3) Effective tax ratedropped 3.8ppt YoY, given rising investments to tax-free government bonds.Results negatives: 1) 2Q20NIM narrowed 3bp QoQ to 1.92% based onour estimate.

This was due to 13bp HoH loan yield contraction and 5bp HoHincrease in deposit cost, more than offsetting the 40bp drop of interbankfunding cost in 1H20. 2) Asset quality under pressure. NPL ratio surged14bp QoQ to 1.69%, and provision coverage slid 3.6ppt QoQ to 152%, oneof the lowest in the sector. However, the bank tightened NPL recognitionstandards, as NPLs covered 125% of >90-day overdue loans as of 2Q20, upfrom 114% as of 4Q19. 3) 2Q20cost-income ratio increased 0.7ppt YoY;4) Investment return declined 12.9% YoY, on bond trading and exchangelosses. 5) Capital position weakened. CET1/total CAR dropped 72bp/38bpQoQ to 8.24%/12.72% on sluggish earnings and cash dividend payout. RWAdensity rose 2.7ppt QoQ to 78.7%.

Maintain HOLD and lower TP to RMB6.40. We cut FY20/21earningsforecasts by 15-17%, to reflect lower NIM/fee income and higher credit costassumptions. Our revised TP of RMB6.40is based on 0.58x (from 0.64x)target P/B and FY20BVPS of RMB10.96.