Chongqing Rural Commercial Bank posts unexpectedly higher profit of RMB2 bn

Thanks partly to fast balance sheet expansion.

Chongqing Rural Commercial Bank (CRCB) reported 1Q15 net profit of RMB 2bn, +11% y/y and slightly higher than Barclays' expectation on rapid balance sheet expansion and strong fee income growth.

According to a research note from Barclays, however, it maintains its UW rating on CRCB as it sees greater pressure on NIM and capital adequacy ratio relative to peers.

Barclays raises its 12-month price target to HK$6.30 from HK$4.30 as it incorporates a slightly lower cost of equity assumption in light of monetary easing by the central bank and higher 2016E earnings.

Here's more from Barclays:

Decent revenue growth: CRCB reported 1Q15 net profit of RMB 2bn, up 11% y/y and slightly higher than our expectation, driven by 1) fast balance sheet expansion (interest earning assets +16% y/y) and 2) strong fee income growth (101% y/y) led by bank card (91%) and wealth management fees (157%).

Net interest margin declined to 3.28% in 1Q15, -11bps q/q, which could be due to 1) the impact of two rate cuts in Nov-14 and Feb-15 and 2) declining LDR (56.7% at end-1Q15, -2.4ppts q/q) on fast deposit growth, in our view. We expect NIM to remain under pressure going forward.

Good asset quality trend: NPL ratio declined by 4bps q/q to 0.74%. Credit cost was 0.68% in 1Q15, up 18bps y/y but down 9bps q/q. Loan loss coverage rose by 16ppts to 476% at end-1Q15. CRCB is the only bank under our coverage that shows improving asset quality trend in 1Q15.

Deposits outpace loans growth, capital under pressure: CRCB's deposits expanded 9% q/q, driven by time deposits up 11%. Management said previously that 1Q15 deposit growth has met 80-90% of their annual target.

Loans grew 5% q/q driven by corporate loans (+9% including discounted bills) while personal loans declined 1%. Surplus funding was deployed into investment securities (9% q/q). The core tier-1 capital adequacy ratio declined by 17bps q/q to 9.95% at end-1Q15, lower than peers.

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