Well provisioned for an economic slowdown
- We like CQRCB’s high provisioning coverage ratios, which we believe sees it well provisioned to weather an economic slowdown.
- Nevertheless, we are concerned that its relatively small size makes it more vulnerable compared to its larger peers to fluctuations in asset quality.
- We believe this may have been a key reason for its 14% yoy fall in FY20 net profit, the second worst of the banks under our coverage.
- Downgrade to Reduce from Hold on valuations, as our TP is cut to Rmb3.20 from a higher assumed corporate NPL ratio in our stress-test adjusted GGM.
Elevated investor concerns over asset quality & policy risks
We think rising asset quality pressures are manageable in FY21F from an EPS point of view for Chongqing Rural Commercial Bank (CQRCB), given its higher-than-peer average provisioning coverage ratio (1H21: 312%) and conservative non-performing loan (NPL) recognition ratio (NPLs/ loans that are more than 90 days overdue) of 173% in 1H21. Nevertheless, we think bank share prices could struggle to perform as we think both property sector’s stress and macroeconomic indicators are not likely to materially improve over the next few months. This could see investor concerns over asset quality and policy risks (such as ‘surrendering’ profits, which occurred in 2020. See Between a rock and a hard place, dated 18 Jun 2020) remain elevated, and thus make it difficult for these banks to materially re-rate in the near term.
Incorporating concerns via a 10.5% corporate NPL ratio assumption
We incorporate elevated investor concerns about the macroeconomy and asset quality by raising the corporate NPL ratio assumption that we use in our stress-test adjusted Gordon Growth Model (GGM), which is the basis of our target prices. Our new corporate NPL ratio assumption used in this stress test is 10.5% (vs. 9% previously).
Downgrade to Reduce from Hold; TP cut to Rmb3.20
We value CQRCB-A using a stress-test adjusted GGM, after factoring in historical A-H share valuation premiums. There are no changes to our FY21-23F EPS estimates. However, due to a 1.5% pt higher corporate NPL ratio assumption used within our stress
test, our TP is cut to Rmb3.20 from Rmb4.40. Given the lower target price, we thus downgrade to Reduce due to valuation reasons. Potential de-rating catalysts are worsening asset quality and a weaker economy. Key upside risks: a better-than-expected
NIM trend and reduced social responsibilities.