China Merchants Bank's net profit climbed 12% to RMB 26.3b

Thanks to these 2 growth boosters.

According to Barclays Research, China Merchants Bank (CMB) reported 1H13 net profit of RMB 26.3bn, up 12% y/y and in line with its estimate of RMB 26.3bn but 4% ahead of Bloomberg consensus of RMB 25.3bn. 

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Key positives included 1) the strong fee income growth (+46% y/y in 1H13 or +57% y/y in 2Q13) and 2) the lower cost to income ratio (-92bps y/y in 1H13 or -107bps y/y in 2Q13).

Negatives include 1) sequential NIM contraction in 2Q13 (-12bps q/q to 2.81% based on our calculation), probably primarily due to negative impact from the interbank rate spike in June, 2) increasing NPL amounts (+14.4%) and ratios (+6bps) in 2Q13, and 3) rapidly rising trust beneficiary rights assets (RMB 150bn outstanding at end-June vs only RMB 14bn at end-2012) could be hurt by volatile interbank rates and regulatory tightening.

CMB’s Tier 1 ratio dropped to 8% in 2Q13.

We believe it was mainly due to the deduction of full-year 2012 dividend. However, we expect it could make its RMB 35bn A+H rights issue soon to lift the ratio by more than 1ppt, as it has received the written approvals from the CSRC recently. However, we expect the bank's ROE to be diluted to 21.1%/18.8%/18.4% in 2013E/2014E/2015E. We maintain our Underweight rating on CMB.