Decreased credit cost boosted Minsheng's bottom line growth

While asset quality deteriorated further.

China Minsheng Bank’s net profit amounted to RMB 25.6bn in 1H14, up by 11.4% y/y, with the bank’s pre-provision operating profit growing by 10.2% y/y, which was mainly driven by non-interest income (+19.1%).

According to a research note from Barclays, however, this result was hindered by sluggish net interest income (+7.5%) and faster operating expense growth (+12.6%).

Due to y/y lower credit costs (0.83% in 1H14 vs. 0.95% in 1H13), despite worse asset quality, the bank maintained double-digit bottom line growth in 1H14.

Here's more from Barclays:

The bank’s total NPLs rose 18% in 1H14 or 12% in 2Q14 to RMB 15.8bn. The NPL ratio also rose 6bps q/q to 0.93% at end-June 2014.

The NPL ratio of MSE loans was 0.69% (vs. 0.48% at end-2013). In 1H14, Minsheng further speeded up NPL disposals by writing off RMB 3.2bn of NPLs (vs. RMB 2.6bn in 1H13 and RMB 1.4bn in 2H13).

In 1H14, loans overdue 1-90 days and >90 days loans grew significantly by 69% and 56% h/h to RMB 28.5bn and RMB 16.3bn, respectively.

Despite the deterioration in asset quality, credit costs fell 12bps h/h in 1H14 to 0.83% (vs. 0.95% in 1H13). Coverage ratio dropped to 216% (from 257% in 1Q14) and reserve to total loans also declined to 2.01% (from 2.22% in 1Q14) at end-2Q14.

Total loans recorded stable growth of 7.8% in 1H14 or 3.7% in 2Q14 (vs. +3.9% in 1Q14), mainly driven by corporate loans (+5.4% q/q or 11.5% h/h) which accounted for 92% of 1H14 incremental loans.

By sector, property development loans (+RMB 23bn) and manufacturing (+RMB 22bn) saw the fastest increases. Retail loans edged up by only 0.9% q/q or 1.7% h/h, mainly driven by credit card loans (+RMB 10.6bn or 9.3% h/h).

Outstanding MSE loans remained flat for the third consecutive quarter (RMB 410bn in 2Q14 vs. RMB 405bn in 1Q14 and RMB 409bn in 4Q13), likely due to concern over further asset quality deterioration of such loans, in our view.

Total deposits at end-1H14 amounted to RMB 2.4tn, +12.8% h/h or +7.3% q/q, driven by corporate time deposits (+19.6% in 1H14) and personal deposits (+16.4%).

Minsheng’s NIM rebounded by 5bps h/h to 2.62% in 1H14, mainly driven by: 1) higher interbank yield (+30bps h/h) and bond investment yield (+16bps h/h); and 2) lower interbank borrowing costs (-24bps h/h).

However, these positives were partially offset by lower yields of both corporate loans (-19bps h/h) and personal loans (-6bps h/h) as well as deposit costs creeping up (+6bps h/h).

At end-June 2014, the bank’s reverse repo was RMB 561bn (-1.6% in 1H14 but +15% in 2Q14). The q/q growth likely implies that reduction in interbank exposure has likely come to an end.

Specifically, reverse repo collateralized by discounted bills increased by 6% h/h to RMB 407bn while those collateralized by trust beneficiary right (TBR) reverse repo dropped 13% h/h to RMB 153bn.

Total interbank assets (interbank borrowing and reverse repo) accounted for 20% of total assets at June-2014, in line with regulators' requirement of <20% mentioned by management earlier.

On the liabilities side, total interbank exposure (interbank deposits, borrowing and repo) was RMB 649bn (-0.9% in 1H14 but +17% q/q in 2Q14).