China Minsheng Bank's 2014 net profit increases 5% y/y to RMB44.5b

High impairment dragged earnings down, though.

China Minsheng Banking Corp. reported RMB 44.5bn of net profits for 2014, a 5% increase y/y, in line with its pre-announced numbers.

According to a research note from Barclays, as expected, the main drag on earnings was high impairment charges, which grew by 63% y/y versus 15% of PPOP.

The bank also increased NPL disposal in 2014, thus keeping the NPL ratio relatively low at 1.17% while lowering loan loss coverage by 78ppts y/y to 182%. The bank’s NIM was up by 10bps y/y in 2014, partly driven by better-than-peer control on deposit cost (+9bps y/y).

The bank’s capital position remains relatively weak with Tier-1 ratio at 8.59% at end-2014, though the RMB 30bn preference share and RMB 8bn equity issuance plan should mitigate the pressure to some extent.

Here's more from Barclays:

Earnings dragged down by high impairment; step-up disposal kept NPL ratio relatively stable - Worsening asset quality was the main drag on Minsheng’s earnings in 2014, as impairment losses (RMB 21.1bn, +63% y/y) grew at a much faster pace than PPOP (RMB 80.9bn, +15% y/y/) in 2014.

In 4Q14, the bank’s credit cost increased by 41bps q/q to 1.79%, which is the highest quarterly credit cost among China banks that have released their results.

The bank’s NPL ratio grew by 31bps y/y or 13bps q/q to 1.17% by end-2014. However, the relatively stable NPL ratio was partly helped by a step-up in NPL disposal in 2014, with write-off and transfer-out up by 76% and 38% y/y, respectively.

As a result, the bank’s loan loss coverage ratio dropped to 182% by the end of 2014, down by 78ppts y/y and 18ppts q/q.

MSE loans a main driver behind poorer asset quality; flat growth in 2014 - In particular, the bank’s poorer asset quality was, to a large extent, the result of its higher-than-peer exposure to micro and small enterprises (MSE), which have been hit in the current cycle.

While MSE loans accounted for 23% of total loans in 2014, its NPL ratio increased by 69bps y/y to 1.17% in 2014 from 0.48% in 2013, contributing to nearly 40% of net increase in total NPL by our estimate. The bank’s MSE loan balance stayed flat in 2014 with only 0.3% annual growth, whereas total loans grew by 15%.

Strong NIM performance supported by good control on deposit costs - Minsheng’s NIM increased by 10bps y/y in 2014, outperforming peers and especially other joint-stock banks (JSB).

The strong performance was supported by expansion in yield on interest-earning assets (+12bps y/y)—which was largely driven by improved investment yield (+89bps) as the bank classified most its NSCA in investment now—and a modest increase of 2bps y/y in cost on interest-bearing liabilities as the funding cost on deposits was up by only 9bps in 2014.

Capital remains under pressure; payout ratio lowered to 14.2% - The bank’s Tier-1 ratio and CAR stood at 8.59% and 10.69% by the end of 2014, down by 13bps and unchanged on an annual basis, respectively, suggesting continuing pressure on capital adequacy, in our view.

The bank had previously announced a plan to issue RMB 30bn preference shares, in addition to RMB 8bn equity issuance via private placement to its own employees. Notably, the bank’s dividend payout ratio was also lowered to 14.2% from 17.3% a year earlier with final DPS of RMB 0.11 for 2014.