China CITIC eyes to keep NPL ratio around 1% level at end-2013

It's exploring packaged NPL sales in 2H13.

According to Barclays, the bank targets to keep its NPL ratio around the 1% level at end-2013 (vs. 0.90% at end-1H13). It is exploring various ways to reduce NPLs, including aggressive write-offs (RMB3.3bn in 1H13 vs. RMB742m in 2012) and actively talking to the big-4 asset management corporations (AMCs) for packaged NPL sales in 2H13.

Here's more from Barclays:

The 1H13 NPL increase of RMB4bn was mainly attributable to the Yangtze River Delta area, with concentration in the steel trading industry.

CITIC Bank’s outstanding loan balance to the steel trading industry amounted to RMB43.3bn as of end-1H13, with an NPL ratio of 8.53% and special mention loan ratio of 2%.

Management believes the steel trading industry has reached the bottom, and while there may still be some new NPLs rising from industry in 2H, the amount should be much lower than that in 1H.

Still need to lift reserve to total loan ratio in the coming quarters

With RMB3.3bn of NPL write-offs in 1H13, the bank’s reserve to total loan ratio slid from 2.12% at end-2012 to 2.01% as of end-1H13, significantly below the regulatory requirement of 2.5%. The bank management still plan to lift the ratio in the coming quarters (i.e. higher credit cost), which will weigh on its profit growth.

NIM hurt by June interbank rate spike; will likely continue to trend down in 2H

The bank’s sequential NIM narrowed by another 15bps to 2.5% in 2Q13 after the 15bps drop in 1Q13, mainly attributable to: 1) large increase in expensive time deposits; 2) rising interbank funding cost amid the tight liquidity; and 3) the rise in loan pricing normally lags the fast rising funding cost.

The bank’s excess reserve ratio jumped to 2.98% at end-June, from 2.21% at end-May, by locking in some high-cost interbank borrowing. The impact may continue in the next few months, in our view.

Management expects the narrowing trend in NIM to continue into 2H13, as interbank funding cost will likely rise amid the tight liquidity conditions.