China Merchants Bank's NPLs up 10.2% for the successive third quarter

And total deposits fell by 1.8%.

According to Barclays, CMB reported 3Q12 net profit of RMB11.4bn, in-line with its forecast of RMB11.3bn, but 5% ahead of Bloomberg consensus (RMB10.9bn), up 17% y/y.

Key negatives include: 1) reported sequential NIM narrowed by 11bps q/q to 2.92% in 3Q12; 2) NPL balance continue to climb, +10.2% q/q; 3) total deposits dropped by 1.8% q/q.

Positives were: 1) 3Q12 fee income recorded a strong growth of 33% y/y, while we see general slowing down in other banks; and 2) its T1 ratio improved by 15bps to 8.47% as of end-Sep.

Here's more from Barclays:

Steady loan growth, but deposits dropped q/q
CMB’s total loans increased by 2.9% q/q, in line with system’s 3.1%, slowing down from the previous two quarters (+4.7% in 2Q12, +3.8% in 1Q12), mainly driven by overseas loans (+46% q/q), while domestic loans only rose 0.5%.

Domestically, both corporate loans (-1.3% q/q) and discounted bills (-14.4% q/q) declined, and personal loans increased by 5.5% q/q, which may be due to an increase in personal business loans.

Total deposits fell by 1.8% q/q, after a good quarter in 2Q12 (8.7% q/q). We believe the declining deposits could be attributable to: intensive deposit competition, and the bank’s intention to reduce expensive deposits, such as wealth management-related deposits and/or negotiated deposits, etc.

Sequential NIM contraction continued in 3Q12
Net interest income was RMB 22.15bn in 3Q12 (up 11% y/y or flat q/q), mainly driven by volume growth (average interest earning assets +3.3% q/q), despite continued NIM contraction of 11bps q/q to 2.92% in 3Q12 (vs. -18bps q/q in 2Q12; +1bp in 1Q12).

The sequential narrowing trend of CMB’s NIM is in line with other mid-size banks but clearly different from that in big banks (+6bps for ABC, +8bps for BOC, +10bps for CCB by our calculation), which we believe might be due to: 1) weakening loan pricing power; 2) shorter duration thus faster repricing of its loan book; 3) increasing proportion of time deposits. In addition, we expect the negative impact of interest-rate cuts and deregulation to be gradually reflected in 2013 financials.

Impressive fee income growth
Net fee income rose to RMB4.9bn in 3Q12 (+33% y/y and +1% q/q), mainly driven by commissions from custody and other trustee businesses. CMB’s 3Q12 fee income growth was much stronger than peers (8% in ABC, -1% in BOC, -2% in CCB, and -51% in CRCB).

NPL amount rebounded, +10.2% q/q
The bank’s NPLs increased for the successive third quarter, up 10.2% q/q in 3Q12 (vs. +3.1%/4.7% q/q in 1Q12/2Q12). Its NPL ratio rose modestly by 3bps q/q to 0.59% as of end-Sep. Provision coverage dropped to 377% at end-Sep (down by 27ppts q/q). Reserve to total loans was flat q/q at 2.24%. Despite increasing NPLs, the bank’s credit cost was low, at only 29bps in 3Q12 (50bps in 2Q12, 47bps in 1Q12).

Tier-1 ratio +15bps q/q; but still under pressure
Tier-1 ratio improved to 8.47% (up 15bps q/q), and total CAR increased to 11.56% (up 1bp q/q), which might be attributable to weaker RWA growth (on slowing 3Q12 loan growth). However, we believe its tier-1 ratio is still under pressure, given the new capital requirement will come into force on 1 Jan 2013. Uncertainty on the timing and pricing of rights issue remains an overhang on CMB’s stock.