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RETAIL BANKING | Staff Reporter, Hong Kong
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Chongqing Rural Commercial Bank's net profit up 28.1% to RMB1.36bn

But the 51% slump in net fee income was disappointing.

According to Barclays, Chongqing Rural Commercial Bank (CRCB) reported strong 3Q12 net profits of RMB1.36bn (10% ahead our forecast RMB1.24bn), up 28.1% y/y. Weaker-than-expected net interest income and fees were largely offset by super low credit costs.

Here's more from Barclays:

Pre-provision operating profit (PPOP) was actually 5% below our expectation. Key positives were: 1) NPL amount and NPL ratio both dropped q/q; 2) T1 ratio improved by 9bps q/q to 12.72% at end-Sep. Key negatives include: 1) NIM decline of 5bps q/q by our estimate;

2) significant slowdown in loan growth, which likely due to bank’s intention to contain capital decline; 3) disappointing fee income growth, -51% y/y in 3Q12; 4) a surprising trading loss of Rmb64m (vs. gain of Rmb68m in 2Q12); and 5)cost-to-income ratio increased sharply by 5ppts q/q to 44.7% in 3Q12. We maintain our UW rating for CRCB.

Slowdown in loan growth to help contain capital decline
Loan growth in 3Q12 dropped to only 2.8% q/q, slower than the banking system average (3.1%) and 1H12 (5.3% in 2Q12, 7.7% in 1Q12). The slow growth likely aimed to reverse the rapidly declining T1 ratio (108bps drop in 1H12 to 12.63% at end-1H12 from 13.71% at end-2011).

This probably indicates that CRCB’s “excess capital” is will not be able to support its “capital-consuming” high asset growth business model for very long. We believe the bank will need to find a balance between its high loan growth and fast capital decline.

Sequential NIM compression continued in 3Q12; net interest income softening
The sequential compression in NIM continued in 3Q12, down 5bps q/q to 3.39% in 3Q12, following a 13bps q/q drop in 2Q12. The continued margin contraction could be due to the weaker loan pricing power, in our view. Driven by narrowing NIM and slowing loan growth, the bank’s net interest income grew by only 5% q/q to Rmb3.3bn in 3Q12.

3Q12 fee income disappointing
CRCB’s net fee income was disappointing, down significantly by 51% y/y in 3Q12, which was mainly attributable to the decrease in consultancy and advisory fees, probably negatively affected by the regulatory tightening on fee charges, in our view. However, the bank’s credit card fees growth showed some strong momentum, up 58.6% y/y to Rmb29m in 3Q12.

Super low credit charge helped to boost bottom line
NPL amount reportedly declined by 2.2% q/q, and NPL ratio fell by 6bps q/q to 1.13% as of end-3Q12. Thus, credit charge was super low, at only 14bps in 3Q12 (vs. 33bps in 2Q12), which was the key factor in boosting the bank’s bottom line growth.

Tier-1 capital ratio increased slightly on slower loan growth
Tier-1 ratio increased slightly by 9bps q/q to 12.72% at end-Sep, following significant drops of 56bps/52bps q/q in 2Q12 and 1Q12, respectively. The sequentially improved T1 ratio might be due to a softer RWA growth, partly helped by slower loan growth (+2.8% q/q in 3Q12), in our view. 

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