The momentum is expected to continue into 4Q12.
Barclays recently attended Minsheng bank's corporate day to visit the bank's Quanzhou branch (in Fujian province) and some of its local micro- and small- enterprises (MSE) customers.
Here's more from Barclays:
Our key positive takeaways include: 1) Minsheng's MSE loan growth rebounded by Rmb29.9bn in 3Q12 (vs. Rmb12.8bn in 1Q12 and Rmb5.6bn in 2Q12), and management expects the momentum to continue into 4Q12;
2) MSE loan pricing is currently at an average level of 8-9%; 3) its MSE loan NPL growth is slowing down in 2H12; and
4) Minsheng will stick with its MSE business strategy, and try to enhance deposit and fee generation. However, in our view, it will take time in the medium term to demonstrate whether its MSE business can generate a "superior ROE" to support the outperformance of Minsheng Bank's stock.
In the near term, we believe joint-stock banks, including Minsheng, will face stronger and earlier operating headwinds in both NIM and NPLs in an economic slowdown, we maintain our EW rating on the stock.
MSE loan growth accelerated in 3Q12, momentum likely to continue into 4Q12: During the trip, we met with the bank's head of MSE business from the headquarter, Quanzhou branch managers, and owners of local stone enterprise and small retailers.
Minsheng's MSE loan growth accelerated, up Rmb29.9bn in 3Q12, after low growth of only Rmb18.4bn in 1H12 (due to macro-environment uncertainties, according to management), which is in line with management guidance in September post 1H12 results.
Total MSE loan balance reached Rmb280.5bn as of end-Sep 2012. Management is confident it can achieve an Rmb20bn increase in MSE loans in 4Q12, as demand is cyclically higher towards year-end, especially in the consumer sector (with Christmas and New Year holidays).
On the loan pricing side, the MSE loan yield is currently at 0.7-0.8% monthly rate, or an annualised rate of 8-9% (approximately 30-50% over benchmark rate).
Minsheng to stick with MSE business strategy, enhance fee generation ability; new NPL in Zhejiang branch slowing down in 2H12: Minsheng will stick with its MSE business strategy, providing more comprehensive services to its customers. The MSE business does not only focus on credit providing, but also fees generated from other specialised services, including settlement, wealth management services, etc.
The number of its MSE customers reached 790K as of end-Sep, increased by 150K in 3Q12 from 640K at end-June 2012. From Minsheng's market survey, only 34% of its MSE customers have loan demand, others are more looking to get basic banking services, such as settlement, card-services, and transfer of funds, etc.
The total installation number of Minsheng's special POS machines "Leshouyin (乐收银)" has reached 237K as of end-Sep, up by 52K in 3Q12, from 185K at end-June 2012. The number of the bank's MSE specialised sub-branches increased to 624 at end-Sep from 556 at the end of last year, and the branch NPL ratio was 0.27% on average at end-Sep.
Management believes "the worst is over" for Zhejiang asset quality deterioration, and it has seen the new NPLs in the bank's Zhejiang branch decelerating in 2H12. Minsheng has lowered the maximum credit line provided to mutual guarantee loans to Rmb2m from Rmb3m previously, with the average single account loan balance lowered to Rmb1.7m in 9M12 from Rmb2.14m at the beginning of the year.
The bank has lowered its loan exposure to high-risk Zhejiang and Jiangsu area from 20% at end-2011 to 15% at end-Sep 2012.
Background of Quanzhou and Minsheng's local branch: Quanzhou, located in the southeast part of Fujian, is the economic centre of Fujian province, its total GDP amounted Rmb427bn in 2011, ranking as top 1 among all cities in Fujian for the 13th successive year.
There were about 1500 companies doing stone business (mainly material processing), sales in Quanzhou account for around 50% of the national market, and are likely to reach Rmb505.8bn in 2012 (+30% YoY), according to management.
There are 22 financial institutions in Quanzhou, total deposits and loans balance were Rmb382.6bn and Rmb315bn as of end-2011, growing at a 3-year CAGR of 22.7% and 28.9%, respectively, while the loan-to-deposit ratio was 82%. Deposit-to-GDP ratio was only 0.9 in 2011 (much lower than the national average of 1.9), implying a relatively high capital turnover rate.
Minsheng Bank Quanzhou branch's deposits stood at 20.6bn as of end-June 2012, meaning it ranks No. 6 in Quanzhou by market share of deposits after the big 4 banks and Industrial Bank. Minsheng's MSE customers in Quanzhou grew from 19.6K at end-Feb 2012 to 54.5K at end-Sep 2012.
The bank's special POS machines "Leshouyin" have received some good feedback from its local customers, as they find it very convenient to use. The total installation of Leshouyin machines has exceeded 15K in Quanzhou city. The NPL ratio of the bank's Quanzhou branch is currently 0.29%, with no NPL on corporate loans.
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