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　　机构：交通银行

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　　Bank of Chongqing ’s FY17 net profit was up 6% YoY, 2%/3% lower than Bloomberg consensus/our estimates, mainly on higher-than-expected impairment losses . Declines in operating expenses partly offset NIM contraction and decrease in fee income. Asset quality improved slightly, but provision pressure remained given the high NPL formation rate, in our view. CQB also cut its dividend payout ratio to 10% in 2017 due to capital pressure, in our view. We expect funding cost to continue to pressure its NIM amid tight liquidity.  

　　Funding cost a drag on NIM: CQB’s reported NIM in 2017 was at 2.11%, compared with 2.14% in 9M17. We believe the further contraction of NIM in 4Q17 was mainly due to increasing interbank funding cost. Interbank liabilities made up 34% of its total liabilities as of end2017, which was close to the regulatory requirement. We believe CQB has to grow its deposits faster with higher cost, which may pressure its NIM.   

　　Asset quality improved, but pressure intact: CQB’s NPL ratio declined by 13bps QoQ to 1.35% at end-2017 and NPL coverage ratio increased by 20PPts QoQ to 210%, thanks to its aggressive write-offs and provision in 4Q17. Both overdue loan and special-mention loan ratios declined HoH in 2H17. However, NPL formation rate increased in 2H17 to 1.71% from 1.31% in 1H17. We believe CQB has to maintain relatively high write-offs and credit cost given the asset quality deterioration pressure, which will dampen its profitability. 

　　Increasing capital pressure: CQB’s CET1 ratio was down 67bps QoQ to 8.62% at end-2017, due to the fast RWA growth. RWA/total assets increased to 72% at end2017 from 66% at end-3Q17, as CQB increased its exposure to interbank investment & loans and cut its interbank lending assets. Interbank investment made up 24% of total assets at end-2017, up from 20% at end-1H17. Given the increasing regulatory scrutiny, we expect CQB’s capital pressure to increase, and it may need to raise more capital from its planned A-share listing.   

　　Good cost control but weak fee income: Cost-to-income ratio declined by 1.77ppts YoY, mainly due to the strict control on administrative expenses. Fee income was down 13% YoY, as the fees from custodian services were down 47% YoY, and the fee and commission expenses increased by 174% YoY.  

　　Maintain Neutral with TP of HK$6.90: We will revisit our earnings forecast and TP after the analyst briefing on 19 March. Our TP is the average of our DDM model and Gordon Growth fair P/B model, based on profit growth of 8%/6%/3% in stage 1/2/3, dividend payout of 26%, sustainable ROE of 14%, and COE of 16.5%. Our TPimplied 2018E P/B is 0.6x. Key risks: Downside: worse-than-expected NIM, NPL and economic growth in Chongqing; tighter-than-expected regulations on WMPs. Upside: better-than-expected NIM and NPL. 

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