Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/22648" target="_blank" rel="noopener" data-smartkarma-citation="entities:22648:1">Bank Of Tianjin (1578 HK)</a> results are again deceptively strong with positive trends in profitability,  in efficiency, in capital adequacy, and in provisioning. (Liquidity and Asset Quality are a different story).Valuations are optically attractive: p/book of 0.42x, franchise valuation of 6%, earnings yield of 22%, and a total return ratio of 3.7x. These metrics appear to be firmly within the bargain hunter space.However, optimism fades fast on closer inspection.Firstly, LDR has surged over the last year from 71% to 88% on the back of gung-ho credit growth of some 25%, YoY, in US$, contrasting with sedate low single-digit increase in Deposits. This is a worrying signal. Secondly, debt funding remains elevated. Debt stands at &gt;4x SH. Funds. This type of funding has exploded by 10x since 2014. Thirdly, Asset Quality continues to erode across buckets (especially "Doubtful Loans") while Loan loss Provisions have soared, growth of impaired Loans outpace NPLs, and SMLs (in part impaired) remain at 2.8x NPLs despite an optically low NPL ratio masked by the aforementioned credit expansion and mammoth write offs. Fourthly, this once SME-centric bank continues to reinvent itself abruptly, veering now aggressively towards CRI (13% of portfolio vs 9% in 2015) and diverse consumer credit (42% vs 13% in 2015). Once mortgages are added, property-related lending stands at 20% of the credit portfolio. The IPO proposition was based on a SME focus.Thus, <a href="https://www.smartkarma.com/entities/22648" target="_blank" rel="noopener" data-smartkarma-citation="entities:22648:1">Bank Of Tianjin (1578 HK)</a> is cheap for a reason. We are reluctant to recommend that investors take a position at this juncture given the ongoing stresses in asset quality and the volatility of P&amp;L derived from a bloated Balance Sheet.

Bank Of Tianjin (1578 HK) results are again deceptively strong with positive trends in profitability,  in efficiency, in capital adequacy, and in provisioning. (Liquidity and Asset Quality are a different story).Valuations are optically attractive: p/book of 0.42x, franchise valuation of 6%, earnings yield of 22%, and a total return ratio of 3.7x. These metrics appear to be firmly within the bargain hunter space.However, optimism fades fast on closer inspection.Firstly, LDR has surged over the last year from 71% to 88% on the back of gung-ho credit growth of some 25%, YoY, in US$, contrasting with sedate low single-digit increase in Deposits. This is a worrying signal. Secondly, debt funding remains elevated. Debt stands at &gt;4x SH. Funds. This type of funding has exploded by 10x since 2014. Thirdly, Asset Quality continues to erode across buckets (especially "Doubtful Loans") while Loan loss Provisions have soared, growth of impaired Loans outpace NPLs, and SMLs (in part impaired) remain at 2.8x NPLs despite an optically low NPL ratio masked by the aforementioned credit expansion and mammoth write offs. Fourthly, this once SME-centric bank continues to reinvent itself abruptly, veering now aggressively towards CRI (13% of portfolio vs 9% in 2015) and diverse consumer credit (42% vs 13% in 2015). Once mortgages are added, property-related lending stands at 20% of the credit portfolio. The IPO proposition was based on a SME focus.Thus, Bank Of Tianjin (1578 HK) is cheap for a reason. We are reluctant to recommend that investors take a position at this juncture given the ongoing stresses in asset quality and the volatility of P&amp;L derived from a bloated Balance Sheet.

Bank Of Tianjin

Bank of Tianjin: More of the Risky Same