Summary

-According to the 2015Q1 business results previously released by Shanghai Pudong Development Bank (“SPD Bank” or “the Group” in the text below), the Group's operating income as at the end of March 2015 recorded a growth of 19.52% yoy, to RMB32.991 billion; while operating profit and net profit attributable to equity holders increased 4.85% and 4.52% respectively, amounted to RMB14.686 billion and RMB11.194 billion respectively;

-SPD Bank's scale of asset demonstrated steady growth. Total asset of the Group increased 1.42% higher than the figure recorded in the year end of 2014, amounted to RMB4.26 trillion. Meanwhile, the growth of net asset recorded 9.73%, to RMB285.494 billion, indicating net asset per share as RMB13.70;

-Being similar to other banks, the asset quality of SPD Bank demonstrated a trend of deterioration. The non-performing loan ratio of the Group in the end of 2015Q1 increased by 0.11 ppts, to 1.18%, in comparison to the ratio recorded in the year end of 2014. It is mainly due to the significant increase of doubtful loan and loss loan in the period under review. The Group's share price, which has recently been affected by the adverse condition of A-sharemarket, showed greater volatility. However, SPD Bank's share price is still obviously better than counterparts in the same period. The recent market adjustment exposed the effect of extended high leverage existed in the market. Meanwhile, it also reflects the potential risks of the wealth management products of the Group. We expect the asset quality of the Group would further deteriorate in the future;

-Overall, with SPD Bank's steady growth of profit and locational advantage in Shanghai district, we are confident toward the business of the Group in the future. We set the 12-month target price as RMB20 (2higher than the most recent closing price) which is equivalent to e2016 21.3x EPS and 1.3x BVPS. We grant the rating of “Accumulate”. (Closing price as at the morning, 10 July 2015)

Steady profit growth; worsen loan quality

As at the end of March 2015, SPD Bank's operating income recorded a growth of 19.52% yoy, to RMB32.991 billion. The operating profit and net profit attributable to equity holders increased 4.85% and 4.52% respectively, amounted to RMB14.686 billion and RMB11.194 billion. Among this, net interest income and net commission income of the Group increased 14.03%yoy and 38.28%yoy respectively, amounted to RMB24.679 billion and 6.932 billion.

However, loan quality of the Group in the period under review consistently deteriorated. Non-performing loan ratio increased by 0.11 ppts to 1.18%, in comparison to the ratio recorded in the year end of 2014.The balance of non-performing loan increased 13.56%, to RMB24.513 billion. Therefore, asset impairment loss significantly increased 105.81% yoy, to RMB9.313 billion.

The main reason of the increase of non-performing loan is related to the surge of doubtful loan and loss loan, which increased 22.10% and 29.52% respectively in the period under review, compared to the end of 2014, and amounted to RMB 9.714 billion and RMB2.176 billion respectively.

We consider profit of the Group would decline in the future, but it keeps stability in general. However, asset quality of the Group would continue to deteriorate and this is exactly one of the major risks faced by the Group in the future.

Risk

Lower-than-expected growth of incomes;

The deterioration of the asset quality due to the large increase of the NPLs;

Share price decreases largely affected by the market environment in the short term.

Financials

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