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Sector recap: Improved short
term outlook
The trade-off between short term and long term
The Chinese bank sector’s short term and long term outlook is diverging, in our view.
Visibility on long term outlook has declined - the sharp acceleration of credit growth and
increased loan concentration during 2H08/1Q09 may lead to high risks of capital
misallocation and NPLs. Risk management practices, which banks struggled to build
over the past few years, may also be relaxed in light of the fervor in supporting
“government projects”. However, earnings visibility has improved in the short term, but
problems could be masked by rich system liquidity and the recovering macro economy.
Short term: share price supported by earnings upside
We upgraded our 09E-10E earnings estimates by 5-20% and PPP by 1-10%
during the recent result season of our coverage universe, driven by lower-thanexpected
credit costs and reduced rate cut expectations. We reckon the potential
earnings upside and expected earnings recovery in 2010 will support continued
strong share price performance. BOC remains our preferred large cap stock.
Some interesting findings in 2H08/1Q09 results
New loans since 2H08 were concentrated in the infrastructure sectors
(power, utilities and transportation). Interestingly, those sectors reported
higher net NPL formation (30-45bp) than the “risky” sectors
(manufacturing and property development), possibly due to: 1) the “risky
sectors” have written off more NPLs; and/or, 2) banks’ relatively relaxed
risk control in those seemingly safe sectors. We reiterate our view that
“infrastructure loans” are not risk free.
Growth of average interest earning assets was only half the growth rate of
assets in 1Q09, possibly due to a sharp surge in loan volume at end March.
We questions the sustainability of this and expect the QoQ growth of net
interest income in 2Q09 will be flattish or <5%.
Net interest margin declined ~75bp HoH on average, while the benchmark LD
spread fell by nearly 100bp. We expect NIM to slip another 10-20bp in
2Q09, and start to recover. In our opinion, while BoComm/CMB/CNCB may
suffer bigger YoY margin decline, they should be better positioned for the
sequential recovery, mainly because they have more room to shift low
yielding bills into real loans and are more sensitive to the shortening of
deposit maturity.
Corporate banking related fees (eg guarantee and consultancy) became
the new driver for fee income growth. CNCB/BoComm reported over 100%
growth in those areas, and replaced CMB to be the leaders in fee income
growth recently. Recovery of retail banking fees (esp fund sales) would help
CMB to regain the leadership in the following quarters.
Banks are willing to cut credit costs from ’08 levels, in light of the record
low NPL ratios and high NPL coverage. We see a sudden drop in system
liquidity and stumble in China’s economy as the main potential risks to sector
asset quality.
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