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China Banks
2Q09 may modestly surprise, but 2H09 may see more
earnings momentum on NIM upside; accumulate
China
Banks
Samuel ChenAC
(852) 2800-8557
samuel.s.chen@jpmorgan.com
Sunil Garg
(852) 2800-8518
sunil.garg@jpmorgan.com
Joseph Leung
(852) 2800-8517
joseph.mj.leung@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
See page 34 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
12M forward P/BV bands of Chinese
banks
1x
2x
3x
4x
0
100
200
300
400
500
600
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Source: Bloomberg, J.P. Morgan research estimates.
• 2Q09 earnings preview: Our current forecast for 2Q09 is a modest 6% q/q
earnings contraction in aggregate, due to higher operating costs and our
assumption of slightly higher credit costs in 2Q09. We however see modest
upside from fees, volume growth, and credit costs, so that actual 2Q09 may
be flattish vs. 1Q09. For 1H09 we forecast an 8% y/y earning contraction.
• Expect more sequential pickup in revenue momentum in 2H09: While
sequentially we expect revenue momentum to start picking up modestly in
2Q09, we still expect an 8bp q/q NIM contraction. The sequential trend is
encouraging, and the degree of NIM expansion in 3Q09 could be a positive
surprise. The 3Q09 results may provide enough optimism to allow the
earnings upgrade cycle to continue in coming months.
• Tightening may not come through in 2H09: While the market is
concerned about tightening, we do not expect any material tightening until
sometime next year. Policymakers have reiterated their relaxed stance,
which is unlikely to change before external demand shows a sustainable
recovery. Meanwhile, even in asset markets, policymakers’ goal is not for a
reversal of the appreciation trend but rather a prevention of overheating.
• Re-rating likely to come through; c30% potential upside by year-end:
The underperformance since July has created opportunities. Looking through
the tightening illusion, investors do care about earnings, which provide
downside support in the near term too. We expect a re-rating as investors
revisit forecasts and switch to 2010 P/E valuations. At only 10x 2010E P/E,
China banks are 1std deviation below historical mean. While 12M forward
P/BV is approaching mean, structurally ROEs have improved and are rising.
• Accumulate stocks with earnings momentum, upside surprises: While
ICBC and CCB look the most solid and may deliver better-than-expected
results, we still prefer BOC-H and BoComm-H. BOC-H has the cheapest
valuation but may also have the most upside surprise in the next 12-18
months and the biggest ROE improvement, driving a greater re-rating. We
recommend buying on A-share weakness; focus on small banks with clear
earnings visibility and catalysts, such as SPDB and SZDB.
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