Near-term disappointment inevitable. We believe market expectations for
China banks’ margin expansion are too high in the near term (2H09). This is
likely to cap banks’ near-term share price performances. We see value for
China banks on a 12-month basis, but believe the risk is high heading into
the 3Q09 results, wherein banks are likely to disappoint on the margin front.
■
Timing matters. Although analysis on the potential positive impact on
margins in a rising interest rate environment has often been done on the
street, we believe the analysis grossly overlooks the timing of the potential
margin expansion. Our note delves into the details and we conclude that the
margin expansion has a significant lag than what the market expects.
■
CCB remains our top pick; ICBC is the most defensive in the near term.
Our analysis shows that CCB has the most margin upside in a rising rate
cycle. ICBC will see margin upside frontloaded, which makes it the most
defensive in the near term. We downgrade BOCOM to NEUTRAL from
Outperform as its margin expansion will have a lag. We revise our 2009
through 2011 earnings estimates to factor in 81 bp symmetrical benchmark
rate hikes by mid-2010 but remodel for the timing of margin expansion to
have a longer tail. We accordingly revise up our 12-month target prices,
based on historical average P/E and 2010E earnings.