21 February 2008
China Banks
Policy uncertainty near-term
but growth intact
Krista Yue, CFA
Research Analyst
(852) 2203 6251
krista.yue@db.com
Sandy Hu, BA
Research Analyst
(852) 2203 6164
sandy.hu@db.com
Robust 2H07 profit to point to sustained growth drivers ahead
We expect China banks (except BOC) to report over 50% y/y rise in 2H07 net
profit due to robust operating trends, including double-digit loan growth, 6-20bps
hoh NIM expansion, and doubling in fee income. We forecast BOC to report a
31% y/y drop in 2H07 due to one-time US subprime loss. With fundamental
growth drivers intact into 2008, we believe the sector offers attractive value and
growth. A sustained re-rating, however, will occur only after 1Q when monetary
policy uncertainty amid rising monthly inflation data is improved.
Deutsche Bank AG/Hong Kong
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DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Company Review
Top picks
ICBC Ltd. (1398.HK),HKD5.22 Buy
China Construction Bank (0939.HK),HKD5.73 Buy
Bank of China (3988.HK),HKD3.24 Buy
Bank of Comm (3328.HK),HKD9.29 Hold
China Merchants Bank-H (3968.HK),HKD27.50 Hold
Companies featured
ICBC Ltd. (1398.HK),HKD5.22 Buy
2006A 2007E 2008E
P/E (x) 23.4 20.3 14.7
Div yield (%) 2.5 3.2 3.8
Price/book (x) 3.5 3.3 3.0
China Construction Bank (0939.HK),HKD5.73 Buy
2006A 2007E 2008E
P/E (x) 17.5 17.5 12.4
Div yield (%) 2.5 3.9 3.6
Price/book (x) 3.5 3.2 2.8
China CITIC Bank (0998.HK),HKD4.24 Hold
2006A 2007E 2008E
P/E (x) – 17.8 13.1
Div yield (%) – 1.6 2.3
Bank of Comm (3328.HK),HKD9.29 Hold
2006A 2007E 2008E
P/E (x) 20.3 20.8 15.0
Div yield (%) 1.8 1.9 2.7
Price/book (x) 4.9 3.3 2.9
Bank of China (3988.HK),HKD3.24 Buy
2006A 2007E 2008E
P/E (x) 19.8 16.5 9.8
Div yield (%) 1.1 2.1 3.0
Price/book (x) 2.9 1.9 1.7
China Merchants Bank-H (3968.HK),HKD27.50 Hold
2006A 2007E 2008E
P/E (x) 26.4 26.2 17.8
Div yield (%) 0.9 1.1 1.7
Price/book (x) 4.5 5.9 4.8
Shanghai Pudong Bank (600000.SS),CNY45.98 Hold
2006A 2007E 2008E
P/E (x) 13.7 36.2 20.3
Div yield (%) 1.3 0.6 0.9
Price/book (x) 3.8 7.0 3.2
China Minsheng Bank (600016.SS),CNY13.33 Hold
2006A 2007E 2008E
P/E (x) 10.9 26.9 20.7
Div yield (%) 0.0 0.5 0.7
Price/book (x) 5.4 4.2 3.6
Industrial Bank (601166.SS),CNY43.79 Hold
2006A 2007E 2008E
P/E (x) – 25.0 20.9
Div yield (%) – 0.8 1.0
Price/book (x) – 5.8 4.7
Global Markets Research Company
One-off US subprime loss and staff retirement charge still manageable
We expect three largest state banks, ICBC, CCB and BOC to recognize in 2H07
one-off charges of RMB11-23bn from 1) an avg 25% loss on their US subprime
securities investments and 2) provision for present value of early retired staff
expenses in compliance with new labor regulations. This brings more clarity to 08.
More interest rate and RRR hikes factored in
With Jan CPI hitting a high of 7.1%, DB’s China economist, Jun Ma, expects more
monetary tightening near-term, including 2-3 asymmetric rate hikes and 150-
200bps RRR hike. We have factored these rate/RRR changes plus one-time 07
charges into our forecasts, resulting in 4-25% cut to 07 and 1%-7% reduction to
08/09 profit for the big state banks (ICBC, CCB, BOC, BOCOM). Our new forecasts
still imply a healthy 47% and 15% sector profit growth in 08 and 09.
TPs down 18%-34% on new DB China cost of equity (COE)
Our DB quant team has revised the China COE to 10.2% from 9.1%, comprising
of 4.9% risk-free rate and 5.3% equity premium. Given our TP methodology is
ROE-g/COE-g, it is highly sensitive to changes in COE with every 1% move
translating to >20% in TP. Fig 1 outlines new TP for each bank. We continue to
prefer large state banks for their strong deposit franchise. See p7 for key risks.