Share prices have risen on strong results
but underlying growth is slowing
􀀗 We think further earnings surprises are
unlikely; the good news is priced in
􀀗 Downgrade BoCOM, CCB and ICBC from
OW(V) to N(V), CITIC from N(V) to UW
Changing picture. Following record earnings in 2007, H-share
banks posted 80%+ y-o-y profit growth in 1Q08. But we think
q-o-q growth may paint a different picture.
Q-o-q interest income growth seems to be slowing. Rate
hikes in 2007 pushed 1-year loan rates up 135bps, widening the
spread 135bps vs demand deposits and narrowing the spread
27bps vs 1-year time deposits. With demand deposits rising to
c51% of total system deposits by end-2007, the stage is set for
continued margin expansion.
But 1Q08 results have been mixed. Mortgages are largely repriced
1Q annually and likely added 4-7bps to yield in 1Q08
but margins were mixed; some q-o-q margins expanded (CMB
+20bps, ICBC +3bps, BoCOM +19bps, and CITIC +9bps) but
others were flat or declined (BOC -16bps and CCB +0bps). We
believe banks have seen rising deposit costs as demand deposits
have retreated to c49% in 1Q08 (back to June 2007 levels). But,
after some upside surprises in 1Q08 results, we have increased
our NIM forecasts for 2008e and 2009e by 10-25bps (to
between 2.94% and 3.38% in 2008e), driving EPS forecasts up
7-19% in 2008e. We have raised our end-2008 target prices by
4-18%.
Time to take profits. We downgrade BoCOM, CCB and ICBC
to Neutral (V) and CITIC to Underweight, all on recent share
price performance. Banks’ share prices appreciated 14-26% in
April 2008 and despite higher earnings and modest target price
revisions, share prices have narrowed or eliminated upside
potential based on our end-08 target prices. Growth should be
sustained but near-term share price catalysts seem to be scarce.