China Banks
Key beneficiary of liquidity and reflation story: Stay
OW on China Banks on strong earnings in 2010-11E
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 43 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.
Price performance relative to MSCI
China (rebated to 100 as of 1 Jan 08)
50
60
70
80
90
100
110
120
130
140
Jan-08 May -08 Sep-08 Jan-09 May -09
A Shares H Shares
Source: Datastream.
• OW on four state-controlled banks. More
Alpha in BOC-H and BoComm-H (both are
in Asia Analyst Focus List)
• We also like CCB-H and ICBC-H.
• Buy SPDB. Minsheng may be a short-term
trade supported by H-share offering.
• Investors are less worried about 2009, but 2010 is still
underappreciated: Entering in 2H09, few investors are still challenging
our 2009 outlook highlighted in the January report and our bullish note
upgrading Chinese banks on 5 March. While earnings growth (except CMB)
and strong profitability in 2009E become clearer, investors have yet to pay
more multiples to the sector for its c30% CAGR earnings growth in 2010-
2011, in our view.
• Key beneficiary of loose monetary policy and reflation: Data points
suggest sequential improvement in the economy. The expected slowdown in
credit growth does not suggest tightening and we don't expect significant
changes in policy stance in the near term. The sector is benefiting from a
liquidity boom, which is also fueling asset reflation. This, we believe, not
only drives volume growth and helps lower NPL risks, but may also boost
WM fees and have a positive impact on NIMs through funding mix and
yield curve movement.
• More earnings upgrades will be key catalyst: While Street estimates are
being revised up, we still see further room for meaningful consensus
upgrades especially for 2010 earnings. We are revising up 09E/10E earnings
by 3% and 8%, respectively. On average, our EPS estimates are still 7%
above Bloomberg mean estimates for 2009 and 20% for 2010.
• 18-20% upgrades to PTs: We raise our DDM-based Dec-09 PTs by 18%
for H-share and 20% for A-shares on average. Despite an average 74% rally
YTD, valuations are still relatively attractive especially in view of strong
earnings growth in 2010-11E. On average they are trading around 10x
2010E, with possibly 29% EPS CAGR growth in 2010-11E. Implied 2010E
valuations of our PTs are still at levels similar to historical mean average.
• Stick with major H-share banks, more "alpha" in BoComm-H, BOC-H.
We maintain OW on all the four state-controlled H-share banks. However,
our strongest conviction OW is for BOC-H and BoComm-H, where we see
more "alpha", or room for earnings upside surprise to consensus. Within Ashares,
we clearly prefer medium-sized banks with low risk to credit
costs (SPDB/SZDB). We recommend investors buy SPDB.
Table of Contents
Chinese banks: Key beneficiary of liquidity boom and asset reflation.................................. 3
Liquidity boom to drive sector earnings ................................................................................... 5
Asset reflation and more active capital market to drive fees and mortgage ......................... 8
NIM may bottom in 2Q09 for most banks................................................................................ 12
Valuation of Chinese banks remains attractive from growth perspective........................... 14
Earnings forecasts revision...................................................................................................... 16
Upgrading price targets, strong buy on bigger H-share banks and SPDB.......................... 20
Historical valuation trading range: 12M forward PB and PE................................................. 23
Industrial & Commercial Bank of China: Summary of financials.......................................... 25
Bank of China: Summary of financials .................................................................................... 26
Bank of Communications: Summary of financials................................................................. 27
China Construction Bank Summary of financials .................................................................. 28
China Merchants Bank: Summary of financials ..................................................................... 29
Huaxia Bank: Summary of financials....................................................................................... 30
China Minsheng Banking Corporation: Summary of financials............................................ 31
Shanghai Pudong Development Bank: Summary of financials ............................................ 32
Shenzhen Development Bank: Summary of financials.......................................................... 33
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