China Banks
Implication of Strong
Liquidity; Positive Near Term
Liquidity a positive near term: Though negative to
NIM, we expect strong liquidity to lead to good loan
growth and easing of asset quality pressure in the near
term. The liquidity benefit will likely continue in the near
term following the reiteration by PBOC of its stance on a
moderately loose monetary policy. We also factor in a
lower risk-free rate on lower long bond yields in China.
CCB and ICBC are core holdings, balancing risk and
reward: 1) large cap banks are better positioned in the
current round of credit expansion given the governmentled
stimulus package. 2) smaller percentage in
discounted bills in new loans make NIM fare better, on a
relative basis, 3) implied fee progression from 1Q is
better; 4) event risks are over; 5) dividend yields are
higher; and 6) balance between coverage ratio and past
new loan origination is more favorable.
Raising 2009-11 estimates and price targets by an
average of 1-3% and 19%, respectively, by applying
slightly higher than previous loan growth and moderately
lower than previous asset quality risks assumptions.
Lower risk free rate/discount rate move our price targets
more than our earnings estimates. We remain
Overweight on ICBC, CCB, BOC and Citic; Equal-weight
on BoComm, Merchants and Industrial; and
Underweight on Minsheng and Pudong.
Where we could be wrong: Should credit costs
normalize due to strong liquidity, we see more upside
potential in names that are more sensitive to downside
risks to asset quality. In our view, BOC, BoComm, Citic,
CMB and Industrial are more sensitive to credit cost
movements than CCB and ICBC.