Generally positive, increased worries — We just returned from marketing in the
US. We find US investors are generally positive on Chinese banks, but versus 1-2
months ago, there seems to be increased worries mainly stemming from strong
loan growth in June, which has raised questions (again) about when NPLs will
become an issue, where banks are lending to and near-term credit/liquidity
controls by the PBOC. Some investors expressed concerns about the sector's lack
of outperformance lately.
NPL timing, no major policy changes — We recognize that the surge in loan
growth in 1H09 clearly raises NPL risks for the sector, but we believe NPL issues
could be more a 2-3 year problem than a 12-month problem given that 2009 is
only the first year of significant loan growth (after several years of measured
growth), and high loan growth could be sustained for several more years if
required (ample system liquidity and capital). Our China Stategist, Lan Xue, does
not expect any major changes to monetary and fiscal policy for the next six
months, until there are solid signals of sustainable and meaningful recovery in the
external environment.
High NIM sensitivity — Positive drivers for the Chinese banks are becoming well
flagged. We believe revisions to consensus earnings are now being put through on
higher loan growth and lower credit costs. The next stage of the revision cycle
should focus more on fee income and NIMs. The sensitivity to NIMs is sizeable
especially given how far NIMs have fallen (down 84bps YoY in 1Q09 on average).
We believe official lending and deposit rate hikes are not likely any time soon, but
nonetheless a moderate 20bps increase in NIM assumptions would raise 2010E
earnings by 14%. Recent trends in loan and deposit mix and bond yields suggest
a moderate NIM recovery is possible in 2H09.
Positive stance — We remain positive on Chinese banks given still supportive
monetary policy, strong system liquidity and high capital levels, and positive NPL
trends (generally still declining in absolute terms this year). 2Q results in mid/late
August will likely be positive. Our top-picks are ICBC and CCB.