Our view
The market likely has digested the good news: NIM bottomed in 2Q09 and credit
charges remain low. Looking ahead, NIM expansion and fee income growth may
generate earnings upside. We favour banks with these abilities, eg CCB and ICBC.
We also favour high beta names such as BOC and CITIC Bank in this bull market.
Anchor themes
We remain Bullish on the Chinese banking sector, largely based on China’s
economic recovery story, no near-term NPL concerns and reasonable valuations.
The underperformance of Chinese bank shares in recent month is due more to
“sector rotation” and “policy scare” than fundamental weakness, in our view.
Our economist recently initiated a forecast of 9.8% for China’s GDP growth in
2011F, coupled with a 10% GDP growth forecast in 2010F — this strong economic
environment should be supportive to banks’ performance.
1H09 preview: positive q-q
momentum outweighs y-y decline
􀁺 Macro backdrop: don’t be scared by policy “fine-tuning”
􀁺 Our broad estimates for 1H09 performance
􀁺 Key issues to watch for individual banks
􀁺 Where will banks go from here?
􀁺 Rationale for individual bank ratings
􀁣 Macro backdrop: don’t be scared by “fine-tuning” policy
We think macro fine-tuning indicates that economic activity is recovering.
Our economist recently initiated a 9.8% y-y GPD growth forecast for
China in 2011F following 10% growth in 2010F, indicating that we are
going to have at least another 2.5 years of very strong economic growth
in China. This is generally positive for bank performance.
In fact, we think moderate 2H09F tightening is sector-positive: money
market rates and short-term bond yields are moving up, positive for NIM;
2) tightening may lead to more pricing power for banks; 3) tightening
has the potential to reduce asset quality risk in the medium term.
Given the ample liquidity and the long-maturity nature of infrastructure
loans, which accounted for more than 50% of the new loans in 1H09, we
think asset quality is likely a medium- to long-term concern (after 2011F).
Later, NPL risks could come from local-government initiated
infrastructure loans, which are generally of more than three years in
maturity. Risks related to property, and to the portion of the
manufacturing sector exposed to weak exports and overcapacity have
receded. Though a property bubble is likely in the medium term should
monetary policy remain extremely loose, there are many moving parts
the government can work to reduce such risks.