We follow up on our recent visit report, China Banks Sector: liquidity
has put concerns to rest, for now, published on 14 July 2009, and
revise our earnings accordingly. We raise our 2010 estimates by 2-23%,
driven mostly by stronger loan growth and lower credit costs.
■ Although we remain cautious about Chinese banks’ long-term
fundamentals, the reality is that ample liquidity puts a downward bias
on credit costs. Moreover, if the local stock market rally sustains
throughout this year, banks’ margin recovery is likely to be stronger
than our current estimates. This means Chinese banks’ earnings
should continue to have an upward bias throughout this year.
■ We raise our target prices to reflect: 1) higher earnings, 2) the rolling
over of the base year to 2010 and 3) multiple expansion closer to the
historical average. In reality, Chinese banks have more similarities with
each other than differences in terms of balance sheet structures and
earnings drivers; this means the shares are likely to move as a pack.
■ That said, banks’ ability to beat consensus estimates is likely to lead to
outperformance. We believe CCB and BOCOM stand a better chance of
surprising the market on the upside. We upgrade both to an
OUTPERFORM, but keep our NEUTRAL ratings on ICBC and BOC, and
UNDERPERFORM on CMB.