20140502-Maybank_KERPL-1Q14__more_provisions_accumulated_12页_633kb

报告摘要

1Q14: More Provisions Accumulated

Core Content

In the first quarter of 2014 (1Q14), Chinese H-share banks experienced a mixed performance, with some facing challenges in net interest margin (NIM) and asset quality, while others benefited from improved non-interest income and cost control. The overall financial landscape for these banks reflected a combination of external pressures and internal strategies to mitigate them.

Main Points

1Q14 Performance Overview

NIM Surprise: Large banks saw limited NIM pressure due to their ability to pass on increased funding costs to loan customers. In contrast, small-to-medium H-share banks experienced a decline in NIM of 13-22bps QoQ due to competition from internet deposits.
Non-Interest Income Growth: Small banks reported strong growth in net fees and other non-interest income, with some reaching over 20% YoY. This was attributed to rising consultancy and advisory fees, as well as the revival of bill discounting and forex trading businesses.
Provisions vs. NPL Formation: Increased provisions more than offset new non-performing loan (NPL) formation, indicating proactive risk management. ABC, BOC, and CMB had particularly high provision-to-loan ratios, suggesting better coverage of potential credit losses.
Earnings: 1Q14 earnings were largely in line with consensus, except for BOCOM and ICBC, which were below due to lower revenue growth and higher credit costs. Net profit growth was between 6-16% YoY for most H-share banks.

Key Drivers of Performance

Loan Growth: Most H-share banks reported solid loan growth of 3.9-7.2% QoQ. Growth was concentrated in residential mortgages, small-to-medium enterprises (MSEs), credit card advances, and overseas loans. BOCOM and ICBC had slower growth due to tighter deposit constraints and cautious lending.
Lending Rates and Funding Costs: Large banks raised lending rates to offset increased funding costs, especially from internet deposits and interbank borrowing. The softening of SHIBOR helped revive bill discounting for CMB and CMSB.
Cost Control: Operating efficiency improved, with most banks reporting a decline in cost-income ratio. ABC and CCB saw slight increases due to expenses from their life insurance ventures.
Asset Quality: While NPL formation stabilized or declined for several banks, provisions were higher than new NPLs, showing a proactive approach to risk. However, there were concerns about the adequacy of provisions to cover overdue loans and shadow banking assets.

Valuation and Outlook

Earnings Forecasts: We revised our NIM forecasts for small banks downward due to the NIM pressure seen in 1Q14. However, we expect EPS growth of 6-18% CAGR for most H-share banks from 2013 to 2016.
Dividend Sustainability: Dividend payouts are expected to remain sustainable in 2014-2015.
CET1 CAR: CET1 capital adequacy ratios (CAR) remained stable, with CMSB showing the lowest at 8.5% in Mar 2014. The adoption of the AIRB approach is expected to improve CAR for most banks, especially by reducing risk weights on loans and mortgages.
Interest Rate Deregulation: With potential further deregulation of RMB deposit rates, we believe large banks will continue to focus on high-yield MSE loans and consumer finance. ABC and CQRB are more defensive due to their strong county area deposit base.

Key Information

Top Picks

OVERWEIGHT: ABC and CQRB are recommended due to their strong position in county area banking and higher provision coverage.
BUY: BOC, CCB, and CMB are also recommended, with BOC benefiting from overseas business and CCB showing a decline in NPL formation.

Financial Summary (as of 30 April 2014)

Bank Name	BB Code	Rating	SP (HKD)	TP (HKD)	Upside (%)	2013 Net Profit (CNYm)	2014F Net Profit (CNYm)	2015F Net Profit (CNYm)	2013 P/E	2014F P/E	2015F P/E	2013 P/B	2014F P/B	2015F P/B	2013 ROE (%)	2014F ROE (%)	2015F ROE (%)	2013 Yield (%)	2014F Yield (%)	2015F Yield (%)
ABC	1288 HK	BUY	3.25	4.45	36.9	166,315	180,307	208,493	5.1	4.7	4.1	1.0	0.9	0.8	20.9	20.0	20.3	6.8	7.5	8.0
BOC	3988 HK	BUY	3.41	4.15	21.7	156,911	158,576	182,448	4.9	4.8	4.2	0.8	0.7	0.7	17.9	16.3	16.8	7.2	7.3	8.0
BOCOM	3328 HK	SELL	4.82	4.15	-13.9	62,295	48,564	56,390	4.6	5.9	5.1	0.7	0.6	0.6	15.6	11.1	11.9	6.7	5.1	5.0
CCB	939 HK	BUY	5.35	6.70	25.2	214,657	227,692	247,009	5.0	4.7	4.3	1.0	0.9	0.8	21.4	20.0	19.1	7.0	7.4	8.0
CMB	3968 HK	BUY	13.84	16.20	17.1	51,743	56,053	68,602	4.8	5.0	4.1	1.1	0.9	0.8	22.2	19.7	20.9	5.6	6.1	7.0
CNCB	998 HK	HOLD	4.62	4.35	-5.8	39,175	34,296	41,258	4.4	5.0	4.2	0.8	0.7	0.6	18.5	14.4	15.6	6.8	5.9	7.0
CQRB	3618 HK	BUY	3.40	4.35	27.9	5,991	5,865	7,019	4.2	4.3	3.6	0.7	0.6	0.6	17.6	15.3	16.4	7.1	6.9	8.0
ICBC	1398 HK	HOLD	4.62	4.85	5.0	262,649	255,052	282,416	4.9	5.1	4.6	1.0	0.9	0.8	21.9	18.8	18.4	7.1	6.9	7.0

Earnings Outlook (2014-2016)

Loan Growth: Expected to remain stable at 10-19% YoY in 2014, with a focus on MSEs, residential mortgages, and overseas lending.
NIM Trends: NIM for small banks is expected to remain stable or widen slightly in 2014, due to a low base for comparison. Large banks are more defensive against interest rate deregulation.
Provisions: Continued accumulation of provisions is expected, with a conservative projection of 13-15% YoY increase in NPLs for certain sectors. Shadow banking assets may require additional provisions.
Capital Adequacy: CET1 CAR is expected to remain stable, with the AIRB approach likely to improve CAR for most banks.

Conclusion

Despite challenges from rising funding costs and NIM pressure, H-share banks showed resilience through improved non-interest income and tighter cost control. The analyst maintains an OVERWEIGHT rating for the sector, with ABC and CQRB as top picks due to their strong position in county area banking and better provision coverage. The outlook for asset quality remains cautiously pessimistic, but banks are expected to maintain their financial health through proactive provisioning and efficient operations.

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