The 11 China banks we keep track of delivered a better-than-expected 1H19 earnings (up 6.4% YoY, 3.4ppt above consensus FY19E growth), as weakening topline growth due to broad-based NIM pressure was largely compensated by lower credit cost on improving asset quality. Earnings momentum of mid-sized JSBs (+11.6% YoY) continued to stay ahead of large SOE banks (+6.5% YoY), as the former tends to benefit more from monetary loosening. In particular, PAB, CEB, and PSBC achieved the fastest 2Q19 net profit growth of 17.4% YoY, 18.7% YoY, and 17.8% YoY, respectively.
- Mixed NIM trend – 4bp QoQ decline for Big-6, 3bp QoQ rise for JSBs. PAB reported the biggest NIM widening of 18bp, while ABC suffered 10bp contraction in 2Q19. Due to intensifying deposit competition and migration of WMPs into time deposits, deposit cost hike outpaced loan yield increase in 1H19. Looking into 2H19, JSBs would remain on favorable spot as liquidity condition stays accommodative. However, their advantage will diminish when NIM’s low-base effect wanes. Big banks would see less pressure in extending MSE loans that bears lower lending rate, as they have almost completed the 30% annual growth target. In addition, most banks said during results briefing that impact from LPR is manageable, as regulator requires a gradual adoption of the new pricing mechanism in coming quarters (30%/50%/80% of new loans in 3Q19/4Q19/2020).
- Asset quality improved in general. Given a relatively loose policy environment, overall asset growth accelerated to 8.5% YoY in 2Q19, from 8.1% in 1Q19. We expect asset expansion to slow down in 2H19 along with moderating TSF growth. NPL ratio declined 3bp QoQ to 1.45%, while provision coverage further climbed 8ppt QoQ to 227% on average. Credit cost fell 35bp to 1.2% in 2Q19 (vs 8bp rise in 1Q19), as banks eased impairment charges to hold up profit growth. We expect those with sufficient provision buffer to see better earnings stability.
- Maintain Outperform. H-share China banks are trading at 0.63 FY19E P/B, and 16% cheaper to their A-share counterparts. Fundamentally, we continue to prefer retail-oriented banks, given their more resilient margin trend amid interest liberalization and less cyclicality to macro headwinds. Top picks are PAB and CEB. On valuation front, we see bottom-fishing opportunity on ABC-H, BOC-H, CITICB-H, and MSB-H, which have: 1) over 10% P/B discount to historical 5-year mean, 2) greater than 20% A/H premium, and 3) above 6% dividend yield.
