The aggregate net profit of the 11 China banks we follow picked up by 7.5% YoY in 3Q18 (vs 7.3% YoY in 2Q19). 9M19 earnings accounted for 85.6% of full-year consensus estimate, suggesting potential upward revision in FY19 forecasts. Similar to 2Q19, moderating credit cost continued to cushion weakening topline growth due to falling margin, as evidenced by slower PPOP growth but stronger earnings momentum. PSBC/CMB/PAB led peers with 19.2%/17.7%/16.0% YoY bottom-line expansion, while Big-5 banks brought up the rear with mid-single digit growth in 3Q19.
- NIM may further narrow but pressure should ease. Sector NIM slid 2bp QoQ in 3Q19, as liquidity easing weighed on asset yields yet liability cost stayed elevated amid deposit competition. Big banks actually fared better with average 1.2bp QoQ NIM contraction, likely due to less reliance on costly structured deposits and higher exposure to mortgage, of which yield trend was largely stable under property tightening. We see easing margin pressure in 4Q19, given that: 1) LPR adjustments have been gradual and benign so far; 2) the Big-5 banks have already completed the 30% MSE loan growth target in 9M19; and 3) CBIRC’s new rules on structured deposits should help to contain banks’ funding costs.
- Asset quality still improving. Except for PSBC, all banks reported flat or declining NPL ratio and rising provision coverage. Management attributed the low correlation between banks’ asset quality and macro economy to optimized credit structure. They see potential risk from credit card loan borrowers, manufacturers exporting to or importing from US, and companies with higher external debt thus might be impacted by exchange rate fluctuation. Banks with strong provision buffer (PSBC/ABC) will have greater room to reduce impairment charges and sustain earnings stability, while MSB/BoCom that lag behind in provision coverage may continue to see higher credit costs.
- Maintain Outperform. A/H-share China banks are trading at 0.85x/0.72x FY19E P/B with 5.5%/3.9% dividend yields, similar to past 5-year mean. We see further sector re-rating driven by better-than-expected NIM trend, overall stable asset quality, and upward revision in earnings forecasts. Joint-stock banks remain on favorable spot as their faster earnings growth drives ROE recovery. Our top picks are CEB and CITICB.
