16 A/H-listed China banks have announced preliminary FY19 results so far. Overall earnings and asset quality trends stayed healthy. Prudent impairment charge in 4Q19 offers potential to reduce credit cost and stabilize profit growth ahead. Considering improving policy and credit environment for big banks in 2020, we add CCB (939 HK) to our sector top picks.
- Milder 4Q19 earnings pace on rising provision. Average FY19 revenue growth for the six joint-stock banks remained solid at 17.3% YoY. Full-year net profit growth moderated to 10.3% YoY from 12.2% YoY in 9M19, suggesting heavy impairment charges in 4Q19. However, NPL ratio declined for most banks (-6bp YoY on average), except a 13bp YoY rise for SPDB (600000 CH). CMB (3968 HK) and CEB (6818 HK) reported ROE expansion of 0.27ppt and 0.22ppt YoY, respectively.
- Credit cost may be the swing factor for FY20 earnings. We forecast 20bp LPR cut in 2020, along with measures to lower banks’ funding cost, such as cut in RRR and MLF rate. NIM would further narrow and weaken topline growth, although overall impact is manageable, in our view. As such, banks having stringent loan classification and above-peers provision coverage will be able to reduce credit cost to stabilize earnings.
- Improving outlook for big banks. We see less policy intervention for the sector this year, as evidenced by lower regulatory target for MSE lending (20% loan growth and 0.5ppt decline in financing cost for 2020, vs 30% loan growth and 1.0ppt decline in financing cost for 2019). The unchanged LPR quotation in Jan indicates more market-oriented mechanism with less window guidance. Meanwhile, corporate credit demand is set to recover on supportive policy for infrastructure and manufacturing sectors, benefiting SOE banks with strong corporate client base. Stable payout and higher dividend yield also increase the attractiveness of big banks.
- Maintain Outperform. A/H-share China banks are trading at 0.80x/0.68x FY20E P/B with 4.7%/5.8% dividend yield. We still prefer retailed-focused banks due to their superior growth potential and lower cyclicality to economic downturn. PAB (000001 CH) and CEB remain as our sector top picks. We also like CCB among big bank space, given higher mortgage exposure hence less susceptible to LPR cut.
