Despite attractive risk-reward for China banks after YTD share price correction, we suggest remain selective and stick to defensive player at this juncture, as impact from COVID-19 and corresponding policy measures start to materialize in banks’ operating results in coming quarters.
- Moderate earnings pace ahead. The 10 China banks under our coverage reported aggregate FY19 net profit growth of 5.7% YoY (vs 4.8% YoY in FY18). 4Q19 growth slowed to 3.4% YoY (vs 6.2% YoY in 9M19) on still proactive impairment charges, especially for JSBs. PSBC/PAB/CEB led the way with 16.5%/13.6%/11.0% YoY full-year earnings expansion. We forecast sector profit growth to soften to 5.2% YoY in FY20, on lower NIM and lackluster fee income. Credit cost may stay elevated for banks with thin provision coverage.
- Expect 5-10bp NIM contraction across banks in FY20E. We see margin pressure mostly from declining asset yields amid LPR cuts and policy guidance for lower effective lending rate. Liability cost tends to be inelastic due to rigid deposit cost, although cut in RRR and open market operation rate could offer some relief. PBoC cut 7-day reverse repo rate by 20bp on 30 Mar. Therefore, MLF rate and LPR shall decline accordingly in April, and deposit rate cut is likely to be postponed. JSBs may still benefit from falling market rate in 1Q20, but NIM’s low-base effect on interest income will largely abate. Ability to optimize funding mix and increase customer stickiness is the key factor to outstand, in our view.
- Credit extension on track, leaning towards corporate side. Most banks kept full-year loan target unchanged despite less front-loading due to COVID-19’s outbreak. While subdued consumer activities weighs on retail lending, banks will allocate higher proportion of new loans to corporate segment, aided by govt’s pro-growth policy measures. We anticipate sector loan growth to remain largely stable at 10.2% YoY in FY20 (vs 10.5% YoY in FY19), as banks intend to compensate margin loss with volume gain.
- Asset quality posts the biggest uncertainty. During results briefings, all banks guided for rising NPLs and overdue loans in FY20. The magnitude and duration of asset quality deterioration primarily depend on how soon the pandemic’s global spread is brought under control. In our base case, we forecast NPL ratio for banks under coverage to pick up 8bp YoY to 1.49%. Retail credit is likely to see immediate shock, due to weaker repayment ability and willingness of credit card and consumption loan borrowers. Corporate credit may experience some delay effect, as demand disruption transmit over the supply chain. We believe CCB, PSBC, and ABC have greater defensiveness, given 1) solid provision buffer, 2) limited credit exposure to cyclical industries, and 3) stringent NPL recognition.
- Maintain Outperform and favor defensive plays. A/H-share China banks are trading at 0.72x/0.61x FY20E P/B, with 5.2%/6.4% dividend yield. We prefer large-cap banks with stronger corporate banking exposure in 1H20, as they tend to benefit from policy stimulus for infrastructure and high-end manufacturing, hence, enjoy stable credit demand and suffer less asset quality pain from COVID-19. Heading into 2H20, retail-oriented banks should fare better on rapid consumption recovery when the pandemic’s impact wanes. Our top picks are CCB, PSBC, and PAB.
