Last week, we hosted investor conferences with four China banks, including CCB, BOC, PSBC, and CMB. Overall, management anticipated softening bottom-line growth in FY20 due to falling yields and profit-sacrifice guidance. On bright side, hard-hit areas amid COVID-19’s outbreak, i.e. credit card and personal consumption loans, were recovering rapidly in 2Q20. We believe the worst period of retail asset quality deterioration is already behind us, and NPL pressure will mainly come from corporate side in 2H20. As such, we turned more positive on retail-focused banks. Top picks are PAB, PSBC and CEB.
Steady recovery in retail credit. All four banks indicated accelerated retail lending along with gradual work resumption in 2Q20, after a temporary slowdown in 1Q20. PSBC and CMB planned to allocate majority of the full-year loan quota to retail segment, meaning even faster catch-up for personal credit in 2H20. Banks saw stable mortgage growth, but were cautious towards financing to property developers given ongoing real estate tightening.
Asset yield retreat to further squeeze margin. All banks acknowledged still heavy NIM pressure, as asset yields are falling due to LPR reform and notably lower interest of MSE loans, while deposit cost stays relatively rigid. However, the pace of yield decline might become slower in 2H20. BOC saw relatively stable pricing for retail loans and expected this trend to persist in coming quarters.
Benign asset quality in 2Q20 but uncertainties remain. CMB expected the formation of retail NPLs to peak in 2Q20, but corporate asset quality might start to worsen in 3Q20 and could last until 2021. The spread of COVID-19 in overseas countries will disrupt global supply chain, and it takes time for export orders to recover to pre-pandemic status. Our observation on banks’ NPL statistics during 2013-2016 credit cycle also suggests that corporate asset quality movement is hysteretic to retail by around 6 months.
Expect subdued FY20E earnings growth. A sector-wide moderation in net profit growth might be inevitable in FY20, although it has been largely priced in current valuation (0.61x/0.73x P/B for H/A-share China banks), in our view. That said, most banks are keeping at least 30% payout ratio, and they did not receive guidance to cut dividend. Potential acquisition of brokerage license would benefit banks’ business prospects with stronger client-servicing capacity and improved customer stickiness.
