Thanks to moderating provision charges under buoyant macro recovery, average net profit growth for China banks under our coverage improved to -3.9% YoY in 3Q20 from -25.3% YoY in 2Q20. PSBC/PAB/CEB/CMB notched earnings expansion of 13.5%/6.1%/2.6%/0.7% YoY, and others (except for MSB) all posted narrower profit decline.
- Mixed margin performance. NIM widened 1bp in 3Q20 on average (vs 4bp contraction in 2Q20), as six out of the 11 banks reported QoQ NIM increase. JSB generally saw better margin trend due to higher proportion of retail loans, less obligation for lower-rate MSE/preferential lending. We expect NIM pressure to further relieve in 4Q20, as new loans continue to lean towards retail side and structured deposits unwind amid regulatory scrutiny. CCB and BoCom acknowledged that 15.4% rate cap for private lending is not applicable to banks’ credit card business.
- NPL pressure eases, despite some uncertainty in 1H21. Most banks reported rising NPL ratio in 3Q20, with CITICB/MSB seeing bigger uptick of +15bp/+14bp QoQ. On positive side, NPL formation stabilized in 3Q20. During results briefing, banks remained optimistic on asset quality outlook, citing stringent loss recognition and sufficient provisions. We believe the worst of retail (esp. credit card) NPL cycle is behind us, and corporate credit quality has a hysteretic nature. However, expiration of temporary policy support (e.g. loan moratorium) and wrap-up in rectification of asset management business may cause some disturbance next year.
- TLAC implementation calls for profit release. On 30 Sep, PBoC issued a consultation paper on implementing Total Loss-absorbing Capacity (TLAC) of Global Systematically Important Banks (GSIB) in China. Total CAR of GSIB should reach approximately 19.5% by early 2025 (around RMB3tn capital shortage for Big-4 by our estimate), and this requires faster external replenishment and internal generation of capital in coming years.
- Maintain Outperform and favour retail banks. A/H-share China banks are trading at 0.77x/0.59x FY20E P/B, offering 4.5%/6.2% dividend yield. Banks with retail-oriented strategy and having stronger topline growth and provision buffer will see faster earnings recovery while authorities’ window guidance abates. Top picks are PAB, CEB, and PSBC.
