China Banks
Worst NIM Behind Us Soon;
Liquidity Helps Asset Quality
Worst likely to be behind us soon in NIM: Industry
data shows that new discounted bills as a percentage of
total new loans has peaked out in 1Q09. Term deposits
as a percentage of total could have peaked with a
pick-up in activity in the domestic A share market. Our
economics team expects no further rate cuts. We are
removing the probability of further NIM erosion from our
price target calculations.
2009 credit cost could normalize to 2006-07 median
level: Our previous net slippage estimates seemed
conservative as 1) industry NPLs were down 3.2% QoQ
in 1Q09, 2) various banks suggested that there was little
deterioration in asset quality since 1Q09, and 3) PBOC
reiterated its ‘reasonably loose monetary policy’. We
see liquidity as a near-term positive in easing asset
quality risks in particular on the domestic front.
Increasing 2009-11 estimates and price targets by an
average of 7%, 4% and 1%, respectively, by applying
lower than previous net NPL slippage and credit costs.
Removal of further NIM concern moves our price targets
more than our earnings estimates. We remain
Overweight on ICBC and CCB, Equal-weight on
BoComm, CMB and Industrial, and Underweight on
Minsheng and Pudong. We downgrade BOC and Citic
from Overweight to Equal-weight.
CCB and ICBC are core holdings, balanced risk and
reward; downgrading BOC and Citic: We downgrade
BOC and Citic as upside is limited following strong
outperformance of an average of 44ppts YTD. CCB and
ICBC are: 1) better positioned in the current round of
credit expansion given the stimulus package; 2) have
favorable retail deposit franchises and hence more
leverage on the strong capital market; 3) better fee
progression implied by 1Q; 4) event risks are over; and
5) dividend yields are higher. For details, please refer to
Implication of Strong Liquidity; Positive Near Term of
May 25, 2009.