- NIM: “the only hope” for positive surprises? "H-share banks reported a strong set of 1H10 numbers, with 20-60% YoY bottom line growth, and continued improvement in asset quality and net interest margin. Looking ahead, we believe sector loan growth should stabilize at ~19% for 2H10 and decelerate in 2011, while NPLs and credit costs are both at low levels with high upward risks. Thus, any positive earnings surprises should be mainly driven by NIM. We analyzed various drivers of banks’ NIM, and concluded that the room for sequential margin recovery is very limited."
- Quantifying the key NIM drivers "H-share banks’ NIM recovered by ~31bp on average from 2Q09 to 2Q10. Based on our analysis, the shift from discounted bills to non-bill loans was the biggest contributor for small banks’ NIM recovery (15-25bp), while the higher LDR helped NIM by ~10bp at BOC, CMB, and BoComm. Longer loan maturity, shorter deposit maturity, better loan pricing, and recovery in treasury yield also boosted margins, though to a lesser extent."
- Expect margin to peak and stabilize "The margin drivers appeared to be running out of steam for 2H10. Discounted bills as % of sector loans was flattish in the past 2mths (-0.2ppt), and may start to rebound as credit demand weakens. LDR in 2H10 should be lower than in 1H10. The maturity mismatch of sector loan-deposit rose to record high levels, and is facing the risk to reverse. Large banks’ margin should be largely stable in 2H10, while CNCB and MSB could suffer margin decline due to the time deposits they gathered in end 2Q10. CMB’s NIM is the most volatile, which may continue to rise in 3Q10, but is vulnerable to any decline in discounted bill yield."
- 1H10 results recap "The big two state banks continued to lead on profitability, provision buffer, and capital. Joint-stock banks enjoyed higher NIM than large banks, but lagged on profitability, due to their relatively low fee income and high operating costs. Loan growth was in line with regulatory guidance, with the property sectors being a key growth driver. NPL ratio reached record low level and credit costs declined further. CMB and MSB appeared tight on core capital, despite their recent capital raising."
- Uninspiring stock performance YTD, watch October "H-share banks' stock prices performed in line with the markets YTD. Most banks traded flattish (except for ABC and CNCB), and the performance converged. We reckon investors are attracted by China's macro story, the banks’ strong balance sheets, and undemanding valuation. Nonetheless, confidence in earnings is low due to the policy risks and asset quality concerns. We believe late October could mark the next milestone, when we may get better clarity on provisions on LGFV l oans, any new property tightening measures, and margin trends in 3Q10."
Merrill Lynch China Banks 20100915
- Quantifying the key NIM drivers "H-share banks’ NIM recovered by ~31bp on average from 2Q09 to 2Q10. Based on our analysis, the shift from discounted bills to non-bill loans was the biggest contributor for small banks’ NIM recovery (15-25bp), while the higher LDR helped NIM by ~10bp at BOC, CMB, and BoComm. Longer loan maturity, shorter deposit maturity, better loan pricing, and recovery in treasury yield also boosted margins, though to a lesser extent."
- Expect margin to peak and stabilize "The margin drivers appeared to be running out of steam for 2H10. Discounted bills as % of sector loans was flattish in the past 2mths (-0.2ppt), and may start to rebound as credit demand weakens. LDR in 2H10 should be lower than in 1H10. The maturity mismatch of sector loan-deposit rose to record high levels, and is facing the risk to reverse. Large banks’ margin should be largely stable in 2H10, while CNCB and MSB could suffer margin decline due to the time deposits they gathered in end 2Q10. CMB’s NIM is the most volatile, which may continue to rise in 3Q10, but is vulnerable to any decline in discounted bill yield."
- 1H10 results recap "The big two state banks continued to lead on profitability, provision buffer, and capital. Joint-stock banks enjoyed higher NIM than large banks, but lagged on profitability, due to their relatively low fee income and high operating costs. Loan growth was in line with regulatory guidance, with the property sectors being a key growth driver. NPL ratio reached record low level and credit costs declined further. CMB and MSB appeared tight on core capital, despite their recent capital raising."
- Uninspiring stock performance YTD, watch October "H-share banks' stock prices performed in line with the markets YTD. Most banks traded flattish (except for ABC and CNCB), and the performance converged. We reckon investors are attracted by China's macro story, the banks’ strong balance sheets, and undemanding valuation. Nonetheless, confidence in earnings is low due to the policy risks and asset quality concerns. We believe late October could mark the next milestone, when we may get better clarity on provisions on LGFV l oans, any new property tightening measures, and margin trends in 3Q10."
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