China banks: Stronger case for soft landing

- More concrete case for soft landing. "August macro data were encouraging. Two pillars of China’s economy, retail sales and industrial production, came in better than expected. Meanwhile, inflation remained manageable and looks set to decline in magnitude in 4Q10. China appears on track for a soft landing, and this bodes well for banks’ asset quality and earnings outlook."
- Bigger banks have less provisioning risk. "According to mainland press reports, banks may be required to hold provisions of at least 2.5% of total loans. This rumoured requirement will not impact the Big 4 banks, but will add provisioning pressure for smaller banks. We believe this requirement is too crude and unfair, since it does not consider NPL differences. Therefore, its implementation chances should be low. Nonetheless, we believe larger banks have better risk/return prospects amid this uncertainty."
- Turning slightly more optimistic. "We maintain our view that banking stocks will remain range bound in 2H10. Yet, given the encouraging August data and upcoming rights issues from the large cap banks, we believe banking stocks can trade towards the upper end of their ranges. Our top picks are large caps CCB and ICBC. We like CCB as it should be next in line to issue rights in October. Meanwhile, ICBC is a good laggard play, especially after the bank’s stellar 2Q showing."

DBS China Banking 20100915

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