- Expect solid 2Q10/1H10 profits. "We expect the 10 banks under our coverage to post 5% q/q (and 28% y/y) profit growth during 2Q10. We expect their aggregate net income in 1H10 to grow 30% y/y and 38% h/h, thanks to strong balance sheet growth, NIM recovery, robust fees as well as improving asset quality. Our forecasts are about 5% above consensus."
- Solid operating performance continues so far into 3Q10. "1) NIM further expanded in 2Q10 despite rising competition for deposits and pressure to lower L/D ratios at some medium-sized banks. We expect stable NIM in 2H10. 2) Fees were robust on the back of strong corporate bills/paper issuance and bank wealth management sales. We however
expect fee growth to soften to 30% for FY10. 3) Solid asset quality improvement. Likely NPL formation may only pick up in 4Q10."
- Our model assumes NPL formation pick-up in 2H10. "The market may focus predominantly on policies and trend in LGFV asset quality, as well as the property market. In our current model, we factor in about Rmb78bn gross new NPLs in 2H10, enough to include 1-1.5% of outstanding LGFV and property development loans to be downgraded to NPL during 2H10. We believe LGFV NPL ratios should stay at 1% or below. Meanwhile, our
models also reflect some dynamic provisioning in 2010."
- Modest earnings revisions: "We now factor in fewer rate hikes, leading to a modest cut in NIM assumptions, particularly in 2011-2012E. Except for a 6-7% downward earnings revision for Citic in 2010-2012E, our earnings cuts are in general insignificant for 2010 and modest at 3-4% in 2011-2012E. Our estimates however remain above consensus mean estimates."
- Undemanding valuations. "We believe the sector may continue to enjoy some re-rating. We still expect 30% earnings growth for FY10E, and 20% plus CAGR growth in 2011-2012E. At 1.75x forward PB and 9x forward PE, valuations appear undemanding. Top pick in H-share remains Citic-H, BOC-H and to less extent BoComm-H. In A-share, we upgrade Minsheng-
A to OW. In A-shares, although big state-owned banks are better value, we prefer Minsheng-A and CMB-A."
- Solid operating performance continues so far into 3Q10. "1) NIM further expanded in 2Q10 despite rising competition for deposits and pressure to lower L/D ratios at some medium-sized banks. We expect stable NIM in 2H10. 2) Fees were robust on the back of strong corporate bills/paper issuance and bank wealth management sales. We however
expect fee growth to soften to 30% for FY10. 3) Solid asset quality improvement. Likely NPL formation may only pick up in 4Q10."
- Our model assumes NPL formation pick-up in 2H10. "The market may focus predominantly on policies and trend in LGFV asset quality, as well as the property market. In our current model, we factor in about Rmb78bn gross new NPLs in 2H10, enough to include 1-1.5% of outstanding LGFV and property development loans to be downgraded to NPL during 2H10. We believe LGFV NPL ratios should stay at 1% or below. Meanwhile, our
models also reflect some dynamic provisioning in 2010."
- Modest earnings revisions: "We now factor in fewer rate hikes, leading to a modest cut in NIM assumptions, particularly in 2011-2012E. Except for a 6-7% downward earnings revision for Citic in 2010-2012E, our earnings cuts are in general insignificant for 2010 and modest at 3-4% in 2011-2012E. Our estimates however remain above consensus mean estimates."
- Undemanding valuations. "We believe the sector may continue to enjoy some re-rating. We still expect 30% earnings growth for FY10E, and 20% plus CAGR growth in 2011-2012E. At 1.75x forward PB and 9x forward PE, valuations appear undemanding. Top pick in H-share remains Citic-H, BOC-H and to less extent BoComm-H. In A-share, we upgrade Minsheng-
A to OW. In A-shares, although big state-owned banks are better value, we prefer Minsheng-A and CMB-A."
JPMorgan China Banks 20100808
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