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buy laggards on GDP recovery
GDP recovery reduces risks; upgrading laggard banks from Hold to Buy
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Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Tracy Yu
Research Analyst
(+852) 2203 6191
tracy.yu@db.com
Judy Zhang
Research Analyst
(+852) 2203 6193
judy.zhang@db.com
Sukrit Khatri
Research Associate
(+852) 2203 5927
sukrit.khatri@db.com
Top picks
ICBC (1398.HK),HKD5.79 Buy
Bank of China (3988.HK),HKD3.62 Buy
China CITIC Bank (0998.HK),HKD4.80 Buy
Industrial Bank (601166.SS),CNY16.79 Buy
Companies Featured
ICBC (1398.HK),HKD5.79 Buy
China Construction Bank
(0939.HK),HKD6.50
Buy
Agri. Bank of China (1288.HK),HKD3.95 Buy
Bank of China (3988.HK),HKD3.62 Buy
Bank of Communications
(3328.HK),HKD6.10
Hold
China Merchants Bank-H
(3968.HK),HKD17.78
Hold
China CITIC Bank (0998.HK),HKD4.80 Buy
China Minsheng Bank (1988.HK),HKD9.53 Hold
Chongqing Rural Bank (3618.HK),HKD4.50 Buy
Industrial Bank (601166.SS),CNY16.79 Buy
Shanghai Pudong Bank
(600000.SS),CNY10.02
Buy
Ping An Bank (000001.SZ),CNY15.99 Buy
Bank of Beijing (601169.SS),CNY9.30 Hold
Bank of Nanjing (601009.SS),CNY9.09 Hold
Bank of Ningbo (002142.SZ),CNY10.55 Sell
China Everbright Bank
(601818.SS),CNY3.07
Hold
We believe China’s GDP recovery will mitigate credit risks for banks. In light of
a better operating environment, we raise H-share listed banks’ target prices by
19.2% on the back of a 7.7% rise in FY13E NPAT and higher terminal ROE. Our
new target prices suggest average potential sector upside of 17%. We upgrade
CCB, ABC, CNCB and PAB to Buy, as they underperformed the sector in 2012.
We identify a notable slowdown in WMP sales resulting in a sharp fall in nonbank
financing as a key risk going into 2H13, which could lead to a 15%
correction from current levels. This explains our house view that banks should
continue to underperform insurers and the MSCI China Index in 2013.
A recovering economy to shield banks from rising default risks of WMPs
As we have highlighted before, this round of economic recovery is driven by a
sharp increase in non-bank financing to the corporate sector (Rmb2tr, up 4.9
times yoy for September-November 2012), which is partly financed by the
exponential sales of off-balance sheet WMPs. A temporary bounce in the
economy will defer the default risk on these products, thereby encouraging
continuance of this practice. However, the sustainability of China’s economic
recovery is incumbent on the pace of corporate profit recovery, as it affects the
ability to repay debts and the appeal of WMPs to depositors. This also explains
why we have identified a notable slowdown in WMP sales leading to a sharp
decline in non-bank financing as a key risk going into 2H13, which, on
materialization (more likely to happen during an economic slowdown), could
lead to a 15% correction and a possible reduction in our new target prices.
Raising 2013E NPAT by 7.7%; risk-reward turning positive for laggards
Reflecting a recovering economy, we raise FY13E net profit for H-share listed
Chinese banks by 7.7%, to Rmb894bn, on a 7bps rise in NIM, a decrease in
credit costs of 13bps, to 50bps (from 63bps), and stronger fee income growth
of 14.3%. Our scenario analysis suggests 19.9% potential upside in the event
that the sector trades back to historical P/B of 1.61x, the mid-point of its
valuation range since 2009. Considering 15% potential downside in the event
of slowing WMP sales, the risk-reward offered by Chinese banks is turning
more favourable, driven by a leg-up from GDP recovery. On current valuations,
we believe the risk-reward is most favourable for CNCB among the mid-sized
Chinese banks, which has been significantly de-rated over the past three years.
Hence, we upgrade CNCB from Hold to Buy and add it to our top picks. We
also upgrade CCB and ABC, which underperformed the sector in 2012.
We maintain a relative preference for large banks and insurers
In 2012, while share prices of H-share listed banks rose by an average of 16%,
they underperformed the MSCI Asia-ex Japan Financial Index by 9% and large
Chinese insurers by 14%. In light of continued global policy easing and fresh
liquidity unleashed by the reversal of the yen trade in favour of risk assets, we
expect Chinese banks to benefit from a surge in global liquidity. Our top picks
are ICBC, BOC, CNCB and Industrial Bank. On our estimates, the listed banks
are trading at 1.3x 2012E P/B and 6.7x 2013E P/E. We value Chinese banks on
a three-stage Gordon Growth Model. We maintain our relative preference for
China insurers, as they should be less affected by interest rate deregulation
and an unexpected disappointment in China’s economic data. (See page 3 for
Keepdancingbutthemusicmaystop，buylaggardsonGDPrecovery（201301070002GH00VT）.pdf
(348.54 KB)
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