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China Banks Sector
EARNINGS
FY08 earnings preview: sequential trend
diverging
■
China banks will commence their FY08 results announcements in mid-
March. We expect Hong Kong-listed China banks in aggregate to report
35% YoY earnings growth in FY08.
■
As China banks’ earnings hit an inflection point in mid-2008, more
emphasis should be put on the sequential trend in the 4Q08 results. We
expect Hong Kong-listed China banks in aggregate to report an
accelerated 44% sequential profit decline in 4Q08, driven by an increased
NPL coverage ratio (credit cost) and 20% QoQ decline in core profit.
■
We expect margin pressure to accelerate across all China banks in
4Q08, as aggressive benchmark interest rate cuts late last year started
to take their toll. Among the China banks, smaller banks (ex. the big
three) are likely to face higher margin pressure, which should continue
through 1H09. We believe that sequential trends will continue to
diverge between the two groups.
■
We continue to focus on the big three banks, of which earnings should
be more defensive given less margin pressure and their stronger
position to tap into infrastructure-related financing, a key area for
credit demand this year. Among the big three, BOC remains a more
defensive play in our view due to its lower trading multiple and less
earnings growth pressure in FY09 from a lower base in FY08.
■
In our 17 February report, we highlighted that CCB’s aggressive
“kitchen-sinking” of bad loan charges in 4Q08 and reduced prospects of
further rate cuts may boost its near-term share price performance. Over
the past month, CCB shares outperformed ICBC’s by 8%. We believe the
short-term trading upside has been priced into the recent
outperformance. ICBC’s recent underperformance, on the other hand,
may attract near-term rotational buying. The potential near-term sell-off
from strategic investors may provide good entry opportunities.
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