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Banks
Focus on quality players
It remains to be seen whether China banks' record new loans in 2009 will turn
into NPLs two years down the road, but we think the possibility is partly reflected
in the derating of the sector to a 22%/17% discount to its historical average PB/
PE. We recommend a lower-beta portfolio comprising CCB, BOC and CMB.
Table 1 : Rating and price target summary
Price target (HK$) Rating Current % upside
Old New Old New price (HK$) (downside)
ICBC 4.61 5.15 Hold Hold 4.62 11.5%
CCB 5.60 5.90 Buy Buy 4.79 23.2%
BOC 2.95 3.40 Buy Buy 2.95 15.3%
CMB na 16.30 na Buy 14.14 15.3%
BoCOM na 6.30 na Hold 6.63 -5.0%
CITIC na 4.40 na Hold 4.26 3.3%
Priced at 26 May 2009
Source: Bloomberg, ABN AMRO
2009 likely a record year for loan growth; sector de-rating already reflects LT concern
We forecast Rmb8trn of system new loans in 2009 (from Rmb7trn) and expect record system
loan growth of 26% to Rmb38trn, equivalent to 120% of GDP – one of the highest levels in
the world. While concerns about longer-term asset quality remain, we believe this is partly
reflected in the sector’s current 22%/17% discount to historical average PB/PE.
Gross NPL formation rate largely steady in 2008 – better than in the last downturn
To the banks’ credit, the sector’s gross NPL formation rate averaged 101bp of loans, on our
estimates, in 2008, only slightly above the previous year despite the impact of the global
financial crisis and the Sichuan earthquake. We note CMB and CCB had lower gross NPL
formation rates (by our estimates) and this trend is consistent with CBRC’s normal loan
migration ratio.
Structural growth areas: consumer banking and capital markets fee income
We note China’s 2008 GDP per capita of US$3,300 is now above the US$3,000 threshold for
a shift towards higher consumer spending. In addition, capital markets penetration remains
low with bank lending still accounting for the lion’s share of financing. We think CCB, ICBC
and CMB are the likely beneficiaries of the resulting trend towards rising fee income.
EPS & TP lift for state banks; initiation of joint-stock banks; recommended pair trades
We roll over the basis for our price targets from end-2009 to mid-2010 as we approach midyear.
This, combined with slight profit upgrades on what we see as a better net interest
income outlook has helped to lift target prices for state banks by 5-15%. We initiate coverage
of joint-stock H-share banks. China’s recent mixed macro data suggest it remains uncertain if
recovery will be sustainable. We would therefore recommend investors remain selective, with
a low-beta bias towards state banks. While we like ICBC’s long-term growth prospects, we
think CCB’s relative underperformance looks more favourable in the near term. We also like
BOC (funded by CITIC) as a value play on rising infrastructure and overseas lending market
share. Within joint stock banks we favour CMB (funded by BoCOM).
Contents
Longer-term asset quality from record loan growth reflected in current
valuation discount
3
We forecast Rmb8trn of system new loans in 2009 and expect record loan growth
of 26%, equivalent to a high 120% of GDP by end 2009, on our estimates.
3
Gross NPL formation rate steady in 2008 –better than the last downturn 6
To the banks’ credit, the sector gross NPL formation rate averaged 101bp of loans
in 2008, on our estimates, only slightly higher than the previous year despite the
impact of the global financial crisis and the Sichuan earthquake.
6
Net interest margin should bottom by 2Q09 10
We expect net interest margin for most banks to have bottomed by 2Q09, with state
banks likely to see margin recovery earlier than joint-stock banks, given their higher
share of infrastructure loans versus the latter’s higher share of low-yielding
discounted bills.
10
Structural growth areas: consumer banking and capital markets fee income 12
We note China’s GDP per capita of US$3,300 in 2008 is now above the US$3,000-
threshold for a shift towards higher consumer spending. In addition, capital markets
penetration remains low with bank lending still accounting for the lion’s share of
financing.
12
Stock picks 13
We have lifted our EPS and target prices for state-owned banks on higher volumedriven
net interest income and because we roll forward the base for our TPs by six
months. We initiate on the three joint stock banks and recommend pair trades (with
a low beta bias).
13
Company profiles 19
ICBC 20
Bank of China 26
China Construction Bank 30
Bank of Communications 35
China Merchants Bank 44
China CITIC Bank 56
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