Banks:Uninspiring results in 1H13

1H13: uninspiring results

    H-share banks will report 1H13 results in late August. We expect the results to beuninspiring, with bottom line growth at 10-15% for the state banks, and 14-18% forsmall banks (except for CNCB). We think the results should be broadly in line withexpectations, with no significant impact from the liquidity squeeze in June.

    Nonetheless, investors may remain skeptical until the 3Q results, as some impactof the interbank “deleveraging” may only be visible in 3Q13. We continue tobelieve that the market has already priced in a “China hard landing scenario”forthe H-share banks, but probably not for the banks in HK and Australia. We believethe strong earnings growth of MSB and ABC should help drive the stocks to catchup with peers, while CNCB’s YoY growth would probably trough in 2Q13.

    Margin to continue the trend in past few quarters

    NIM in 2Q13 will continue the trend of the past few quarters, with large banksoutperforming small banks. MSB, which has the biggest interbank operations,could see continued margin decline (~16bp QoQ) due partly to the dilution frominterbank activities. Nonetheless, its NIM should trough in 2Q, as the bank sharplyscales back interbank activities in 3Q. Other small banks and ABC could see 5-10bp QoQ NIM decline in 2Q12, while large banks’ NIM should remain stable.

    Fee income growth to recover to 20-50% YoY

    Fee income growth has been volatile in the past few quarters, and very strong in1Q13, due to: 1) rapid growth in WMP sales and off B/S credits; 2) seasonalfactors for 1Q (e.g., trade related fees & precious metal sales). With tightening onfake trades and non-loan credits in 2Q, fee income in 2Q13 could be weaker than1Q13 for many banks. Nonetheless, 2Q12 was a particularly weak quarter due tothe regulatory tightening on fees, and YoY growth for fees in 1H13 should bestrong, at >20% YoY for the large state banks and 35-50% for the small banks.

    NPL and credit cost will likely remain stable

    Banks’ reported asset quality should be stable in 2Q13 despite the slowingeconomy, due partly to accelerated NPL write offs. Banks guided for higher NPLvolume, but largely stable NPL ratios in 2Q13. Most banks increased provisioncharges this year (average credit cost in 1Q13 was 59bp, vs 51bp in FY12). ABC,whose loan-reserve coverage is by far the highest at 4.31% by 1Q13, will likelyhave room to cut credit cost from 90bp/75bp in FY12/1Q13 to <60bp in 2Q13,which can drive its above-average earnings growth. CNCB, whose credit cost was130bp/56bp in 2H12/1Q13, can also reduce provisions for the rest of the year,and its earnings growth should trough in 1H13 and recover in 2H13.

    Capital raising: exploring alternative tools

    CBRC has set the transitional targets of minimal Tier 1 ratio to be 6.5% by end2013, up to 6.9% by 2014, and 7.3% by 2015 (and 1ppt higher for SIFIs). Thus, allH-share banks are comfortably above the minimal and have limited regulatorypressure to raise equity at the currentdepressed valuation. They may exploreother instruments like sub-debt with forced write-down clauses, or PreferredShares, to boost CAR.