China Banks:1H14 results review – avoid the JSBs

16bps qoq. Fee growth in 2Q was only 5% YoY for the big 4 banks and 33%YoY for mid-cap banks. However, fee growth may see headwinds in 2H14 dueto tightening of regulations regarding financing fees charged to SME clients

    Balance sheet growth trend: Loan growth was stable at 3% qoq. Big 4 bankssaw stable asset growth (+3% qoq) in general, but other banks saw faster assetgrowth (+9% qoq), mainly on interbank assets (+26% qoq).

    Asset quality pressure continues: NPL ratio continues to increase by 6bpsqoq; JSBs saw 8bps of quarterly growth. On overdue loan balances, sectorgrowth was 35% HoH; JSBs saw 51% HoH in 1H14. NPL/overdue loans ratio is45% for JSBs on average, much lower than 73% for the big 4 SOE banks. Thisindicates that JSBs have more overdue loans which are not yet being recognizedas NPLs, pointing to and potentially relaxing on NPL recognition as well ashigher pressure on NPL formation for coming quarters.

    JSBs saw fast increase in risk assets with thin provisions: On balance sheetrisk assets, including trust beneficial rights, asset management plans and WMPissued by other financial institutions, increased from 7.7% of total assets onaverage at end 2013 for JSBs to 10.6% at end 1H14. This is much higher thanthe big 4 SOE banks of about 0.6% at end 1H14 (flat HoH). Provisions on suchassets were only 0.02% for Citic, 0.01% for CMB and nil for Minsheng, muchlower than loan provisions of 2.26% on average for the JSBs.

    JSBs may see headwinds on NIM: JSBs have supported NIM by fast growth ofrisk assets (+65% HoH), but we believe growth on such assets is going to slowdown due to capital constraints, as Citic and Minsheng saw tier-1 ratio of 8.77%,slightly above the regulatory required level of 8.5%. In addition, rising interbankrates in 3Q14 may lead to pressure on funding costs for JSBs, which are netborrowers from interbank markets.