China Banks-Bottom:fish quality banks

What’s New.

    2Q15 earnings in line. Net profit of H-share banks grew 2.3% YoYin 2Q15, on average, in line with the consensus forecast.

    Discrepancies were higher credit costs and non-interest income.

    NIM pressure should reduce in 2H15. Most H-share banks saw NIMnarrowing of 3-25bps QoQ in 2Q15. This was mainly due to theincrease in the cap of deposit rates to 1.3x of the benchmark ratein Mar 2015. However, the H-share banks indicated that they havecapped their time deposit rates at 1.2-1.3x of the benchmark rateeven though there was further deposit rate deregulations in May &Aug 2015. Hence, we estimate that the interest rate cuts in May,Jun & Aug 2015 should have limited impact on H-share banks’ NIM.

    Net fees growth should not be hit by stock market turmoil. Mostbanks reported strong net fees growth and rising net feescontribution in 2Q15. This was partly aided by the increaseddistribution of unit trusts given the rallying A-share market. Weestimate that fund distribution fees accounted for <10% of H-sharebanks’ total gross fees in 1H15. We believe potential reduction inthese fees in 2H15 could be partly offset by increased selling ofwealth management products & bancassurance. We expect netfees growth of H-share banks will be ~30% in 2015, on average.

    Some banks with better asset quality. 2Q15 results show thatbanks which have been aggressive in small-to-micro-finance overthe past few years (CMB, CMSB & CNCB) saw a sharp rise in newNPL formation & credit costs. The state-owned banks (except forABC) and the two Chongqing banks (BOCQ & CQRB) reported afall/slight rise in new NPL formation in 2Q15 vs. 1Q15. We expectthese banks to see stable-to-lower new NPL formation in 2H15.

    This is due to: (i) state-owned banks should have fewer exposuresto small-to-micro enterprises; and (ii) economic growth & newindustry development in Chongqing should be faster than nationalaverage. We thus see higher chance that credit costs for thesebanks will peak during 2015 and decline slightly in 2016.

    What’s Our View.

    Maintain OVERWEIGHT. We forecast EPS growth of 0.4-17.4% forthe H-share banks in 2016 given healthy loan & net fees growth,and tight cost control. BUY BOC, BOCOM, CCB, BOCQ & CQRB.