中資優質銀行股存驚喜

2018-09-06 08:02
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Since the liquidity concerns in June has faded, Chinese banking sector has turned positive. Although the cash dividend season has passed, we believe that there are still several catalysts for further outperformance in the sector, including improvement in asset quality and profit margin.

Asset quality is improving 
A series of macro indicators, such as PMI, PPI and GDP, show that Chinese economy has been recovering since last year. It may slow down in the second half of year, but overall activities are stable and within government target range.

Surprise can come from the supply-side reform, which makes a positive effect on Chinese industrial profitability especially for SOEs. The latest industrial profit grew 22.0% from January to June in 2017, and the data of SOEs jumped to 45.8%. We expect local government will continue to rigorously carry out supply-side reforms that rebalance supply and demand dynamics, supporting profitability trend in second half of this year.

Earnings help generate healthy free cash flow and thus release banks credit risks. Gross nonperforming loan (NPL) formation from Credit Suisse estimation seems to be peak in 2015, and net new NPL formation seems to be peaked in high quality banks. Based on the preliminary second quarter result, we believe less impairment helps contribute to positive number in banks' earnings growth.

Credit Suisse Estimates Gross NPL Formation of Banking Sector

Data source: Credit Suisse

Bigger banks can win in financial deleverage
Business in wealth management products (WMP) segment has significantly slowed in banks this year as financial deleveraging process strengthened. WMP growth has slowed to less than 10% from over 50% at peak. All banks will continue to suffer from the unfavorable regulation. As a result, non-interest income growth may register decline this year.

However, net interest margins (NIM) will be stable this year because the loan and deposit repricing almost completed end the first quarter. Loan yields can improve and somewhat cover rising deposit funding costs.

Bigger banks still benefit from sufficient deposit status. Their funding costs are much lower than some mid- and small-cap banks which rely on wholesale funds. Moreover, they are not subjected to too much capital pressure given their relative light shadow banking exposure.

We expect some major catalysts for rerate in banking sector in the second half of year. First of all, the industrial profit continues its upward trend. Secondly, quarterly results can prove whether fundamentals of banks have improved.

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