China State-Owned Enterprise Banks: NIM Still Under Pressure, but Credit Quality Looks Stable

Our valuations for Agricultural Bank of China, Bank of China, Industrial and Commercial Bank of China, and Postal Savings Bank of China are unchanged following interim results that are largely in line with our expectations. We expect Postal Savings Bank and Bank of Communications to deliver 2023 stronger-than-peer earnings growth. All state-owned-enterprise banks, including China Construction Bank, which reported results earlier, are undervalued, trading at a historic trough of 0.3-0.4 times 2023 price/book ratio and about a 9% dividend yield, except for Postal Savings of about 7%. Postal Savings shows better growth momentum, but Agricultural Bank and China Construction are our top picks given above-peer provision coverage, stable credit quality, lower exposure to retail banking—which faces near-term challenges—and high return on equity. These factors should mean resilient growth in net profit and book value. We are confident these well-capitalized banks can deliver stable dividend income during an economic downturn.