China Banks Earnings: Revenue Pressures Continued and Guidance Is Somewhat Disappointing

The China banks’ cumulative, nine-month net profit growth was largely in line with our expectations, with decent loan growth partly offsetting declining net interest margin and soft fee income. Industrial and Commercial Bank, Bank of Communications, China Merchants Bank 600036, and Postal Savings Bank, saw 0.8%, 1.9%, 6.5%, and 2.4% growth in net profit, respectively, year on year. Agricultural Bank of China reported higher profit growth at 5%, but the improvement was mainly driven by a lower tax rate on higher investment in government bonds. Among the China banks that reported results, Agricultural Bank and China Construction Bank reported steadier net profit growth at 3.1% and 5%, versus 3.4% and 3.5% in the first half, thanks to their resilient loan and fee income growth.

Although earnings growth was largely in line, management guidance during the analyst briefing on future NIM trends and fee income growth from large banks was somewhat disappointing, At this stage, we maintain our fair value estimates of HKD 5.00 per H share (CNY 4.60 per A share) for Industrial Bank; HKD 3.50 per H share (CNY 3.30 per A share) for Agricultural Bank; HKD 6.00 per H share (CNY 5.50 per A share) for Bank of Communications; HKD 6.50 per H share (CNY 6.00 per A share) for Postal Savings; and HKD 54 per H share (CNY 50 per A share) for China Merchants. We’re sticking with Agricultural Bank and China Construction Bank as our top picks, given that their above-peer provision coverage, stable credit quality, and high return on equity should translate to resilient growth in net profits and book value, making us confident of the ability of these well-capitalized banks to deliver stable dividend income. Though we believe quality retail-heavy banks, including China Merchants Bank and Ping An Bank, are undervalued, we expect significant headwinds to both NIM and fee income in coming quarters given the muted stock market, tougher regulatory stance to bancassurance sales, and insurance New Year sales.