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

Our valuations for Agricultural Bank of China ACGBF, Bank of China BACHY, Industrial and Commercial Bank of China 601398, and Postal Savings Bank of China PSTVY are unchanged following interim results that are largely in line with our expectations. We expect Postal Savings Bank and Bank of Communications BKFCF to deliver 2023 stronger-than-peer earnings growth. All state-owned-enterprise banks, including China Construction Bank CICHY, 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.

China Construction, Agricultural, and Postal Savings banks posted decent first-half 2023 net profit growth of 3.4%, 3.5%, and 5.2% year on year, respectively, while Industrial and Commercial Bank were generally stable. Performance reflects lower provision expense, similar to that seen from the China banks that reported earlier. Revenue growth remained under pressure, down 1.2-2.7 percentage points sequentially. Disappointing revenue growth indicates headwinds, such as faltering retail credit demand, weak wealth management business, and falling interest rates. Among the Big Four banks, Agriculture and China Construction banks delivered better profit performance with stabilizing net interest margin-resilient fee income growth and lower provisioning on a stable credit-quality outlook. Industrial and Commercial Bank still underperformed as revenue and net profit growth slightly missed our expectations on weakening wealth management and higher NIM pressure.