20140407-DBS_Group-Large_banks_are_safer_bets_based_on_4Q13_trends_39页_520kb

DBS Group Research Summary: Large Banks Are Safer Bets Based on 4Q13 Trends

Core Content Overview

This report from DBS Group Research provides an analysis of the performance and outlook of China's H-share banks based on the financial results from FY13 and 4Q13. The report highlights that large banks are more resilient and offer better prospects in terms of net interest margin (NIM), capital, and dividend payouts, despite macroeconomic uncertainties. It also compares key metrics across banks, including asset quality, liquidity, and NPL ratios, to determine the best investment opportunities.

Main Points

• FY13 Earnings Performance: H-share China banks' FY13 earnings were either slightly above or in line with consensus, but growth slowed from 18% in FY12 to 13.3% in FY13. This was primarily due to a 12bps average decline in NIM (from interest rate cuts and liberalisation) and a 5bps increase in credit costs (from GDP slowdown and deleveraging).

• ROE and Dividends: The average ROE slightly decreased to 19.9% from 20.7%. Dividends were a positive factor, with all banks except CMBC maintaining or increasing their payout ratios.

• Preference for Large Banks: 4Q13 trends reaffirm the preference for large banks due to better NIM performance, liquidity, and asset quality. Large banks have a more stable funding base and are better positioned to manage LDR (Loan to Deposit ratio), which reduces concentration risk in overcapacity clusters in Eastern China.

• PPOP Growth: Large banks lost out on PPOP (Profit Per Outstanding Share) growth to smaller peers due to slower asset growth and regulator investigations into bank fees.

• Asset Quality Outlook: The asset quality guidance is relatively optimistic, with most banks expecting only minor to moderate increases in NPL (Non-Performing Loan) ratios this year. However, the NPL ratio increased by 4bps q-o-q, and would be higher if adjusted for write-offs and disposals.

Key Banks and Investment Outlook

• Top Picks: CMB (China Merchants Bank) and CCB (China Construction Bank) are the top picks. ABC (Agricultural Bank of China) and BOC (Bank of China) are also recommended among large caps.

• CMB:

  • Closing price: HK$13.98
  • PBV: 0.88
  • PER: 4.9
  • Yield: 6.1%
  • ROE: 19.4%
  • Target Price: HK$18.11
  • Upside: 29.5%
  • Stock Rating: Buy

• CCB:

  • Closing price: HK$5.40
  • PBV: 0.85
  • PER: 4.6
  • Yield: 7.6%
  • ROE: 19.8%
  • Target Price: HK$7.93
  • Upside: 46.9%
  • Stock Rating: Buy

• BOC:

  • Closing price: HK$3.38
  • PBV: 0.72
  • PER: 4.6
  • Yield: 7.0%
  • ROE: 16.6%
  • Target Price: HK$4.39
  • Upside: 29.9%
  • Stock Rating: Buy

• ABC:

  • Closing price: HK$3.36
  • PBV: 0.85
  • PER: 4.4
  • Yield: 8.0%
  • ROE: 20.9%
  • Target Price: HK$4.61
  • Upside: 37.2%
  • Stock Rating: Buy

Key Metrics Comparison

NIM Trends

• NIM Change (2Q12 to 4Q13, bps):

  • ICBC: -12.2
  • CCB: +6.4
  • BOC: +22.5
  • ABC: +18.8
  • BoCom: -12.2
  • CMB: -20.9
  • CNCB: -19.8
  • CMBC: -18.0
  • CQRCB: +1.4
  • Average: -12bps

• NIM (2013, %):

  • ICBC: 2.57
  • CCB: 2.74
  • BOC: 2.24
  • ABC: 2.79
  • BoCom: 2.52
  • CMB: 2.82
  • CNCB: 2.60
  • CMBC: 2.49
  • CQRCB: 3.41
  • Average: 2.69

Liquidity and Capital Position

• Loan to Deposit Ratio (Dec'13, %):

  • ICBC: 67.9
  • CCB: 70.3
  • BOC: 75.3
  • ABC: 61.2
  • BoCom: 76.8
  • CMB: 74.4
  • CNCB: 69.2
  • CMBC: 73.3
  • CQRCB: 59.0
  • Average: 69.0

• Liquidity Ratio (Dec'13, Rmb %):

  • ICBC: 30.2
  • CCB: 46.6
  • BOC: 48.0
  • ABC: 43.6
  • BoCom: 47.6
  • CMB: 57.0
  • CNCB: 43.5
  • CMBC: 29.3
  • CQRCB: 34.0
  • Average: 41.0

• Core CAR (Dec'13, %):

  • ICBC: 10.6
  • CCB: 10.9
  • BOC: 9.7
  • ABC: 9.3
  • BoCom: 9.8
  • CMB: 9.3
  • CNCB: 8.8
  • CMBC: 8.7
  • CQRCB: 11.9
  • Average: 10.0

Summary of FY13 and 4Q13 Performance

• Net Profit Growth:

  • FY13: 13.3% (slower than previous year)
  • 4Q13: Net profit growth slowed due to increased credit costs and lower NIMs, except for some banks that saw growth from a low base.

• NPL Ratio:

  • 4Q13: Increased by 4bps q-o-q, with potential for higher increases if adjusted for write-offs and disposals.

• PPOP Growth:

  • 4Q13: Strong at 14.7% y-o-y, driven by better cost efficiency.

• Fee Income Growth:

  • 4Q13: Most banks saw a decline in fee income, except for some that had positive growth.

Conclusion

Large banks are positioned as safer bets due to their better NIM, capital, and dividend outlooks, along with improved liquidity and asset quality. While they faced challenges in PPOP growth, their resilience in uncertain macroeconomic conditions makes them more attractive for investment. The report recommends CMB and CCB as top picks, with ABC and BOC also showing strong fundamentals.