Company Reports

As expected, China’s state-owned enterprise banks—Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, and Postal Savings Bank of China—reported a year-on-year revenue decline of 2% on average in the first quarter, versus 0.6% growth in 2023. Though the contraction in net profit appeared weaker than expected when compared with the 2% growth in 2023, we expect revenue headwinds to gradually abate. Banks are on track to meet our full-year net profit growth forecast of 0.5%. We retain our fair value estimates of HKD 5 per H share for ICBC, HKD 6.20 per H share for CCB, HKD 3.50 per H share for ABC, HKD 3.50 per H share for BOC, and HKD 6.50 per H share for PSBC.

We maintain fair value estimates on the H-shares of Industrial and Commercial Bank of China, or ICBC, at HKD 5, China Construction Bank, or CCB, at HKD 6.2, Agricultural Bank of China, or ABC, at HKD 3.5 per, Bank of China, or BOC, at HKD 3.5, and Bank of Communications, or BoCom, at HKD 6 as results were largely in line and we leave our key assumptions unchanged. H-share prices are undemanding for all SOE banks, but our preferred picks are CCB, ICBC, and CMB on their strong capital position, above-peer return on risk weighted assets, and steady dividends.

Bank of China, or BOC, China Minsheng Bank, or CMBC, and Bank of Ningbo, or BONB’s cumulative nine-month net profit growths were largely in line. We maintain our fair value estimates of HKD 3.5 per H share (CNY 3.1 per A share) for BOC, HKD 3.6 per H share (CNY 3.3 per A share) for CMBC, and CNY 32 per A share for BONB. The first nine-month results reflect less net interest margin, or NIM, pressures than peers, which contracted 13, 14, and 10 basis points, respectively, for BOC, CMBC, and BONB. BOC’s NIM performance was slightly stronger than expected, only declining 3 basis points from the first half’s level. We suspect this was mainly attributable to the rising NIM trend as seen in its subsidiary, BOC Hong Kong, which reported a 36-basis-point year-on-year increase for the first nine months, with third-quarter NIM further increased 10 basis points from the second quarter. We expect BOC Hong Kong’s favorable NIM trend to continue to buffer against downward pressures in BOC’s domestic RMB business in 2023 and the first half of 2024. But the benefit should taper off from second quarter of 2024 onward on higher base, rising deposit competition, and falling rates if the Fed starts cutting rates.

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.

No-moat Bank of China's first-quarter results were mixed, with decent revenue growth of 11.6% year on year but net profit disappointing at 0.5% growth. The positive is that net interest margin, or NIM, continued to outperform peers as BOC benefits from its higher exposure to overseas banking. Revenue growth was partly driven by fair value gains of financial assets and the 7% year-on-year growth in net interest income, partially offset by a 0.8% decline in fee income. The flat bottom line also reflects expanded loan loss provisioning to boost provision coverage ratio by 14 percentage points to 202.56% from end-2022, despite the signs of improving credit quality. In contrast to the shrinking provisioning of peers, BOC’s credit impairment charge increased 11% year on year. Nonperforming loan balance increased a benign 1%, leading to a 14-basis-point drop in NPL ratio to 1.18% from end-2022 level. As the results were roughly in line, we retain our fair value estimate of CNY 3.10 for the A-shares and HKD 3.50 for the H-shares. The stock is undervalued, trading close to its historic low of below 0.4 times 2023 price/book value and an attractive dividend yield of over 8%.

Bank of China is the country's fourth-largest bank by assets. Its respected brands, solid expertise in China's cross-border banking services, and cost advantages position it to benefit in the long term from China's increasing integration with the global economy.

Narrow-moat Bank of China, or BOC, reported 2.1% and 5% year-on-year growth in full-year 2022 total revenue and net profits, respectively. As the results were roughly in line, we retain our fair value estimates of CNY 3.10 for the A shares and HKD 3.50 for the H shares. The stock is undervalued, trading close to its historic low of below 0.4 times 2023 price/book value and an attractive 8.8% dividend yield. The bank has a solid track record of growing dividends with a steady payout ratio above 30% since 2016.

The large Chinese banks will release 2022 results in late March and first-quarter 2023 results in late April. Pressures on net interest margin are likely to rise in the first quarter. However, the accelerating recovery in China’s economy since reopening reaffirms our expectation for asset risks to be contained. This allows banks some flexibility in their already-high provision levels, which should enable them to smooth net profit growth despite significant revenue pressures. But we do see a wider divergence in profitability in 2023 as slowing revenue growth results in less leeway to manage earnings growth. Those banks that can benefit from a rebound in retail lending and wealth-management services, which we expect in mid-2023, should present buying opportunities along with stronger earnings performance.

Bank of China is the country's fourth-largest bank by assets. Its respected brands, solid expertise in China's cross-border banking services, and cost advantages underpin its narrow economic moat and position it favorably to benefit in the long term from China's increasing integration with the global economy.

Shares of Asian banks in our coverage declined again Thursday morning after Credit Suisse’s 24% drop overnight to below CHF 1.70 per share reignited concerns about global financial stability that emerged last week with the failure of Silicon Valley Bank. In terms of systemic risk, we see very low risk of bank runs occurring anywhere in Asia given policy support from each government and the absence of problematic large institutions like Credit Suisse which could become vectors of contagion. Japanese banks are the most susceptible in Asia, in our view, to worries over financial stability in the United States or Europe due to their greater linkages with these regions. Next in terms of vulnerability, in our view, is the Korean banking system, which depends on having access to U.S. dollar liquidity. However, we think the U.S. Federal Reserve, or the Fed, can be relied upon to set up a currency swap arrangement with the Bank of Korea again if needed to ensure stability. The Fed has a continuous unlimited swap agreement with the Bank of Japan.

The largest five SOE banks: Industrial and Commercial Bank of China, or ICBC; China Construction Bank, or CCB; Agricultural Bank of China, or ABC; Bank of China, or BOC; and Bank of Communications, or Bocom; released third-quarter results end of October. The mixed results reflected mounting challenges to top line growth given the dim consumer outlook, heightened capital market volatilities, and exchange losses related to banks’ overseas assets. We expect headwinds to continue in the first half of 2023.

Bank of China is the country's fourth-largest bank by assets. Its respected brands, solid expertise in China's cross-border banking services, and cost advantages underpin its narrow economic moat and position it favorably to benefit in the long term from China's increasing integration with the global economy.

Narrow-moat Bank of China, or BOC reported 3.4% and 6.3% year-on-year growth in first-half total revenue and net profit, respectively. The results were roughly in line with our full-year net profit growth forecast of 5.7% and we retain our fair value estimates of CNY 3.50 for the A-shares and HKD 3.80 for the H-shares. The stock is undervalued, trading close to its historic low of 0.3 times 2022 price/book value.

We maintain our fair value estimates for the majority of our Chinese bank coverage after the media reported an increasing number of homebuyers across China are refusing to repay mortgage loans for delayed projects. While we expect the imminent impact on banks' credit quality is small, the news reflects challenging liquidity conditions for private developers and weak consumer confidence. We believe this may lead to a weak recovery of the wealth management business—especially for private bank business—as investors are likely to have little mood for financial products linked to the property sector. Hence, we modestly lower fair value estimates for the two retail-oriented banks China Merchants Bank, or CMB, to HKD 68 from HKD 70 per share; and Ping An Bank, or PAB, to CNY 24 from CNY 26 per share, to factor in lower wealth-management-related income growth in 2022.

Bank of China is the country's fourth-largest bank by assets. Its respected brands, solid expertise in China's cross-border banking services, and cost advantages underpin its narrow economic moat and position it favorably to benefit in the long term from China's increasing integration with the global economy.

Eight Chinese banks in our coverage universe: state-owned Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications, Postal Savings Bank of China (PBOC), and joint stock banks China Citic Bank (CITIC) and China Minsheng Bank (CMBC) released first-quarter results at end-April. The largest five state-owned, or SOE, banks reported first-quarter net profit growth at around 6% to 7% year on year. PSBC topped the list, delivering strong and resilient growth at 18%. While CITIC posted 11% earnings growth, CMBC's net profit declined 7% year on year. We retained our fair value estimate of these banks as results were largely in line. Shares of these banks are trading at historical low valuation levels.

Bank of China is the country's fourth-largest bank by assets. Its respected brands, solid expertise in China's cross-border banking services, and cost advantages underpin its narrow economic moat and position it favorably to benefit in the long term from China's increasing integration with the global economy.

Narrow-moat Bank of China, or BOC, reported 7.1% and 12.3% year-on-year growth in revenue and net profits, with net profit growth largely flat while revenue growth accelerated from the 6.3% growth for the first three quarters. Similar to other state-owned enterprise banks, the results highlighted stabilizing net interest margin and credit quality improvement. In addition, BOC’s year-on-year fee-income growth posted the strongest recovery to 7.8% since 2015, driven by its booming wealth management business. We attributed its advantage in wealth management to a huge, quality retail customer base, and strong growth in bank wealth management product scale in 2021. We believe BOC’s average customer is wealthier than other big four peers, as total assets managed by BOC’s private bank accounted for 20% of the bank’s retail assets under management, or AUM. Such proportion was higher than close peers. BOC managed to expand the size of its bank wealth management product by 23% from 2020 to CNY 1.71 trillion, in contrast to a 4.5% decline for ICBC. By leveraging the synergies of the group’s financial subsidiaries, BOC has established a reputed brand for wealth management. Retail AUM exceeded CNY 11 trillion, with wealth management revenue growing 33% from 2020. Growth in number of VIP customers and AUM both reached the highest level for the past three years.

Following The People's Bank of China's 10-basis-point cut to the borrowing rates of one-year medium-term lending facility, or MLF, and the seven-day reverse repurchase agreements on Jan. 17, we revisited potential impacts on Chinese banks. We previously expected two to three rounds of 5-basis-point cuts to the Loan Prime Rate, or LPR, in the first half--the 10-basis-point MLF rate cut is expected to translate to a 10-basis point cut to one-year LPR and a 5-basis-point cut to five-year LPR on Jan. 20. This indicated downward pressures on NIM are more front-loaded than we previously expected. In reference to the previous rate cut cycle, our models now factor in a total of 25- and 10-basis-point cuts to one-year and five-year LPRs, respectively, in 2022. We also see policy tools to ease the pressure, including a reserve requirement rate cut, RRR, a change in the deposit rate-setting method, and lower interbank rates as results of the key policy rate cut.

Five state-owned enterprise, or SOE, banks reported third-quarter results Overall, the results were in line with what we outlined in our Oct. 20 report “Asia Financials and Real Estate: Third-Quarter Earnings Outlook.” Nine-month net profit growth accelerated on lower provisioning and stabilizing of net interest margin, or NIM. Growth in net profits of these banks further accelerated to 12% year on year from 11% in the first half of 2021. Agricultural Bank of China, or ABC, China Construction Bank, or CCB, and Bank of China, or BOC reported net profit growth at 12% to 13%. Again, Industrial and Commercial Bank of China, or ICBC’s, net profit growth was lower than peers' at 10% on stagnant fee income and largely steady provisioning. Bank of Communications, or BoCom’s, net profit further accelerated to 22% from 15% on strong top line growth and there was a sharp reduction in cost/income ratio.