Company Reports

China's big four state-owned banks, Agricultural Bank of China, Bank of China, China Construction Bank, and the Industrial and Commercial Bank of China, posted interim revenue and profit growth of 9%-11% and 3%-5% year on year, respectively.

China's big four state-owned banks, Agricultural Bank of China, Bank of China, China Construction Bank, and the Industrial and Commercial Bank of China, posted year-on-year first-quarter revenue and profit growth of 8%-11% and 4%-5%, respectively.

China Construction Bank's differentiated deposit franchise and high-quality customer base set it apart from peers, underpinned by its expansive physical network and entrenched relationships across both retail and corporate segments. However, this structural advantage is currently offset by industrywide headwinds, namely decelerating deposit growth and a continued flight to time deposits amid the ongoing rate-cut cycle. We anticipate CCB's net interest margin (NIM) to demonstrate relative resilience and outperform as economic activity rebounds.

China Construction Bank's differentiated deposit franchise and high-quality customer base set it apart from peers, underpinned by its expansive physical network and entrenched relationships across both retail and corporate segments. However, this structural advantage is currently offset by industry-wide headwinds, namely decelerating deposit growth and a continued flight to time deposits amid the ongoing rate-cut cycle. We anticipate CCB's net interest margin (NIM) to demonstrate relative resilience and outperform as economic activity rebounds.

2025 revenue and profit growth for China's Big Four state-owned banks accelerated to 1.9%-4.5% and 0.7%-3.2%, respectively, from the first nine months.

Industrial and Commercial Bank of China held an Investor Day on Nov. 26, highlighting recent trends in net interest margin, or NIM, demand from corporate and inclusive finance sectors, and potential in the overseas banking segment.

China's Big Four state-owned banks reported divergent September-quarter performances due to fee-based activities and asset mix. Year-to-September net profit recovered to growth of 0.3%-3% year on year, helped in part by lower provision expenses.

China's six state-owned enterprise banks reported first-half revenue growth of 0.8%-3.8% year on year, the best since 2022. Net profit performance diverged, ranging from a 1.4% decline to 2.7% growth, reflecting differences in loan-loss provisioning. Operating expenses were flat to slightly lower.

China will reinstate a 6% value-added tax on interest income from treasury bills, local government bonds, and financial institution notes issued after Aug. 8. These had been exempt since 2016.

We update our cost of equity assumption for China Construction Bank to reflect recent industry and regulatory developments. First-quarter loan growth fell 3 percentage points from 2024, as the central bank has shifted focus since mid-2024 from quantitative targets to curbing pricing competition.

China Construction Bank's strong deposit franchise and high-quality customer base differentiate it from peers, as it leverages its extensive offline network and strong ties with household and corporate customers. However, its deposit strength is overshadowed by ongoing industry headwinds, including slowing deposit growth and ongoing deposit migration to time deposits during the falling rate cycle. We expect CCB's net interest margin should outperform when business activities recover.

Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and Postal Savings Bank of China reported first-quarter net profits that fell 2% to 4% year on year. Meanwhile, Agricultural Bank of China saw 2% growth.

We maintain our fair value estimates for Industrial and Commercial Bank of China, or ICBC, China Construction Bank, or CCB, Agricultural Bank of China, or ABC, and Postal Savings Bank of China, or PSBC, after they reported net profit growth in 2024 of 0.5%, 1.1%, 4.8%, and 0.3% respectively. ABC’s net profit growth exceeded our expectation by 1 percentage point, driven by industry-leading loan growth and strong investment gains. Other banks’ results are in line.

We raise our fair value estimates for select China banks after revisiting key model assumptions. Recent industry developments indicate improved prospects for net interest margins, or NIMs, and corporate credit quality. Our respective fair values for Industrial and Commercial Bank of China, or ICBC, China Construction Bank, or CCB, Agricultural Bank of China, or ABC, Bank of China, or BOC, China Merchants Bank, or CMB, and China Citic Bank, or CITIC, rise by 4% to 15%, to HKD 6.1, HKD 7.6, HKD 4.8, HKD 4, HKD 50, and HKD 6.2.

We believe China Construction Bank's strong deposit franchise and good-quality customer base are key differentiating factors from Chinese bank peers, as it leverages its extensive offline network and entrenched ties with household and corporate customers. However, its deposit strength is overshadowed by ongoing industry headwinds, including rising deposit migration to time deposits and longer-term deposits as consumer confidence remains weak. We expect the bank's net interest margin should outperform when business activities recover.

We have raised our fair value estimates for some of China's SOE banks after third-quarter earnings. Our fair value estimate for Agricultural Bank of China, or ABC, rises 16% to HKD 4.4; for Industrial and Commercial Bank of China, or ICBC, by 8% to HKD 5.4; and for China Construction Bank, or CCB, by 10% to HKD 6.8. This adjustment reflects our reduction in credit cost assumptions by 2 basis points-8 basis points for 2024 and 2025 after China's recent economic stimulus package. Our FVEs for the other three SOE banks, namely Bank of China, or BOC; Bank of Communications, or BoCom; and Postal Savings Bank of China, or PSBC, are unchanged.

We believe China Construction Bank's strong deposit franchise and good-quality customer base are key differentiating factors among Chinese bank peers, leveraging its extensive offline network and entrenched ties with household and corporate customers. Though its deposit strength is overshadowed by ongoing industry headwinds including rising deposit migration to time deposits and longer-term deposits as consumer confidence remains weak. We expect the banks' net interest margin should outperform when the business activities recover.

We maintain our fair value estimates for the state-owned enterprise banks in our coverage except for Agricultural Bank of China, which is seeing higher-than-expected net interest margins. We now increase ABC’s NIM assumption by 5 and 2 basis points in 2024 and 2025, respectively, which leads to a rise in fair value estimate to HKD 3.80 from HKD 3.50. Overall, there are no changes to our outlook for the other SOE banks.

We believe CCB's strong deposit franchise and good-quality customer base are key differentiating factors among Chinese bank peers, leveraging its extensive offline network and entrenched ties with household and corporate customers. Though its deposit strength is overshadowed by ongoing industry headwinds including rising deposit migration to time deposits and longer-term deposits as consumer confidence remains weak. We expect the banks' net interest margin should outperform when the business activities recover.

Driven by improved investor sentiment for China banks with stable dividend payments and a historic property rescue package introduced in May, the Hang Seng Mainland Banks Index rallied over 20% in the second quarter. But it pulled back sharply on profit-taking and investors’ concerns that the easing measures were not sufficient to turn around struggling property sales. H-shares of most China banks remain undervalued, with 2024 price/book modestly increasing to 0.2-0.5 times. Dividend yields remain attractive at 6%-8%. With A-share counterparts trading at a 35% premium to H-shares on average, we expect the regulators’ push for higher and more regular dividend payouts, as well as the expansion of eligible exchange-traded funds on Stock Connect, should gradually narrow the valuation gap for Chinese dual-listed banks. Amid sluggish economic growth in China with no major recovery in property sales and consumer spending anticipated in 2024, we prefer defensive state-owned banks, including China Construction Bank, or CCB, and Industrial and Commercial Bank of China, or ICBC, and leading retail-focused bank China Merchants Bank for stable dividends, strong capital returns, and better earnings visibility.