We Expect Revenue Pressure Through H1, but Signs Point to Improving Environment for Chinese Banks

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.

We retain our fair value estimates for most Chinese banks we cover, except for Bank of China (down to HKD 3.50) and China Minsheng 600016 Banking Corp. (down to HKD 3.60). We’ve also lowered our BOC moat rating to none from narrow, given that bank’s weakening NIM due to higher-than-peers deposit costs. Our lower fair value estimates reflect our weaker NIM outlook during the forecast period, although the negative valuation impact is partly offset by lower credit cost assumptions in 2023 and 2024.

Our top picks remain China Merchants Bank and Ping An Bank. We expect these two to stand out and enjoy higher-than-peers earnings elasticity thanks to strength in retail banking and high provisioning levels. Another investment theme for global investors seeking safety is the leading state-owned enterprise banks, including Agricultural Bank of China and Postal Savings Bank of China, which have relatively low earnings volatility and high dividend yields with a strong record in paying dividends. There could be additional upside from the government’s supportive signals to boost the market valuation of SOEs via deepening SOE reform.