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1、China banks,BANKS1H12 results summaryWhat to focus on next:overdueloans 2x of that of NPLs;assetquality deterioration on the way1H12 NPAT growth stayed decent,albeit with continued moderationMost H-share China banks have reported in line results,with ABC missingestimates as we expected,whereas CCB a
2、nd Citic Bank beat consensuson strong margin recovery and lower credit cost in 2Q12,respectively.Bottom-line growth managed to sustain a decent level of 21%y-y in 1H12;however,growth momentum softened across the board compared withFY11,when China banks net profit increased briskly by 33%y-y.Weattrib
3、ute this mainly to the larger-than-expected margin contraction of11bps on average in 2Q12 and sluggish fee income,which fell 3.2%y-y onaverage in 2Q12 vs.52%y-y growth in FY11,as a result of CBRCs strictscrutiny of banks fee charges.Significant NIM contraction due to higher funding costNIM contracti
4、on was generally larger than our and market expectations,with smaller banks as well as ABC seeing 13-25bp compression in 2Q12,despite the 6bp and 8bp NIM expansion for ICBC and CCB,respectively,and a mild(-1bp)contraction for BOC.Loan yields eased in 2Q12compared to 1Q12,but remained at high levels
5、for 1H12,especially fordiscounted bills.We believe the significant margin contraction essentiallystems from higher funding costs for both(1)customer deposits due to 1-4ppt h-h increase in the proportion of time deposits in 1H12,as well as 50-100bp y-y surge in time-deposit interest rates in light of
6、 fierce depositcompetition and interest rate liberalization;and(2)interbank liabilities thenarrowed interest spread due to more rapidly rising cost and quicklyexpanding size of interbank liabilities(up by 40%y-y vs.19.3%for totalliabilities)reduced margin contribution.As management from most banksgu
7、ided to proactively reduce the proportion of interbank liabilities withhigher funding cost in 2H12,we think NIM for large banks will stabilize ordecline slightly around 5bps in 3Q12 and 4Q12,since all the banksconfirmed no floor lending rate(0.7x of benchmark)so far.Asset quality remains a concern w
8、ith surging overdue loansWhile outright asset-quality deterioration has yet to be seen as of 1H12,itremains a concern to us given the surging overdue loans total overdueloans increased 31.4%h-h vs.a decline of 4.9%in FY11,and in particularloans overdue for more than 90 days jumped 48.9%h-h vs.-4.2%f
9、orFY11.Most banks reported concentrated rising NPLs in Zhejiang province(namely Wenzhou and Hangzhou in particular)in 1H12 and managementsbelieve the trend in Zhejiang is unlikely to spread out to the rest of thecountry,which continued to see a flattish or declining NPL ratio in 1H12.As we have fact
10、ored in a significant margin contraction post interest ratecut and deregulation as well as mounting NPLs,we see limited downsideto our earnings forecasts for FY12-14F.We remain cautious on the sector;our top picks are BOC and ICBC,both rated BUY.,EQUITY RESEARCHSeptember 5,2012Anchor themesWe remain
11、 cautious on Chinesebanks near term after thePBOC announced interest rateliberalization and two interestrate cuts in June and July 2012.Consequently,rapid NIMerosion is likely amid sluggishcredit demand,diminishingpricing power and the gradualincrease in bad loans.Nomura vs consensusOur FY13F earnin
12、gs forecastsare on an average about 19%lower than consensusestimates.Research analystsChina BanksLucy Feng-NIHK+852 2252 2165Donger Wang-NIHK+852 2252 1590See Appendix A-1 for analystcertification,importantdisclosures and the status ofnon-US analysts.,Minsheng,BOCOM,CITICBank,Minsheng,BOCOM,CRCB,CIT
13、IC,Bank,ICBC,CRCB,CCB,CCB,CMB,BOC,ABC,ICBC,CMB,BOC,ABC,Nomura|China banks1H12 NPAT further slowed on large NIMcontraction and anaemic fee income;asset quality deterioration remains aconcernChina banks continued to see moderating,albeit decent,net profit growth of 21%y-y in1H12,mainly on large margin
14、 contraction and anaemic fee income growth in the secondquarter.Asset quality remains the only uncertainty given the surging overdue loans in1H12;however,we see limited downside for our earnings forecasts in FY12-14F as wehave already factored in 25bps and 34bps y-y increase in NPL ratio for FY12-13
15、F.1H12 NPAT growth remained decent,albeit amid continuedmoderationH-share China banks all reported 1H12 results by end-August 2012,with most in linewith expectations.ABC missed estimates,as we expected,whereas CCB and Citic Bankbeat consensus on strong margin recovery and lower credit cost in 2Q12,r
16、espectively.Fig.1:1H12 NPAT results of H-share China banks versus consensus,September 5,2012,1H12 NPAT(CNYmn),y-y growth(%),our forecast(%),versus consensus,ABCICBCCCBBOCBOCOMCMBCITIC BankMinshengCRCB,80,499123,160106,28371,60131,08823,37719,37319,0532,804,21131581826293725,2212971727223522,Missin-l
17、ineBeatin-linein-linein-lineBeatin-linein-line,Source:Company data,Bloomberg,and Nomura estimates.The sectors bottom-line growth managed to sustain a decent level of 21%y-y in 1H12;however,the growth momentum softened across the board compared with FY11,whenChina banks net profit increased briskly b
18、y 33%y-y.We attribute this mainly to thelarger-than-expected margin contraction of 11bps q-q on average in 2Q12 and sluggishor negative growth in fee income,which declined by 3.2%y-y on average in 2Q12 versusthe 52%y-y growth in FY11.,Fig.2:2Q12 NPAT growth(y-y)(%)302520151050Source:Company data,Nom
19、ura research.,Fig.3:2Q12 NPAT growth(q-q)(%)302520151050(5)(10)(15)(20)Source:Company data,Nomura research.,2,Minsheng,BOCOM,CITICBank,CITICBank,Minsheng,BOCOM,CRCB,CRCB,CCB,ICBC,CMB,BOC,ICBC,CCB,ABC,CMB,BOC,ABC,Nomura|China banksSignificant NIM contraction due to higher funding cost forboth traditi
20、onal and interbank liabilitiesNIM contraction was generally larger than our and market expectations in 2Q12,withsmaller banks as well as ABC seeing 13-25bp q-q compression in 2Q12,despite the 6bpand 8bp NIM expansion for ICBC and CCB,respectively,and a mild(-1bp q-q)contraction for BOC.,September 5,
21、2012,Fig.4:China banks NIM change in 2Q12(q-q),Fig.5:China banks 2Q12 NIM,(bp)1050(5),6,8,(1),(%)4.003.503.00,2.74,2.69,2.73,2.57,3.03,2.78,3.04,3.44,(10)(15)(20)(25)(30),(23),(7),(18),(23),(25),(13),2.502.001.501.00,2.10,Source:Company data,Nomura Research.,Source:Company data,Nomura Research.,Admi
22、ttedly,loan yields eased in 2Q12 compared with 1Q12,but remained at high levelsfor 1H12,especially for discounted bills(6.8-9.6%in 1H12).We believe the significantmargin contraction essentially stems from the higher funding cost for both traditional andinterbank liabilities.On the customer deposits
23、front,the proportion of time deposits increased by 1-4ppt h-h,whereas the proportion of demand deposits slipped by a corresponding magnitude in1H12.Meanwhile,the average interest rates for both corporate and personal depositsrose significantly in 1H12 compared with those in 1H11,particularly for tim
24、e depositswhose interest rate rose by about 50-100bps y-y in light of fierce deposit competition andinterest rate liberalization.3,Nomura|China banksFig.6:Loan yields(%),Loans,September 5,2012,1H12,ABC,ICBC,CCB OC domestic,BOCOM,CMB CITIC Bank,Minsheng,CRCB,Corporate loans-short-term corporate loans
25、-medium< corporate loansDiscounted billsRetail loansOverseas and othersLoan yields,6.676.696.668.136.352.636.54,6.55nana9.635.983.886.29,6.656.616.678.336.143.166.37,6.82nana8.155.891.266.57,6.66nana6.837.10na6.75,6.57nana7.456.79na6.69,6.94nana8.676.31na6.88,7.69nanana7.75na7.71,7.318.477.987.56,
26、1H11,Corporate loans-short-term corporate loans-medium< corporate loansDiscounted billsRetail loansOverseas and othersLoan yields,5.945.965.925.305.582.455.79,5.58nana7.825.183.345.39,5.645.515.695.855.242.655.42,5.67nana6.195.010.735.48,5.70nana5.455.90na5.73,5.62nana6.615.81na5.73,5.81nana6.435.
27、39na5.76,6.68nanana6.69na6.68,5.848.057.996.64,y-y change(bp),Corporate loans-short-term corporate loans-medium< corporate loansDiscounted billsRetail loansOverseas and othersLoan yields,737374283771875,97nana181805490,10111098248905195,115nana1968853109,96nana138120na102,95nana8498na96,113nana224
28、92na112,101nanana106na103,1470042(1)092,Source:Company data,Nomura research.Fig.7:Deposit funding costDeposits,1H12,ABC,ICBC,CCB OC domestic,BOCOM,CMB CITIC Bank,Minsheng,CRCB,Corporate depositsTimeDemandPersonal depoitsTimeDemandDeposit costs,1.693.430.781.993.340.501.87,1.803.290.862.203.410.461.8
29、0,1.903.470.872.203.320.482.03,2.073.390.962.443.420.572.45,2.20nana2.10nana2.17,2.053.300.771.673.180.581.91,2.293.490.792.383.030.442.30,2.413.630.762.242.900.472.38,1.002.260.532.463.230.462.10,1H11,Corporate depositsTimeDemandPersonal depoitsTimeDemandDeposit costs,1.252.910.641.532.480.501.41,1
30、.362.430.751.692.540.481.51,1.342.430.751.622.400.471.46,1.542.400.841.842.510.491.76,1.69nana1.47nana1.62,1.523.180.581.402.510.601.48,1.642.540.711.692.200.391.65,1.932.940.761.712.210.461.89,0.811.640.541.872.460.461.59,y-y change(bp),Corporate depositsTimeDemandPersonal depoitsTimeDemandDeposit
31、costs,4452144686046,4486115187(2)29,56104125892157,5499126091869,51nana63nana55,5312192767(2)43,659586983565,486905369149,1962(1)5977051,Source:Company data,Nomura research.4,Nomura|China banksFig.8:Proportion of demand and time depositsAs of 1H12,September 5,2012,(pp),ABC,ICBC,CCB,BOC,BOCOM,CMB CIT
32、IC Bank Minsheng,CRCB,%of demand deposits to total deposits%of time deposits to total deposits%of demand deposits to total deposits-h-h change%of time deposits to total deposits-h-h change,53.441.2(3.3)1.5,49.346.9(2.1)2.3,51.248.8(2.1)3.7,44.852.8(1.7)1.4,45.654.3(3.4)3.4,53.546.5(1.1)1.1,41.958.1(
33、2.8)2.8,37.761.9(4.5)4.3,38.859.9(1.7)1.7,Source:Company data,Nomura research.In terms of interbank liabilities,on the one hand,rapidly rising cost of interbank liabilitiesnarrowed the interest spread between interbank assets and liabilities,which fell from0.77%in 1H11 to 0.40%in 1H12,with ICBC and
34、BOCOM posting negative interestspreads of-0.25%and-0.74%,respectively.On the other hand,the size of totalinterbank liabilities of all the H-share banks expanded briskly by 33%y-y versus 19.3%for total liabilities of these banks over the same period.Management of most banksattributed the bulk of the
35、increase in interbank liabilities to the negotiated depositsproactively taken by banks,such as from insurance companies and Postal Savings Bankof China.Based on data from CEIC,bank deposits by insurance companies increasedby 27.9%y-y to RMB2.3trn in 1H12.However,these negotiated deposits generally h
36、avehigher interest rates than customer deposits,hence lifting the funding cost for interbankliabilities.Given the narrowing interest spread and the quickly expanding size ofinterbank liabilities,the margin contribution from interbank business fell significantly in1H12.That said,managements of many C
37、hina banks stated in their post results conferencethat banks will proactively control the size of these higher-cost interbank liabilities in2H12 and also banks have not yet offered the floor lending rate(0.7x benchmark)to anykind of borrowers.Thus,we believe NIM will stabilize or decline slightly fo
38、r large-capbanks in 2H12.Fig.9:Average balance and interest rate of Interbank assets and liabilitiesInterbank assets,1H12 average balance,1H12 avg yield,1H11 avg balance,1H11 avg yield,Avg balance changes,Yield changes,RMB mn,%,RMB mn,%,RMB mn,%y-y,%,ABCICBCCCBBOCBCOMCMBCitic BankMinshengCRCB,971,09
39、0815,285558,5941,117,336331,505295,953456,449553,41271,034,3.842.583.844.63.704.224.565.606.41,659,415471,709135,772872,225195,740241,257249,718369,02457,994,3.683.032.173.573.403.773.824.785.31,311,675343,576422,822245,111135,76554,696206,731184,38813,040,47.27%72.84%311.42%28.10%69.36%22.67%82.79%
40、49.97%22.49%,0.16(0.45)1.671.030.300.450.750.821.10,Total,5,170,658,3,252,854,1,917,804,58.96%,Interbank Liabilities,1H12 average balance,1H12 avg cost,1H11 avg balance,1H11 avg cost,Avg balance changes,Cost changes,RMB mn,%,RMB mn,%,RMB mn,%y-y,%,ABCICBCCCBBOCBCOMCMBCitic BankMinshengCRCB,940,4471,
41、794,7191,118,7672,021,7931,058,354438,078372,210534,08262,423,3.342.833.22.884.443.944.535.105.52,768,1241,218,612826,8341,709,033814,133309,988177,445375,54454,223,2.241.961.961.923.562.873.344.294.49,172,323576,107291,933312,760244,221128,090194,765158,5388,200,22.43%47.28%35.31%18.30%30.00%41.32%
42、109.76%42.22%15.12%,1.10.871.240.960.881.071.190.811.03,Total,8,340,873,6,253,936,2,086,937,33.37%,Source:Company data,Nomura research.5,Minsheng,Minsheng,CRCB,BOCOM,CITICBank,BOCOM,CITICBank,CRCB,CCB,CMB,CCB,ICBC,ICBC,CMB,BOC,BOC,ABC,ABC,Nomura|China banksFig.10:Bank deposits from insurance compani
43、es(y-y growth)(%)6050403020100,September 5,2012,1H09,2H09,1H10,2H10,1H11,2H11,1H12,Source:CEIC,Nomura research.Fee income growth turned out anaemic in 2Q12Following a moderation in 1Q12,China banks fee income growth continued to trenddown in 2Q12 due to the CBRCs stricter scrutiny of banks fee charg
44、es since thebeginning of this year.More than half of H-share banks recorded negative y-y growth fornet fee income,with net fee income the sector down by 3.2%y-y in 2Q12 compared with38.6%y-y growth in 1Q12,mainly due to the declines in fee and commission incomesfrom credit commitment and loan busine
45、ss as well as consultancy and advisory fees.,Fig.11:2Q12 Fee income growth(q-q)(%)100(10)(20)(30)(40)(50)(60)Source:Company data,Nomura research.,Fig.12:2Q12 Fee income growth(y-y)(%)6040200(20)(40)(60)(80)Source:Company data,Nomura research.,Asset quality remains a concern with surging overdue loan
46、sJudging from NPL balance and ratio,asset quality of China banks turned out to beslightly better than we expected as half of H-share banks continued to report dual declinein NPL balance and ratio in 2Q12.Even for those with rising NPL balance and ratio,bothparameters did not increase that significan
47、tly.Looking at the NPLs by different regions,most banks reported concentrated rising NPLsin Zhejiang province(namely Wenzhou and Hangzhou in particular)in 1H12,such asABC(NPL balance increased by RMB1.56bn in Zhejiang province while NPL balance forthe bank overall decreased by RMB1.29bn.NPL ratio fo
48、r Zhejiang was at 1.14%)andBOCOM(NPL balance rose by RMB1.7bn in Zhejiang province,almost double the netincrease in NPL balance for the bank in 1H12 of RMB887mn;NPL balance in Wenzhoualone increased by RMB800mn in 1H12 with NPL ratio in the city at 3.92%comparedwith the overall NPL ratio of 0.82%for
49、 the bank).Nevertheless,we believe the trend inZhejiang province is unlikely to spread out to the rest of the country,where continue tosee a flattish or declining NPL ratio in 1H126,Minsheng,Minsheng,BOCOM,BOCOM,CITICBank,BOCOM,Minsheng,CMB,BOC,CRCB,ICBC,CCB,CITIC,Bank,ABC,CITICBank,CRCB,CRCB,ICBC,C
50、MB,BOC,CCB,CCB,ABC,ICBC,CMB,BOC,ABC,Nomura|China banksFig.13:2Q12 NPL balance change(q-q)(%)1614121086420(2)(4)Source:Company data,Nomura research.Fig.15:NPL ratio comparison as of 1H12(%),Fig.14:2Q12 NPL ratio change(q-q)(bp)6420(2)(4)(6)(8)(10)Source:Company data,Nomura research.,September 5,2012,
