Company Reports

We retain fair value estimates for Bank of Communications, or BoCom, at HKD 6.0, China Merchants Bank, or CMB, at HKD 48, China Citic Bank, or Citic, at HKD 5.7, and China Minsheng Bank, or CMBC, at HKD 3.6 per H share. For Bank of Ningbo, or BONB, the FVE is CNY 27 per A share. The banks' interim results aligned with our expectations for net profit growth ranging from flat to low single digits in 2024. H shares of these banks appear undervalued, trading between 0.2 times-0.7 times 2024 book value, with attractive dividend yields of 6.5%-8.5%, except for BONB, with 3% dividend yield in A stock market. Despite weak net interest margin, or NIM, for CMB, we favor it due to its superior return on equity, steady dividends, and upside potential if consumer sentiment in China recovers.

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.

China Merchants Bank, or CMB, and China Minsheng Bank, or CMBC, reported a deeper year-on-year decline in first-quarter revenue of 5% and 7% versus the 2% and 1% decline in 2023. China Citic Bank’s results were stronger than expected, with revenue increasing 5% year on year, driven by stronger-than-expected growth in fee and investment income, which benefited from falling interest rates. The net profit trend weakened further, with net profit contracting 2% and 6% for CMB and CMBC, respectively, and increasing 0.4% for Citic, year on year.

We retain our fair value estimate for China Minsheng Bank, or CMBC, at CNY 3.30 per A-share (HKD 3.60 per H-share) following 2023 results. Year-on-year contraction in total revenue narrowed to 1.2% versus a 2% in the first three quarters on recovery in trading income from a low base, leading to better-than-expected net profit growth at 1.6% versus a 0.6% decline in the first three quarters. In 2023, CMBC saw less-than-peer revenue pressure and credit quality improvement, in contrast to peers that reported deteriorating retail credit quality. Net interest margin, or NIM, declined 14 basis points from 2022, but the 2-basis-point contraction from mid-2023 was milder than peers. Besides its lower mortgage exposure, we believe the mild NIM compression was attributable to tuning down asset growth while increasing allocation to higher-yield credit card and small and micro enterprise, or SME, loans. Corporate loans slid 0.7% and retail loans increased 0.7% from mid-2023. We expect this strategy will enable CMBC to deliver less than peer NIM declines in 2024.

China Minsheng Banking Corp.'s credit risk has showed gradual improvement after years of restructuring. The bank was once a leader in China’s micro- and small-enterprise, or MSE, financing market. The fragility of small private enterprises translated to a painful business restructuring for CMBC over the past few years. CMBC's multiyear restructuring and derisking translated to declines in the nonperforming loan ratio and lower bad debt formation rate.

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.

China Minsheng Banking Corp's, or CMBC’s, first-half revenue and net profits declined 3.6% and 3.5% year on year. The bank was unable to keep positive first-quarter 2023 momentum into the second quarter. Overall, we think the underlying trends were anticipated, and we retain our fair value estimate for CMBC at CNY 3.30 per A-share and HKD 3.60 per H-share. CMBC H-shares are trading at a sharp discount to A-shares as mainland China investors are anticipating a strong recovery off a low base with CMBC completing its three-year asset clean-up and restructuring in 2022, but we expect this rebound is likely to be muted as mounting industrywide challenges indicates higher-than-peer revenue pressure for CMBC. While we continue to see H-shares as undervalued, we think the below-peers asset quality and loan growth will continue to weigh on its share price in the near term.

Large Chinese banks will release 2023 interim results in late August. We expect that stabilized loan yields after the first-quarter loan repricing, mild consumption recovery, a favorable base effect, and a generally benign credit quality outlook supported by government policies will translate to improved second-quarter growth in both revenue and net profits compared with the first quarter. We expect second-quarter net profit growth to increase by 2 or 5 percentage points to 4% to 9% for six state-owned enterprises from the first quarter’s level, primarily driven by higher revenue growth and lower credit costs.

The Hang Seng Mainland Banks Index has declined 11% from its recent peak in early May. We attribute the decline to increasing concerns about downward pressure on banks’ net interest margins, or NIMs, and growing risks related to debts of local government financing vehicles, or LGFVs, amid a weak economic recovery and struggling land sales. We believe SOE banks have smaller exposures to LGFV debt and that their credit quality is better than peers given strong bargaining power to implement prudent borrower selection. Monetary and fiscal easing and the government’s strong support for troubled regional banks also limit systemic risks, in our view. That said, we believe the ongoing LGFV loan restructuring is likely to weigh on banks’ NIMs and the classification of restructured loans as special-mentioned loans will also increase provision expenses for banks. We maintain our fair value estimates for Chinese banks as we already factored in a NIM reduction of 10-25 basis points this year and expect credit costs to trend in line with our existing forecasts.

China Minsheng Bank's, or CMBC's, first-quarter revenue growth edged up 0.4% year on year, outperforming joint-stock bank peers in our coverage. While fee income growth of 9% year on year outpaced its peers, we note that this reflects a low base and we think CMBC will continue to see challenges in boosting revenue relative to peers. First-quarter revenue growth largely reflects fee income growth masking an 8% year-on-year slide in net interest income. CMBC’s relatively slower loan growth of 3.5% versus system loan growth of 12% and the average 9% pace among its joint-stock bank peers, points to sliding market share. This reflects fierce competition for good-quality loans and anemic retail credit demands during the past quarter as CMBC’s retail loans merely increased 0.1% from end-2022. The bank was more negatively affected by this trend due to its weaker-than-peer customer base, in our view.

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.

China Minsheng Banking Corp.'s credit risk still faces challenges after years of restructuring. The bank was once a leader in China’s micro- and small-enterprise, or MSE, financing market. The fragility of small private enterprises translated to a painful business restructuring for CMBC over the past six years. These difficulties are compounded by ongoing regulatory tightening to crack down on shadow bank credits and reduce wholesale funding.

China Minsheng Banking Corp's, or CMBC's, credit risk still faces challenges after years of restructuring. The bank was once a leader in China’s micro- and small enterprise, or MSE, financing market. The fragility of small private enterprises translated to a painful business restructuring for CMBC over the past six years. These difficulties are compounded by ongoing regulatory tightening to crack down on shadow bank credits and reduce wholesale funding.

No-moat China Minsheng Banking, or CMBC's, second-quarter results showed a continuation of higher-than-peer pressures on both loan growth and net interest margin, or NIM, as the bank struggled to derisk its loan book amid surging economic headwinds. Management’s two-year reform to clean up asset risks and lower fund costs in 2021 and 2022 was complicated by sluggish loan demand and growing risks in retail-and property-related sectors. Given the results were largely in line with our expectation, we retain our fair value estimate of CNY 4.00 per A-share and HKD 4.50 per H-share.

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.

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.

No-moat China Minsheng Bank Corporation's, or CMBC's, 2021 results reflected higher-than-peer pressure on net interest margin, or NIM, as the bank continues to struggle derisking its loan book amid rising economic headwinds. Given the results were largely in line, we retain our fair value estimate at CNY 4.00 per A-share and HKD 4.50 per H-share. Total revenue and net profits both reported better growth from the levels of the first three quarters. The former contracted 8.7%, a modest improvement from the 8.9% decline for the first three quarters. Positively, net profit growth was positive at 0.21%, versus the 4.9% decline for the first three quarters. The reforms initiated by new management, who came on board in 2021, have been progressing well. The new management team clearly set out key strategic goals for its five-year reforms by 2025. The first stage of the reforms are from 2021 to 2022, focused on the cleanup of asset risks and lowering funding costs. As a result, year-on-year growth in loans and deposits slowed to 5% and 1.5% respectively during the restructuring in 2021.

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.

China Minsheng Banking Corp's, or CMBC's, credit risk has yet to see improvement after years of restructuring. The bank was once a leader in China’s micro- and small enterprise, or MSE, financing market. The fragility of small private enterprises translated to a painful business restructuring for CMBC over the past six years. These difficulties are compounded by ongoing regulatory tightening to crack down on shadow bank credits and reduce wholesale funding.

No-moat China Minsheng Bank Corp.'s, or CMBC's, third-quarter results reflected significant headwinds in the bank’s net interest margin, or NIM, as the bank struggled to derisk its loan book amid rising property risks and weakening credit demand. We believe the current economic environment is not favorable for banks such as CMBC. The bank has relatively high on-balance-sheet and off-balance-sheet exposures to property and local government financing sectors. Nine-month total revenue and net profit contracted 8.9% and 4.9%, respectively, from the year-ago period. As net profit growth was on track to deliver our full-year estimate of around 10% year-on-year decline, we retain our fair value estimate at CNY 4.00 per A-share and HKD 4.50 per H-share. H-shares are trading at a historical trough of below 0.3 times 2021 price/book value. Despite its cheap valuation, we believe the bank has higher uncertainties, given its weak deposit base and the risky corporate and retail loans as evidenced by its higher-than-peer NPL formation rate and retail NPL ratio.