CHINA_BANKS_1H12_RESULTS_SUMMARY-2012-09-05.ppt

china banks,banks 1h12 results summary what to focus on next: overdue loans 2x of that of npls; asset quality deterioration on the way 1h12 npat growth stayed decent, albeit with continued moderation most h-share china banks have reported in line results, with abc missing estimates as we expected, whereas ccb and citic bank beat consensus on 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 with fy11, when china banks net profit increased briskly by 33% y-y. we attribute this mainly to the larger-than-expected margin contraction of 11bps on average in 2q12 and sluggish fee income, which fell 3.2% y-y on average in 2q12 vs. 52% y-y growth in fy11, as a result of cbrcs strict scrutiny of banks fee charges. significant nim contraction due to higher funding cost nim contraction 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 2q12 compared to 1q12, but remained at high levels for 1h12, especially for discounted bills. we believe the significant margin contraction essentially stems 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 fierce deposit competition and interest rate liberalization; and (2) interbank liabilities the narrowed interest spread due to more rapidly rising cost and quickly expanding size of interbank liabilities (up by 40% y-y vs. 19.3% for total liabilities) reduced margin contribution. as management from most banks guided to proactively reduce the proportion of interbank liabilities with higher funding cost in 2h12, we think nim for large banks will stabilize or decline slightly around 5bps in 3q12 and 4q12, since all the banks confirmed no floor lending rate (0.7x of benchmark) so far. asset quality remains a concern with surging overdue loans while outright asset-quality deterioration has yet to be seen as of 1h12, it remains a concern to us given the surging overdue loans total overdue loans increased 31.4% h-h vs. a decline of 4.9% in fy11, and in particular loans overdue for more than 90 days jumped 48.9% h-h vs. -4.2% for fy11. most banks reported concentrated rising npls in zhejiang province (namely wenzhou and hangzhou in particular) in 1h12 and managements believe the trend in zhejiang is unlikely to spread out to the rest of the country, which continued to see a flattish or declining npl ratio in 1h12. as we have factored in a significant margin contraction post interest rate cut and deregulation as well as mounting npls, we see limited downside to our earnings forecasts for fy12-14f. we remain cautious on the sector; our top picks are boc and icbc, both rated buy.,equity research september 5, 2012 anchor themes we remain cautious on chinese banks near term after the pboc announced interest rate liberalization and two interest rate cuts in june and july 2012. consequently, rapid nim erosion is likely amid sluggish credit demand, diminishing pricing power and the gradual increase in bad loans. nomura vs consensus our fy13f earnings forecasts are on an average about 19% lower than consensus estimates. research analysts china banks lucy feng - nihk +852 2252 2165 donger wang - nihk +852 2252 1590 see appendix a-1 for analyst certification, important disclosures and the status of non-us analysts.,minsheng,bocom,citicbank,minsheng,bocom,crcb,citic,bank,icbc,crcb,ccb,ccb,cmb,boc,abc,icbc,cmb,boc,abc,nomura | china banks 1h12 npat further slowed on large nim contraction and anaemic fee income; asset quality deterioration remains a concern china banks continued to see moderating, albeit decent, net profit growth of 21% y-y in 1h12, mainly on large margin contraction and anaemic fee income growth in the second quarter. asset quality remains the only uncertainty given the surging overdue loans in 1h12; however, we see limited downside for our earnings forecasts in fy12-14f as we have already factored in 25bps and 34bps y-y increase in npl ratio for fy12-13f. 1h12 npat growth remained decent, albeit amid continued moderation h-share china banks all reported 1h12 results by end-august 2012, with most in line with expectations. abc missed estimates, as we expected, whereas ccb and citic bank beat consensus on strong margin recovery and lower credit cost in 2q12, respectively. 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,abc icbc ccb boc bocom cmb citic bank minsheng crcb,80,499 123,160 106,283 71,601 31,088 23,377 19,373 19,053 2,804,21 13 15 8 18 26 29 37 25,22 12 9 7 17 27 22 35 22,miss in-line beat in-line in-line in-line beat in-line in-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, when china banks net profit increased briskly by 33% y-y. we attribute this mainly to the larger-than-expected margin contraction of 11bps q-q on average in 2q12 and sluggish or negative growth in fee income, which declined by 3.2% y-y on average in 2q12 versus the 52% y-y growth in fy11.,fig. 2: 2q12 npat growth (y-y) (%) 30 25 20 15 10 5 0 source: company data, nomura research.,fig. 3: 2q12 npat growth (q-q) (%) 30 25 20 15 10 5 0 (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 banks significant nim contraction due to higher funding cost for both traditional and interbank liabilities nim contraction was generally larger than our and market expectations in 2q12, with smaller banks as well as abc seeing 13-25bp q-q compression in 2q12, despite the 6bp and 8bp nim expansion for icbc and ccb, respectively, and a mild (-1bp q-q) contraction for boc.,september 5, 2012,fig. 4: china banks nim change in 2q12 (q-q),fig. 5: china banks 2q12 nim,(bp) 10 5 0 (5),6,8,(1),(%) 4.00 3.50 3.00,2.74,2.69,2.73,2.57,3.03,2.78,3.04,3.44,(10) (15) (20) (25) (30),(23),(7),(18),(23),(25),(13),2.50 2.00 1.50 1.00,2.10,source: company data, nomura research.,source: company data, nomura research.,admittedly, loan yields eased in 2q12 compared with 1q12, but remained at high levels for 1h12, especially for discounted bills (6.8-9.6% in 1h12). we believe the significant margin contraction essentially stems from the higher funding cost for both traditional and interbank liabilities. on the customer deposits front, the proportion of time deposits increased by 1-4ppt h-h, whereas the proportion of demand deposits slipped by a corresponding magnitude in 1h12. meanwhile, the average interest rates for both corporate and personal deposits rose significantly in 1h12 compared with those in 1h11, particularly for time deposits whose interest rate rose by about 50-100bps y-y in light of fierce deposit competition and interest rate liberalization. 3,nomura | china banks fig. 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 - medium & lt corporate loans discounted bills retail loans overseas and others loan yields,6.67 6.69 6.66 8.13 6.35 2.63 6.54,6.55 na na 9.63 5.98 3.88 6.29,6.65 6.61 6.67 8.33 6.14 3.16 6.37,6.82 na na 8.15 5.89 1.26 6.57,6.66 na na 6.83 7.10 na 6.75,6.57 na na 7.45 6.79 na 6.69,6.94 na na 8.67 6.31 na 6.88,7.69 na na na 7.75 na 7.71,7.31 8.47 7.98 7.56,1h11,corporate loans - short-term corporate loans - medium & lt corporate loans discounted bills retail loans overseas and others loan yields,5.94 5.96 5.92 5.30 5.58 2.45 5.79,5.58 na na 7.82 5.18 3.34 5.39,5.64 5.51 5.69 5.85 5.24 2.65 5.42,5.67 na na 6.19 5.01 0.73 5.48,5.70 na na 5.45 5.90 na 5.73,5.62 na na 6.61 5.81 na 5.73,5.81 na na 6.43 5.39 na 5.76,6.68 na na na 6.69 na 6.68,5.84 8.05 7.99 6.64,y-y change (bp),corporate loans - short-term corporate loans - medium & lt corporate loans discounted bills retail loans overseas and others loan yields,73 73 74 283 77 18 75,97 na na 181 80 54 90,101 110 98 248 90 51 95,115 na na 196 88 53 109,96 na na 138 120 na 102,95 na na 84 98 na 96,113 na na 224 92 na 112,101 na na na 106 na 103,147 0 0 42 (1) 0 92,source: company data, nomura research. fig. 7: deposit funding cost deposits,1h12,abc,icbc,ccb oc domestic,bocom,cmb citic bank,minsheng,crcb,corporate deposits time demand personal depoits time demand deposit costs,1.69 3.43 0.78 1.99 3.34 0.50 1.87,1.80 3.29 0.86 2.20 3.41 0.46 1.80,1.90 3.47 0.87 2.20 3.32 0.48 2.03,2.07 3.39 0.96 2.44 3.42 0.57 2.45,2.20 na na 2.10 na na 2.17,2.05 3.30 0.77 1.67 3.18 0.58 1.91,2.29 3.49 0.79 2.38 3.03 0.44 2.30,2.41 3.63 0.76 2.24 2.90 0.47 2.38,1.00 2.26 0.53 2.46 3.23 0.46 2.10,1h11,corporate deposits time demand personal depoits time demand deposit costs,1.25 2.91 0.64 1.53 2.48 0.50 1.41,1.36 2.43 0.75 1.69 2.54 0.48 1.51,1.34 2.43 0.75 1.62 2.40 0.47 1.46,1.54 2.40 0.84 1.84 2.51 0.49 1.76,1.69 na na 1.47 na na 1.62,1.52 3.18 0.58 1.40 2.51 0.60 1.48,1.64 2.54 0.71 1.69 2.20 0.39 1.65,1.93 2.94 0.76 1.71 2.21 0.46 1.89,0.81 1.64 0.54 1.87 2.46 0.46 1.59,y-y change (bp),corporate deposits time demand personal depoits time demand deposit costs,44 52 14 46 86 0 46,44 86 11 51 87 (2) 29,56 104 12 58 92 1 57,54 99 12 60 91 8 69,51 na na 63 na na 55,53 12 19 27 67 (2) 43,65 95 8 69 83 5 65,48 69 0 53 69 1 49,19 62 (1) 59 77 0 51,source: company data, nomura research. 4,nomura | china banks fig. 8: proportion of demand and time deposits as of 1h12,september 5, 2012,(pp),abc,icbc,ccb,boc,bocom,cmb citic 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,53.4 41.2 (3.3) 1.5,49.3 46.9 (2.1) 2.3,51.2 48.8 (2.1) 3.7,44.8 52.8 (1.7) 1.4,45.6 54.3 (3.4) 3.4,53.5 46.5 (1.1) 1.1,41.9 58.1 (2.8) 2.8,37.7 61.9 (4.5) 4.3,38.8 59.9 (1.7) 1.7,source: company data, nomura research. in terms of interbank liabilities, on the one hand, rapidly rising cost of interbank liabilities narrowed the interest spread between interbank assets and liabilities, which fell from 0.77% in 1h11 to 0.40% in 1h12, with icbc and bocom posting negative interest spreads of -0.25% and -0.74%, respectively. on the other hand, the size of total interbank 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 banks attributed the bulk of the increase in interbank liabilities to the negotiated deposits proactively taken by banks, such as from insurance companies and postal savings bank of china. based on data from ceic, bank deposits by insurance companies increased by 27.9% y-y to rmb2.3trn in 1h12. however, these negotiated deposits generally have higher interest rates than customer deposits, hence lifting the funding cost for interbank liabilities. given the narrowing interest spread and the quickly expanding size of interbank liabilities, the margin contribution from interbank business fell significantly in 1h12. that said, managements of many china banks stated in their post results conference that banks will proactively control the size of these higher-cost interbank liabilities in 2h12 and also banks have not yet offered the floor lending rate (0.7x benchmark) to any kind of borrowers. thus, we believe nim will stabilize or decline slightly for large-cap banks in 2h12. fig. 9: average balance and interest rate of interbank assets and liabilities interbank 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,%,abc icbc ccb boc bcom cmb citic bank minsheng crcb,971,090 815,285 558,594 1,117,336 331,505 295,953 456,449 553,412 71,034,3.84 2.58 3.84 4.6 3.70 4.22 4.56 5.60 6.41,659,415 471,709 135,772 872,225 195,740 241,257 249,718 369,024 57,994,3.68 3.03 2.17 3.57 3.40 3.77 3.82 4.78 5.31,311,675 343,576 422,822 245,111 135,765 54,696 206,731 184,388 13,040,47.27% 72.84% 311.42% 28.10% 69.36% 22.67% 82.79% 49.97% 22.49%,0.16 (0.45) 1.67 1.03 0.30 0.45 0.75 0.82 1.10,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,%,abc icbc ccb boc bcom cmb citic bank minsheng crcb,940,447 1,794,719 1,118,767 2,021,793 1,058,354 438,078 372,210 534,082 62,423,3.34 2.83 3.2 2.88 4.44 3.94 4.53 5.10 5.52,768,124 1,218,612 826,834 1,709,033 814,133 309,988 177,445 375,544 54,223,2.24 1.96 1.96 1.92 3.56 2.87 3.34 4.29 4.49,172,323 576,107 291,933 312,760 244,221 128,090 194,765 158,538 8,200,22.43% 47.28% 35.31% 18.30% 30.00% 41.32% 109.76% 42.22% 15.12%,1.1 0.87 1.24 0.96 0.88 1.07 1.19 0.81 1.03,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 banks fig. 10: bank deposits from insurance companies (y-y growth) (%) 60 50 40 30 20 10 0,september 5, 2012,1h09,2h09,1h10,2h10,1h11,2h11,1h12,source: ceic, nomura research. fee income growth turned out anaemic in 2q12 following a moderation in 1q12, china banks fee income growth continued to trend down in 2q12 due to the cbrcs stricter scrutiny of banks fee charges since the beginning of this year. more than half of h-share banks recorded negative y-y growth for net fee income, with net fee income the sector down by 3.2% y-y in 2q12 compared with 38.6% y-y growth in 1q12, mainly due to the declines in fee and commission incomes from credit commitment and loan business as well as consultancy and advisory fees.,fig. 11: 2q12 fee income growth (q-q) (%) 10 0 (10) (20) (30) (40) (50) (60) source: company data, nomura research.,fig. 12: 2q12 fee income growth (y-y) (%) 60 40 20 0 (20) (40) (60) (80) source: company data, nomura research.,asset quality remains a concern with surging overdue loans judging from npl balance and ratio, asset quality of china banks turned out to be slightly better than we expected as half of h-share banks continued to report dual decline in npl balance and ratio in 2q12. even for those with rising npl balance and ratio, both parameters did not increase that significantly. looking at the npls by different regions, most banks reported concentrated rising npls in zhejiang province (namely wenzhou and hangzhou in particular) in 1h12, such as abc (npl balance increased by rmb1.56bn in zhejiang province while npl balance for the bank overall decreased by rmb1.29bn. npl ratio for zhejiang was at 1.14% ) and bocom (npl balance rose by rmb1.7bn in zhejiang province, almost double the net increase in npl balance for the bank in 1h12 of rmb887mn; npl balance in wenzhou alone increased by rmb800mn in 1h12 with npl ratio in the city at 3.92% compared with the overall npl ratio of 0.82% for the bank). nevertheless, we believe the trend in zhejiang province is unlikely to spread out to the rest of the country, where continue to see a flattish or declining npl ratio in 1h12 6,minsheng,minsheng,bocom,bocom,citicbank,bocom,minsheng,cmb,boc,crcb,icbc,ccb,citic,bank,abc,citicbank,crcb,crcb,icbc,cmb,boc,ccb,ccb,abc,icbc,cmb,boc,abc,nomura | china banks fig. 13: 2q12 npl balance change (q-q) (%) 16 14 12 10 8 6 4 2 0 (2) (4) source: company data, nomura research. fig. 15: npl ratio comparison as of 1h12 (%),fig. 14: 2q12 npl ratio change (q-q) (bp) 6 4 2 0 (2) (4) (6) (8) (10) source: company data, nomura research.,september 5, 2012,1.6 1.4,1.39,1.19,1.2 1.0 0.8 0.6,0.89,1.00,0.94,0.82,0.56,0.61,0.69,0.4 0.2 0.0 source: company data, nomura research. 7,nomura | china banks fig. 16: loans and npls breakdown by regions as of 1h12,september 5, 2012,balance (cnymn),% to total,npl balance (cnymn),npl ratio,fy11,1h12,fy11,1h12,fy11,1h12,fy11,1h12,abc,head office yangtze river delta,91,189 1,511,027,105429 1,591,619,2% 27%,2% 26%,2 14,880,2 15,953,0.00% 0.98%,0.00% 1.00%,- zhejiang,1,560,1.14%,pearl river delta bohai rim central china northeastern china western china overseas total,808,715 996,549 678,615 205,807 1,230,733 106,070 5,628,705,864,553 1,074,239 739,572 229,723 1,327,319 147,650 6,080,104,14% 18% 12% 4% 22% 2% 100%,14% 18% 12% 4% 22% 2% 100%,11,860 14,808 13,109 4,195 28,284 220 87,358,11,443 14,036 11,937 4,504 26,418 215 86,068,1.47% 1.49% 1.93% 2.04% 2.30% 0.21% 1.55%,1.32% 1.31% 1.61% 1.96% 1.99% 0.15% 1.42%,icbc,head office yangtze river delta pearl river delta bohai rim central china northeastern china western china overseas total,248,044 1,743,851 1,090,247 1,409,314 1,047,939 462,909 1,311,132 475,461 7,788,897,284,177 1,853,084 1,168,861 1,488,251 1,125,885 487,448 1,414,250 602,081 8,424,037,3% 22% 14% 18% 13% 6% 17% 6% 100%,3% 22% 14% 18% 13% 6% 17% 7% 100%,2,105 11,367 10,802 12,826 13,564 5,216 14,622 2,509 73,011,2,806 13,958 10,192 12,996 13,810 5,202 13,581 2,580 75,125,0.85% 0.65% 0.99% 0.91% 1.29% 1.13% 1.12% 0.53% 0.94%,0.99% 0.75% 0.87% 0.87% 1.23% 1.07% 0.96% 0.43% 0.89%,ccb,yangtze river delta pearl river delta bohai rim central western northeastern head office overseas total,1,476,118 955,937 1,137,623 1,051,837 1,108,112 406,035 105,632 255,117 6,496,411,1,577,349 1,030,533 1,223,271 1,128,151 1,193,276 434,766 130,524 343,473 7,061,343,23% 15% 18% 16% 17% 6% 2% 4% 100%,22% 15% 17% 16% 17% 6% 2% 5% 100%,19,264 9,69