德意志银行业-Chinese banks Better earnings quality should drive big banks’ re-rating-DeutscheBank

Deutsche Bank Markets Research Asia China Banking / Finance Banks Industry Chinese banks Date 15 August 2017 Results Better earnings quality should drive big banks' re-rating Banking quarterly data 2Q17: wider divergence between big and smaller banks ________________________________________________________________________________________________________________Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Hans Fan, CFA Research Analyst (+852 ) 2203 6353 hans.fan@db.com Jacky Zuo Research Analyst (+852 ) 2203 6255 jacky.zuo@db.com Edward Du Research Associate (+852 ) 2203 6185 edward.du@db.com Stephen Andrews, CFA Research Analyst (+852 ) - 2203 6191 stephen-a.andrews@db.com Top picks ICBC (1398.HK),HKD5.40 Buy Bank of China (3988.HK),HKD3.84 Buy Source: Deutsche Bank Companies Featured ICBC (1398.HK),HKD5.40 Buy China Construction Bank (0939.HK),HKD6.45 Buy Agri. Bank of China (1288.HK),HKD3.56 Buy Bank of China (3988.HK),HKD3.84 Buy Bank of Communications (3328.HK),HKD5.68 Buy China Merchants Bank (3968.HK),HKD25.35 Hold China Minsheng Bank (1988.HK),HKD7.68 Hold CEB (6818.HK),HKD3.65 Sell Chongqing Rural Bank (3618.HK),HKD5.61 Hold Bank of China (601988.SS),CNY3.91 Buy Shanghai Pudong Bank (600000.SS),CNY12.56 Hold Industrial Bank (601166.SS),CNY17.04 Sell Source: Deutsche Bank We value Chinese banks using a three-stage Gordon Growth Model (PV= (ROE-g)/(COE-g)), with target prices based on 2017E book values. Key downside risk: property price correction. Key Upside risk: removal or softening of GDP targeting which signals reforms may start. See pages 8-9 for more details. The CBRC released 2Q17 operating data for China’s all commercial banks, with quarterly net profit at Rmb477bn, up 11.6% yoy (1Q17: +4.6%). The earnings recovery was driven by moderating NPL formation, lower credit cost and mild NIM expansion (Fig 1). For the big banks, we see gradual improvements in earnings quality, characterized by an NIM recovery, lower NPL ratio and stronger provision coverage. Hence, we expect the big banks to report solid 2Q17 results, which should help drive a re-rating. In contrast, joint-stock banks (JSBs) slowed asset growth notably and reported further NIM contraction amid financial deleveraging. We stay cautious on JSBs. Top picks: ICBC and BOC. NIM trend: big banks (recovered) vs. JSBs/city banks (compressed) NIM for the entire banking sector was up 2bps qoq to 2.05% (1Q17: down 19bps), due to gradual asset repricing. Average yield for new corporate loans picked up 40bps YTD. Specifically, big banks’ NIM was up 3bps qoq, while JSBs & city commercial bank