Deregulation, reform progress likely boosted Chinese banks' performance

Can outperformance continue, though?

The recent outperformance of China banks, in Barclays' view, may have been driven by progress on deregulation and reform.

According to a research note from Barclays, these include: the launch of SH-HK Connect and introduction of the local government debt-swap program which reduces banks' credit risk and boosts capital adequacy.

It also includes the introduction of the Employee Stock Ownership Plan by some of the banks, which better aligns the interest of management and shareholders.

Here's more from Barclays:

Can outperformance continue? We believe share price performance going forward will highly depend on whether the progress of further reform specific to the banking sector will be sufficient to offset the ongoing pressure to earnings from interest rate and RRR cuts.

Since November 2014, the PBOC has cut the one-year benchmark lending rate by a cumulative 90bps. Our economist, Jian Chang, is expecting another 50bp of benchmark interest rate cuts and two more RRR cuts by Q3, accompanied by a complete removal of the deposit rate ceiling, with risks of more easing if economic growth fails to stabilize by mid-year.

Every 25bps benchmark interest rate cut could potentially reduce banks' net interest margin by 12bps on a full year basis, leading to 7% lower FY16E net profits, on our estimates, assuming all else is equal and before taking into account any management action.