Chinese H-share banks report 13% profit growth for 1H13

Find out what supported the growth.

Barclays notes that China's H-share banks reported average profit growth of 13% y/y for 1H13, 2ppt ahead of its above-consensus estimate.

The results were supported by strong fee growth (+38% y/y), good cost control (+12% y/y) and stable credit costs (55bps in 1H13) but were overcast by moderate weakening in asset quality and capital ratios. 

"Going forward, we believe banks will benefit from gradual macroeconomic improvement as the new government targets to stabilize China's GDP growth in 2H13. While NPLs will continue to rise on a measured pace, investors appear to have already priced in such risks."

Here's more from Barclays:

Expect stabilizing macro environment and NCD as the next steps in deposit rate liberalization in 2H13: Managements guided for 1) the macro condition to be stable, 2) fiscal policy to be expansionary and monetary policy to stay tight, and 3) PBOC to start large negotiable certificate of deposits (NCD) for further deposit rate liberalization.

More defensive outlook for banks in 2H13 with large banks giving more bullish guidance than JSBs: We expect the market to lift its 2013 full-year forecasts for China banks post the above-consensus results.

In 1H13, BOC and ABC delivered the most upside surprises; Minsheng delivered the strongest profit growth (up 20% y/y in 1H13) and CITIC Bank the weakest (up 5% y/y).

In general, large banks reported better results: 1) NIM avg. -4bps q/q in 2Q at Big 4 banks vs. avg. -11bps at joint stock banks (JSBs); 2) NPLs avg. +2.7% q/q at Big 4 banks vs. +8.6% q/q at JSBs;

3) NPL ratio avg. flat q/q vs. +3bps q/q at JSB; and 4) 1-90days overdue avg. +14% in 1H at big 4 banks vs. avg. +56% at JSBs. The management guidance of the large banks is more bullishly than that of JSBs.

More aggressive NPL recognition and disposal improve NPL visibility: 1-90 day overdue loans and special-mention loans rose 26% and 8% h/h respectively. We believe more recognition and exposing of NPLs are consistent with market expectation of rising NPLs, hence, increasing NPL visibility over time.

In anticipation, banks have become more aggressive in disposing of NPLs (Bocom sold its NPL portfolio in 1H13; CITIC Bank is negotiating with AMCs) and doing write-offs (up 120% y/y).

In 2H13, we expect banks' on-balance sheet assets to grow faster, especially if NCDs comes out, while off-balance sheet activities should taper as a result of regulation (Document No. 8) and more careful liquidity risk management post "interbank lending crunch".

Catalysts in the next few months: We believe bank earnings' upward revisions, growth stabilization and positive sentiment before the November Communist Party Congress are positive catalysts for China bank shares in the next few month.

Downside risk are 1) significant deterioration in other EM countries and the negative sentiment spread to China and 2) larger-than-expected local government debt (>RMB 16bn) from September audit.