(HK) China Banking Sector - Buy on dips for multi-year boom

20 January2010DBS Group Research . Equity In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com Refer to important disclosures at the end of this report ed-SGC / sa- DC Buy on dips for multi-year boom • Tuned down our short-term views following policy exits and fund-raising concerns • But still positive about 2H10 as: (i) normalization of policies will be gradual, (ii) ample liquidity is structural and asset reflation is a multi-year process, (iii) any equity-raising impact will be mild, (iv) tightening is positive for NIM, and (v) banks are major beneficiaries of RMB appreciation & inflation expectations • Buy on dips for decent rebound in 2H10 Buy on dips. Policy overhang and fund-raising concerns should trigger a c.20% share price correction in 1H10 from Oct/Nov-09 peaks (i.e. another 10% downside from current levels). But share prices should resume their uptrend in 2H10 once the overhang is removed or discounted. On a full year basis, the sector still offers decent 24% upside. Policy tightening & fund-raising not major concerns. Any global exit strategies should be gradual. The Chinese government’s priority this year remains pro-growth rather than controlling inflation. Hence, China’s loan growth should remain robust at 20% this year. During the tightening cycle in 2006-2007, Chinese banks were re-rated, as the economic outlook and NIM improved, and share price consolidation was temporary and not severe. Most banks (except BoComm and Minsheng) can avoid equity-raising if they cut 2009-10 dividends. But dilution impact would be limited even if new equity is issued. Cheap valuation. Chinese banks are still trading at below mid-cycle P/B valuations, while their Asian peers are either at or above mid-cycle valuations. Our top-picks are ICBC, followed by CCB, for low equity-raising and NPL risks. Among small banks, we like CMB following a shift in its strategy to focus on profitability instead of volume. HSI: 21,678 ANALYST Jasmine Lai · (852) 2971 1926 · jasmine_lai@hk.dbsvickers.com Chinese banks: Valuation & recommendation ClosingTarget Upside Stock pricePBVPER yieldROEPrice(%) rating(H K$)(X )( X )( %)(%)(H K$)ICBC (1398 HK)6.0 52.310 .44. 3 2 3.48.4 039 %BUYBOC (3988 HK)4.0 91.68 .56. 1 2 0.15.3 029 %BUYCCB (939 HK)6.4 22.08 .84. 5 2 5.18.5 032 %BUYBoComm (3328 HK)8.9 72.09 .73. 6 2 1.910.3 015 % HOLDCMB (3968 HK)19.4 22.612 .32. 0 2 3.124.5 026 %BUYCNCB (998 HK)5.8 51.610 .02. 0 1 7.26.8 016 % HOLDMinsheng (1988 HK)8.4 21.711 .22. 0 1 5.89.5 013 % HOLDAve rage2.010 .13. 5 2 1.024 %FY 10 FChinese banks: Entry prices En try prices% from rec ent hi gh% from closing price2010F P/ B2010F P/E(HK$)(%)(%)(x)(x)ICBC5.70-19%-6%2.19.8B OC4 .00-19%-2%1. 68.3C CB6 .00-19%-7%1. 98.2BoComm8.00-24%-11%1.88.6CMB18.00-19%-7%2.411.4CNCB5.60-20%-4%1.59.5Minsheng6.90-24%-18%1.49.3Average-20%-10%1.89.3Source: Bloomberg, DBS Vickers Note: ICBC, BOC, CCB, BoComm, CMB, CNCB and Minsheng stand for Industrial Commercial Bank of China, Bank of China, China Construction Bank, Bank of Communications, China Merchants Bank, China CITIC Bank and China Minsheng Bank respectively Hong Kong / China Industry Focus China Banking Sector Hong Kong Research Team Corporate Research Head of Research Derek Cheung (852) 2971 1703 Derek_cheung@hk.dbsvickers.com Banking & Finance Jasmine Lai (852) 2971 1926 jasmine_lai@hk.dbsvickers.com China Property Carol Wu (852) 2863 8841 Carol_wu@hk.dbsvickers.com China Property Danielle Wang (852) 2820 4915 danielle_wang @hk.dbsvickers.com Consumer Alice Hui, CFA (852) 2971 1960 alice_hui@hk.dbsvickers.com Consumer Titus Wu (86 21) 6888 3360 titus_wu @hk.dbsvickers.com Electronics & Technology Dennis Lam (852) 2971 1922 dennis_lam@hk.dbsvickers.com Hong Kong Property Jeff Yau, CFA (852) 2820 4912 Jeff_yau@hk.dbsvickers.com Industrials Patricia Yeung (852) 2863 8908 patricia_yeung@hk.dbsvickers.com Automobile, Infrastructure, Machinery Rachel Miu (852) 2863 8843 Rachel_miu@hk.dbsvickers.com Media & General Retail Mavis Hui (852) 2863 8879 mavis_hui@hk.dbsvickers.com Oil & Petrochemicals, Pharmaceuticals & Shipping Gideon Lo, CFA (852) 2863 8880 gideon_lo@hk.dbsvickers.com Software & Telecom Steven Liu, CFA (852) 2971 1780 steven_liu@hk.dbsvickers.com Table of Contents Investment summary – BUY on dips 3 Policy normalization fear overplayed 5 Accommodative policy stance will stay 12 Being re-rated in tightening cycle 18 Capital-raising not a major concern 20 NIM and ROE recoveries justify further re-rating 25 Ot