Banks: FY17 Results Preview

Hong Kong Sector Update See important disclosures at the end of this report 1 Powered by the EFA Platform 12 February 2018 Financial Services | Banks Banks Overweight (Maintained) Stocks Covered: 9 FY17 Results Preview Ratings (Buy/Neutral/Sell): 4 / 5 / 0 Last 12m Earnings Revision Trend: Positive We remain OVERWEIGHT on Chinese banks, given the continuous earnings growth recovery and undemanding valuations. The sector's ROE-P/BV matrix looks attractive vis-à-vis global peers’, while the current 26% discount to A-share counterparts makes it a favourable target for south-bound inflows. Recent share price weaknesses offer a good window to accumulate quality names and to position for the upcoming FY17 results, in our view. We prefer the Big-4 banks, given their funding and capital strengths. Our Top Picks are ABC and BOC. Table Of Contents Sector Update FY17 Results Preview 2 Deleveraging Lowers Systematic Risks 4 Valuations And Recommendation 5 Company Reports Agricultural Bank of China 7 Bank of China 10 China Construction Bank 13 ICBC 16 Top Picks Target Price Agricultural Bank of China (1288 HK) – BUY HKD5.80 Bank of China (3988 HK) – BUY HKD5.90 FY17 results calendar (tentative) Source: Bloomberg, RHB China banks' forward P/BV in the past five years Source: Bloomberg, RHB FY17 bottomline growth to accelerate. H-share Chinese banks are reporting their FY17 earnings in late-March. We expect the sector's full-year profit growth to reach 4.4% (FY16: 0.9%), driven by healthy credit growth and easing asset quality pressure. Apart from China Merchants Bank (CMB) and China CITIC Bank (CITIC) – which have reported preliminary data in January – Bank of China (BOC) may surprise on the upside (+6.5% YoY profit growth) on lower credit costs. Bank of Communications (BoCom) might bring up the rear on sluggish NII. NIM trends likely to remain mixed. Sector NIMs should record a moderate QoQ expansion, led by the big banks. Smaller banks that rely more on interbank borrowings are likely to see subdued NIM trends due to elevated funding costs. This is given since the 3-month negotiable certificates of deposit (NCD) issuance rate surged 60bps in 4Q17. That said, liquidity conditions have turned more accommodative in January, thanks to the contingent reserve requirement ratio (RRR) cuts during the Lunar New Year and for inclusive financing. Thus, we may see a faster NIM rebound in 1Q18F. Asset quality recovery on track. An improving macro-economy and banks' efforts in optimising their loans mix should underpin continued asset quality recovery in 4Q17. Most banks are likely to report flat or falling NPL ratios with moderating formations. Yet, credit costs may not decline much, as banks are likely to try ramping up their provision buffers when topline growth strengthens. The Big-4 banks and CMB should see better NPL trends, given more stringent recognition, ie higher NPL/90-day overdue loans. However, we are cautious on potential rebounds in NPLs to property developers – this is as authorities tighten financing to the real estate sector and urge to control household leverage. Outstanding development loans accounted for 5.9% of banks' total loan book by 1H17. China Minsheng Banking Corp (MSB) and CITIC have larger exposures, at 9% and 10.3% respectively. Slower balance sheet expansion. Banks are likely to report a decline in asset growth in FY17F (-4% to 10% vs FY16: 8-30%), primarily on funding and capital constraints. Smaller banks would feel more pressure, as their asset growth would be curbed by controls on broad-based credit and long-standing disadvantages in attracting deposits. The Big-4 banks ought to gain a bigger credit supply share, should balance sheet restructuring persists for joint-stock banks in 2018. Maintain OVERWEIGHT, with higher TPs. We raise our TPs for the Big-4 banks by 13-23%, as we lift ROE forecasts and lower cost of equity (CoE) assumptions on reduced systematic risks due to financial deleveraging. After a catch-up by valuation laggards in the past month, we believe fundamental strength is to resume as the key driver for share price performance. Recent market corrections also offer a good window to accumulate quality banks prior to the upcoming FY17 results. We like the Big-4 banks for their solid funding and capital positions. Our Top Picks are Agricultural Bank of China (ABC) and BOC. Source: Company data, RHB NameTickerFY17 reporting dateABC1288 HK22-Mar-2018CMB3968 HK23-Mar-2018CITIC998 HK26-Mar-2018ICBC1398 HK27-Mar-2018CCB939 HK27-Mar-2018CEB6818 HK28-Mar-2018BoCom3328 HK29-Mar-2018MSB1988 HK29-Mar-2018BOC3988 HK29-Mar-20180.4x0.5x0.6x0.7x0.8x0.9x1.0x1.1xFeb-13Feb-14Feb-15Feb-16Feb-17Feb-18P/BVAverage+1 SD-1 SD+2 SD-2 SDP/E (x)P/B (x)Yield (%)Dec-18FDec-18FDec-18FAgricultural