China banks to kick off 1H14 reporting season

Decent average profit growth is expected.

The H-share China banks will kick off their 1H14 reporting season on 19 August, and Barclays forecasts continued decent average profit growth of 10% y/y in 1H14, supported by strong loan growth and steady NIM.

According to a research note from Barclays, among the H-share banks under our coverage, it expects ABC and BOC to deliver strong profit growth, while BOCOM and CITIC Bank could be laggards.

During 2Q14, Barclays expect NPLs continued to rise moderately.

The outlook for NIM could be more diverse as a steady trend for large banks is seen but some downward pressure for joint-stock banks, except Minsheng, which could further cut interbank exposure to help its margin rebound).

Here's more from Barclays:

In addition, city commercial banks could see declining margins due to a reduction in high-yield interbank investments after stricter regulation of such business.

Overall, we maintain our positive view on China banks in the next few months, while in the long term we believe the recent fiscal and SOE reform announcements could be catalysts for a potential sector re-rating.

Profit growth remains decent: We estimate decent profit growth for our covered companies in 1H14, at 10% y/y on average, driven by strong loan growth (+8% h/h) and steady NIM (-1bps q/q in 2Q14E).

Fee income growth likely moderated in 2Q14, with average growth estimated at +21% y/y (down from 28% in 1Q14).

Credit cost could crawl up by 8bps y/y to 0.59% on average in 2Q14E but decline by 17bps on a quarterly basis amid improving economic development in the quarter.

We expect a moderate increase in NPLs of +4.9% q/q in 2Q14E, slightly better than +7.3% q/q in 1Q14.

We expect short-term asset quality pressure to be alleviated to some extent after targeted monetary loosening measures were introduced in the past several months.

Results leaders and laggards: We expect BOC and ABC to deliver strong profit growth among the big banks (+13% y/y in 1H14E for both banks), while CMB's profit growth could remain steady (+14% y/y).

On the other hand, we expect BOCOM's weak trend to continue in 2Q14, leading to profit growth of +5% y/y for 1H14E.

Meanwhile, CITIC Bank could kitchen-sink NPLs and charge a high credit cost (1.0% in 2Q14, +48bps y/y and +7bps q/q) after the appointment of a new president recently, dragging down 1H14 estimated profit growth to only +6% y/y.

Investment view: In the short term, we expect China banks' share price performance to be supported by decent 1H14 results.

Furthermore, the Shanghai-Hong Kong Stock Connect programme, due to be launched in the next few months, could be positive for market sentiment and attract international funds to sectors with undemanding valuations.

We believe the gradual delivery of announced fiscal, SOE and government reforms have the potential to remove some of the NPL overhang and improve efficiency of the economy over the medium to long term.