Chinese banks' 3Q net profit projected to grow 8% y/y

Slightly down from the previous quarter.

As H-share China banks are expected to report their 3Q14 results on 23 October, it has been forecast that 3Q net profit will grow by 8% y/y on average.

According to a research note from Barclays, this is slightly down from 9% y/y in 2Q and 12% y/y in 1Q.

Barclays expects ABC (10%) and CMB (12%) to deliver the highest profit growth among the big four banks and joint stock banks (JSBs), respectively.

Meanwhile, BOCOM (5%) and CITIC bank (3%) are likely the slowest among peers.

Here's more from Barclays:

During the results season, we believe key issues watched by investors will include:

1) impact of the newly announced deposit deviation rule on banks' deposit/loan growth and NIM;

2) banks' interbank business development under the tighter regulatory environment (Document #127, #140 and #178);

3) implementation of the new mortgage policy and the impact on banks' NIM;

4) banks' gross NPL formation rates and their asset quality outlook; and

5) progress of the big banks' preference share issuance plans, impact on their funding cost and EPS.

We reiterate our cautious view on China bank stocks; BOC remains our only OW name in the space.

Profit growth set to further ease in 3Q: We estimate stable profit growth for our covered banks in 3Q14, at 8% y/y on average. We expect to see:

1) continued diverging NIM trends – large banks likely to hold up well, while JSBs likely to report continued NIM contraction;

2) lackluster fee income growth, but we may still see strong momentum at CMB and CITIC bank;

3) credit costs likely to be held at the high level of 0.8% on average in 3Q14E (vs. 0.79% in 1H14 and 0.57% in 2013).

Asset quality deterioration trend likely to continue: We expect the high gross NPL formation trend to continue amid the weak macro environment, and banks will likely maintain high levels of write-offs and sale of NPL packages to stabilize reported NPL balances.

We forecast a moderate NPL increase of +6% q/q on average in 3Q14, slightly lower than that in 1Q/2Q14 (+7% q/q).

Results leaders and laggards: Among the big four banks, we expect ABC (+10% y/y in 3Q14E) to deliver the highest profit growth.

We believe CMB's profit growth of 12% y/y could top JSBs', supported by continued strong fees despite high credit costs.

On the other hand, we expect BOCOM's (+5% y/y) and CITIC bank's (+3% y/y) weakening profit growth trends to continue in 3Q14.

We retain our cautious view on the sector: We turned defensive on the sector in September (see our report: China Banks: Turning more cautious after the rally, dated 16 Sep 2014), as we see more downside risks on the horizon, including:

1) more tolerance by the government towards a lower GDP growth;

2) no large stimulus in 2H14, but targeted easing still in place; and

3) worsening of banks' asset quality and resultant slower profit growth with higher credit costs.