5 downside risks for China banks in 2013

Potential management transitions could sink BOC and ICBC's NPLs.

Barclays is positive on China banks stocks despite their recent rally. It raised its 2012-14 earnings forecasts primarily on improved bank loan pricing power and lower credit costs.

Here's more from Barclays:

We expect China banks to demonstrate 1) better NIM than we estimated before, 2) stable asset quality and 3) reduced capital pressure. We upgrade BoCom and CRCB to OW on their attractive valuations and removal of equity overhangs. We move CMB to EW as pressure to raise capital appears reduced and downgrade CITICB to UW on potential high loan-loss provisions. We stay OW on BOC and ICBC.

Lifting our profit growth estimates by 13% for 2012, 7% for 2013 and 13% for 2014E and raising PTs by 20% on average: Our earnings revisions are based on pricing power proving stronger than we previously expected and stable NPL risk leading to lower provision pressure. We also raise our price targets on stronger earnings.

Key themes for 2013: We expect banks to report 1) decent results for 2012 in the second half of March; 2) NIMs troughing in 1Q13 and becoming stable thereafter; and 3) relatively stable asset quality, due to large liquidity available from banks and non-bank financial institutions as well as the bond market in 2012 from the improvement in macro conditions. In addition, we believe China banks are likely to have less capital pressure after the CBRC post the transition to the new capital regulations.

Key risks to our view: We see the downside risks as 1) potential management transitions, which could increase the likelihood of kitchen-sinking NPLs, particularly at BOC and ICBC; 2) monetary tightening if inflation is rising faster than expected; 3) the tightening of shadow banking and WMPs in mid-2013 by a new CBRC/PBOC head, which could shrink the non-bank sectors an increasingly significant contributor to total social financing (TSF); 4) the further lifting of the deposit rate ceiling as deregulation moves forward, which could drag down banks' NIMs in 2H13; and 5) a weakening of China's economy, which would weaken asset quality.

Regional view: We maintain our Neutral stance on the Asia ex-Japan Banks industry, and our top picks in the region remain HSBC, UOB, Shinhan Financial, Mega, BOC and BOCHK.