2 key negative catalysts for China banks

Barclays believes these are well flagged.

Following better-than-expected 1Q13 results, Barclays raised its earnings forecasts by 4.5%/3.6% for 2013/14 and increased its price targets by an average of 2%, leaving 11% potential upside for the sector.

Here's more from Barclays:

The outlook for China banks from here remains one of steady returns, capped on the upside by the risks of rising NPLs and NIM compression, but supported on the downside by "bond-like" yields of 5-6% and low valuations.

Against the "New Norm" backdrop of slower economic growth and accelerating financial sector reform, we expect China bank shares to be range-bound at 1.0-1.5x 2013E P/B. 

Prefer large banks with high dividend yields and small banks with attractive valuations: In a world hungry for yields, large China banks offer steady and high dividend yields (average of 5.6% for 2013E).

Near-term, share prices could be supported going into the June 2013 annual dividend season. We maintain our OW ratings on BOC, CCB and ICBC as they have demonstrated steady performance, especially in NIM amid interest rate deregulation. For investors with higher risk appetite we believe BoCom and CITIC Bank offer better upside potential as they currently trade at the low end of their valuation ranges.

Raising earnings forecasts by 4.5%/3.6% for 2013/14 and PTs by 2%; also roll out 2015 forecasts: We raise our average profit growth forecasts for 2013 to 12% y/y from 8% on:

1) lower-than-expected NIM compression (down 9bps vs. 12bps previously); 2) stronger fee growth (23% y/y vs. prior 9%); and 3) credit charges remaining stable, despite a slight increase in NPLs. We also lift our price targets by 2% on average.

Catalysts: Key positive catalysts include: 1) better monthly macroeconomic indicator improvement in China; 2) better-than-expected mid-year results in August; and 3) possible reversal of global fund flows to Hong Kong/China.

Key negative catalysts, which we believe are all well flagged, include: 1) deposit rate deregulation; and 2) tightening of interbank products. We also highlight the possibility that monetary policy may tighten later in the year.