CCB, ICBC likely to increase dividend payout ratio to 40% in 2012

It could increase to 50% in 2014.

According to Bernstein Research, last week, the CBRC released the timeline of minimum capital requirements that Chinese banks will be held to over the 2013-18 period as Basel III is phased in for the Chinese banking sector.

Here's more from Bernstein:

The guidelines were more generous than we had expected as the minimum Tier 1 capital requirement that the large, systemically important Chinese banks will be held to will be 7.5% at the end of 2013. The minimum capital requirement will then be increased by 40bp per annum until 2018 when the minimum capital requirement will be 9.5%.

CCB and ICBC, will generate return on RWAs of 2.6-2.7% for full-year 2012, the strongest profitability among the listed Chinese banks. This level of profitability will allow them to grow their RWA base by 16.5% assuming they maintain their dividend payout ratio at 35%.

Despite this, their YoY RWA growth at the end of H1 '12 averaged 11%, down from 15% at the end of 2011. We expect that the two banks will report further RWA deceleration in H2 '12 to 9-10%.

We believe the excess capital generation at these two banks will allow them to increase their dividend payout ratio by 500bp to 40% on their 2012 earnings, in line with its 2010 payout ratio and well below the peak 50% payout ratio at these two banks in 2008. We expect these two banks will report rising payout ratios over the following years, increasing to 50% on their 2014 earnings.

CCB and ICBC are unique in their strong profitability (ROEs of 22-23% this year), strong capital adequacy ratios (10.5% for ICBC and 11.4% for CCB at the end of Q3 '12) and a recent deceleration of YoY RWA growth from 19% at the end of H1 '11 to 11% at the end of H1 '12.

As a result of the increase in the dividend payout ratios for CCB and ICBC, we forecast that they will report dividend per share growth of 18% and 19%, respectively, over the 2011-14E time period. This, despite moderate 4-6% annual growth in earnings.

We rate both ICBC and CCB outperform but continue to favor CCB as the bank trades at a 5% discount  to ICBC despite the bank's stronger profitability (in terms of ROA and RoRWA) and stronger core capital ratio (11.4% vs. 10.5%).