China Banks 1Q15 result summary:Still suffering from the two headwinds

1Q15 NPAT continued slowing, as expected, to 3.2% YoY on average from 7.0% in FY14 as net interest income growth moderated to 8.3% YoY from 11.6% in FY14 due to rate cuts while fee income growth picked up slightly to 23.7% YoY in 1Q from 21.2% in FY14.

    NIM contracted significantly by 9bps QoQ, smaller than previously thought, to 2.58% on average for H-share China banks given the rate cuts and lifted ceiling for deposit rates since November 2014.

    Asset quality further deteriorated in 1Q with substantial increase in NPL balance and ratio for most of H-share China banks under our coverage despite the ease in gross NPL formation for some of them.

    Pressures remain in place in 1Q15 and beyond

    H-share China banks went through further moderation in earnings growth in 1Q15 with most reported in-line results while CITICBank was a miss and ICBC plus Minsheng slightly below estimates. NPAT growth slid to 3.2% YoY on average for those under our coverage in 1Q15 from 7.0% in FY14, mainly dragged by the slower net interest income growth (8.3% YoY in 1Q vs 11.6% in FY14) and elevated credit cost (0.87% on average in 1Q vs 0.79% in FY14).We expect NPAT growth to average at about 1% in FY15E. As the majority of the impact fromthetwo rate cuts since November 2014 started kicking in, NIM compressed by 8-17bps QoQ for all the H-share China banks under our coverage except BOC (0bps) and BOCOM (+4bps) in 1Q. We look for further margin contraction in 2Q as the impact continuesto be in place. Meanwhile, asset quality further deteriorated with rising NPL balance (+10.2% QoQ) and ratio (+8bps QoQ) while gross NPL formation estimated at 0.59%-1.85% in 1Q despite a temporary ease for some banks, indicating lingering pressures on asset quality in the coming quarters.

    Catalysts and Valuation

    Further supportive fiscal and monetary measures to prevent real economy from a dramatic slowdown shouldserve as a catalyst for China banks’share prices.The sector is trading at 1.08x FY15E P/B and 6.93x FY15E P/E and we think the valuation isstillundemanding compared to historical average of 1.25x PB and 7.17x PE. We remain cautiously positive for the sector and reiterateOVERWEIGHT rating. CCB remains to be ourtop pick stock for the long run and BOCOM is among ourmost preferred in the short run.Our TPs are under review.