China banks' profits could grow a "decent" 12% in 3Q

Big banks like ABC/CMB expected to fare better than the rest, notes Barclays.

Here's more from Barclays Research:

H-share China banks will start reporting 3Q12 results on 25 October. We forecast 3Q profit growth to be decent at 12% y/y, although down from 24% y/y in 2Q. We expect ABC/CMB to deliver the highest profit growth of 15% y/y among the H-share banks, while BOC/CITIC grow the slowest (8%/5%).

Three key trends: 1) differentiating NIM trend – large banks hold up well but joint-stock banks continue report NIM compression, 2) fee income growth still weak, and 3) reported NPLs stable. While we still hold range-bound view on Chinese bank stocks on concerns of interest rate deregulation and China's weakening economy to cap re-rating in the medium-term, decent 3Q results and macro catalysts including QE3, stabilizing European debt crisis and increased political visibility could support China banks shares to higher level of their trading range in the next few months. ICBC (OW) and BOC (OW) remain our top picks.

Outperformers vs. Underperformers in 3Q: We expect profit growth to be relatively stable at big banks (11% y/y in 3Q vs 13% in 2Q) while JSB banks could see faster growth deceleration (12% in 3Q vs 24% in 2Q). Big banks could report stable NIMs and credit costs, while JSB banks could report continued NIM declines. We expect ABC/CMB to deliver the highest y/y profit growth. BOC could once again report a slower profit growth but the growth gap vs. other banks could narrow. With Citic's management change, we suspect the bank could take a larger credit charge to narrow its gap vs. the 2.5% reserve/loan requirement. As a result, it could surprise the market on the slow profit growth in 3Q.

Weak fee income growth: We expect fee growth to be 9% y/y in 3Q. A sluggish equity market, regulatory restrictions on fees, and weakening trade surplus would negatively affect the fees especially consultancy and trade finance-related fees. We expect BOC and ABC to report a negative y/y fee income growth in 3Q.

Overdue loans still up but at a slower pace while NPLs largely flat: While banks are not required to report 1-90 day overdue loan statistics in the quarterly reporting, we believe they are still rising but at a slower pace. We expect NPL amount to have increased moderately while NPL ratio remains stable. Minsheng could report the highest increase on NPLs due to its higher exposure on SME lending, by our forecast.

Share prices likely move up into results season and 18th party congress on Nov 8: China banks' shares could move up on QE3, stabilization of European debt crisis as well as in the run-up to China's party congress on Nov 8. We believe the decent 3Q results could also support bank stocks in the near term. However, overhangs of slowing economic growth, interest risk deregulation and potential NPL risk could limit upside.