Smaller China banks predicted to cut down on shadow bank assets

And are likely to lean towards less risky loans.

The number of Bloomberg 1H14 earnings estimates for H-share banks was low at 4-6, and based on these estimates, market expects net profit for state-owned banks and other banks to grow 5-12% YoY and 11-14% YoY for 1H14.

According to a research note from Maybank Kim Eng, it has adopted more conservative assumptions on asset quality.

Hence, with the exception of ABC, CMB, CCB and HUSB, Maybank Kim Eng expects a decline in net profits for H-share banks in 1H14 vs. 1H13.

Here’s more from Maybank Kim Eng:

We forecast net profit for the four banks to grow 6-8% YoY for 1H14.

Key focuses on earnings. Market expects:

(i) a stable NIM in 2Q14 vs. 1Q14 given less competition from money market funds;

(ii) limited improvement in YoY net fees growth for large banks; and

(iii) stable-to-rising new NPL formation and credit costs in 2Q14 vs 1Q14.

We expect slight improvement in net fees growth and project a rise in credit costs in 2Q14 vs. 1Q14.

Key focuses on balance sheet. Market expects:

(i) stable loan growth amount in 2Q14 vs. 1Q14;

(ii) loan-to-deposit ratio to improve slightly in 2Q14 given less severe competition from money market funds;

(iii) CET1 CAR to decline slightly in 2Q14 given the distribution of 2013 final dividends.

We share similar views as consensus.

We expect small banks will reduce their exposure to shadow bank assets (i.e. trust beneficiary rights, asset management plans and non-standardized wealth management products).

We also believe banks will shift towards less risky loans. We see chances of positive surprises in new NPL formation in the coming quarters on the back of a gradual economic recovery.

Strong capital positions should help banks sustain high dividend payouts.