银行行业：重拾信心，上调至超配.docxVIP

Investment highlight: Last December, we downgraded our banking sector rating from Overweight to Equalweight due to three major concerns, namely narrowing net interest margins (NIMs), weakening asset quality, and rising capital pressure. Since then, the sector has corrected by 1%, underperforming the HSCEI by 7ppts. However, we note marginal improvement for all three factors, and thus upgrade our sector rating from Equalweight to Overweight. Easing NIM pressure. We were concerned about narrowing NIMs due to a weakening loan structure amid China’s economic downturn and monetary easing last December. However, we note preliminary signals of economic stabilisation and a deceleration of monetary loosening since March. This resulted in improving effective loans demand and rising risk appetite from banks, which led to rising loan yields. The proportion of medium- to long-term enterprise loans reached 40% in January- April (vs 36% in 2018, 46% in 2017, and 33% in 2016), while the proportion of medium- to long-term household loans reached 25% (vs 31% in 2018, 38% in 2017, and 45% in 2016). The sector average NIM increased to 1.64% in 1Q19 (vs 1.58% in 2018 and 1.51% in 2017). We see limited room for further monetary easing, given the policy stance implied by the politburo on 19 April, which stressed the importance of structural deleveraging. As monetary loosening slows, we expect the rising interest rate curve in the interbank market and bond market to improve the pricing power of bank loans and ease the NIM pressure in 2019. Controllable asset quality risks. We were also concerned about increasing asset quality risks due to rising economic downward pressure and loan exposure to private firms. However, thanks to continuous loan structure adjustments and non-performing loan (NPL) disposal, the sector average NPL ratio decreased to 1.53% in end-1Q19 (vs 1.55% in end-2018 and 1.60% in end-2017), while the coverage ratio rose to 208% in end-1Q19 (vs 202% and 177%, respectively).