In the third of our Testing the ‘Impossible Trinity’ series, we assess the dividend
sustainability of banks in our coverage, based on adjusted book value incorporating
the margin risk of local government debt and additional losses in bank credit
portfolios (see Parts I and II in the series).
Our analysis suggests that 1) adjusted dividend yields of A/H covered banks will
come in at ~4%/6% in 2023E, ~2ppt lower than before adjustment, and 2) dividend
payout targets could come under increasing pressure, on weaker earnings growth
and the need to maintain high CET1 ratio targets. Based on our framework, we see
potential for BoCom and Hua Xia to miss dividend payout targets in 2023E,
Industrial Bank in 2024E, and ICBC and ABC in 2025E (Exhibit 10
-Exhibit 11).
Drawing parallels from the 2013-15 cycle, we note that banks struggled to maintain
dividends at the beginning of the downcycle then gave up dividend targets in order
to prioritize capital and risk buffers when the trinity of dividends, capital and
provisions could not be well balanced. We expect banks to face similar challenges in
2023-25E, with a similar dividend pattern to repeat.
Consensus believes that large banks are trading at distressed valuation multiples
(average ~2.5x P/PPOP), posing upside share performance risk. Fundamentally,
however, we belie
ve a further multiple correction is likely, driven by margin risk from
local government debt and more losses within bank credit portfolios. This could
weaken earnings growth, pressure capital accumulation and thus pressure dividend
payout levels. We revise down our large bank PPOP estimates by -5%/-6% in
23E/24E reflecting margin risk. Our CAMELOT-based target P/PPOP (reflecting bank
PPOP growth, ROE, capital and dividend levels) is cut to 2.4x/2.2x for A/H shares in
order to capture squeezed bank earnings and notably incorporate dividend payout
risk, and therefore we revise our A/H 12m TPs by an average of -5%/-1%.
That said, PSBC‘s peer-leading earnings forecasts and stable dividend payouts are
underappreciated, in our view, and we upgrade PSBC-A/H to Buy from Sell, on
target P/PPOP of 3.75x/3.25x vs. 2.75x/2.25x prior and 3% PPOP increase vs. prior,
with new 12m TPs of Rmb6.03/HK$5.8 or 21%/19% upside. At the same time, we
downgrade ABC-A/H to Sell from Neutral, on target P/PPOP of 1.875x/1.6x vs.
Shuo Yang, Ph.D.
+852-2978-0701 | shuo.yang@gs.com
Goldman Sachs (Asia) L.L.C.
China Financial Services
Testing the ‘Impossible Trinity’ Part III: Increasing dividend
risk; PSBC up to Buy, ICBC/ABC/Industrial down to Sell
4 July 2023 | 11:21PM HKT
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