Don't be fooled by Chinese banks' improving NPLs

Asset quality is likely to deteriorate again as monetary policy normalises.

UOB KayHian expects banks to report growth of 1.5% yoy, mainly driven by lower credit costs on monetary loosening and asset growth. Mid-sized banks may see upside surprises in earnings given their stronger fee growth.

"That said, we continue to expect most banks to report earnings declines in 2016 on a full-year basis."

Here's more from UOB KayHian:

Easing of asset quality pressure unlikely to be sustainable. Given that the sector saw Rmb4.61t in new loans and Rmb6.59t in total social financing in 1Q16, we expect banks to report moderate increases in NPL ratios as corporates are likely to have seen better liquidity in the quarter.

However, we believe the improving NPL trend will be shortlived because asset quality is likely to deteriorate again as monetary policy normalises. As regulators continue to roll out new NPL-supportive measures in the form of debt-to-equity swaps and NPL securitisation, we believe the credit cycle is still far from over.