Equity Research Financials Jan 17, 218 Chinese Banking Sector Positive (maintained) Strong loan demand expected; intensified competition in deposits Wang Wen SFC CE No. BGL298 wangwen@gfgroup.com.hk +86 755 8826 1286 With contribution from the GF A-share research team. GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Maintain positive rating on the Chinese banking sector Continued financial deleveraging and strengthened regulation will put pressure on asset expansion at small and medium-sized banks. Given gradual interest re-pricing of assets and better liability management, overall NIM should improve steadily in 218. Banking asset quality will also improve amid an economic recovery, helping to enhance the sector s valuation. Given steadily improved fundamentals as well as investment opportunities brought about by valuation enhancements, we maintain our Positive rating on the Chinese banking sector and continue to recommend banks with strong fundamentals, such as China Merchants Bank (636 CH/3968 HK) and Bank of Ningbo (2142 CH), as well as large state-owned banks such as ICBC (61398 CH/1398 HK) and ABC (61288 CH/1288 HK), given their smaller exposure to policy risks, controllable cost of debt and stable dividend yields. 217 Dec money supply and lending data The PBoC issued Dec money supply and lending data recently. China s M2 money supply increased by 8.2% YoY in Dec, compared with 9.1% the previous month and 11.3% last Dec. M1 rose 11.8% YoY in Dec, compared with 12.7% in Nov and 21.4% last Dec. Rmb loans increased by Rmb13.53trn in 217, up 12.7% YoY while Rmb deposits increased by Rmb13.51tn, up 9% YoY. The weighted average inter-bank lending rate was 2.91% in Dec,.1% lower than Nov and.47% higher than last Dec. The weighted average pledged repo rate was 3.11% in Dec,.11% and.55% higher than Nov and last Dec respectively. Significant decrease in new Rmb loans in Dec New Rmb loans of Rmb584.4bn in Dec was down significantly from Rmb1.12trn in Nov and Rmb1.4trn last Dec, mainly due to: 1) bank credit being in shortage at the end of the year as the strengthened regulatory environment in 217 led financing needs to be shifted back onto statements; 2) suppressed credit expansion at banks under the pressure of year-end assessments. New Rmb loan volume in 217 came in at Rmb13.53trn, up 12.7%. Loan structure: medium to long-term loans accounted for the majority Medium/long-term Rmb loans continue to account for the majority: 1) new household loans totaled Rmb329.4bn with medium/long-term loans (mortgages) contributing nearly 95%. 2) New corporate loans came in at Rmb243.2bn with medium/long-term corporate loans contributing over 8%. Strong Rmb loan demand expected in 218 We expect strong Rmb loan demand in 218 as 1) externally, the global economy continues to recover while central banks worldwide are gradually entering an interest rate hike cycle, among which the Fed is expected to raise rates three times in 218. 2) Internally, a stabilized economy, rising inflation expectations and the large numbers of ongoing infrastructure projects should provide strong support for financing needs. 3) Under strengthened regulation, nonstandard investments will continue to be shifted back onto statements and issuance rates of bonds are expected to remain higher than benchmark loan rates. 4) Banks have abundant project reserves for early 218 and asset pricing ability is expected to improve further. Intensified competition in Rmb deposits Dec new Rmb deposits came in at a negative Rmb792.9bn, down significantly from Rmb2.36trn in Nov, mainly due to the substantial decline in fiscal deposits and deposits of non-bank financial intermediaries. Fiscal deposits experienced intense deliveries at the fiscal year-end, leading to a decrease of Rmb1.23trn in Dec. Deposits of non-bank financial intermediaries recorded a decline of Rmb912.9bn under restrictions relating to multi-layer investment structures from new asset management regulations.
Jan 17, 218 We expect competition for deposits to be more intense in 218 as it becomes the biggest constraint of credit expansion. The cost of deposits is expected to increase as inter-bank interest rates rose substantially in 217 and remained high under strengthened regulation. Positive fiscal policy indicates strong financing demand from government and infrastructure projects. Overall, we expect divergent sub-sector performance in deposit competition. Large state-owned banks with extensive networks and good government relations, and banks with strong retail banking businesses (such as China Merchants Bank) could gain competitive strength. NIS at these banks is expected to see an ongoing recovery while asset quality will improve steadily with strong industrial policy support for their clients. M2 growth hits at annual low M2 growth came in at an annual low of 8.2% in Dec, down 3.1% YoY and.9% MoM, mainly driven by constrained money creation due to financial deleveraging and strengthened regulation. M1 growth decreased by.9% MoM and 9.6% YoY. Total financing was Rmb1.14trn in Dec, down by Rmb458.2bn MoM, mainly driven by a significant decrease in Rmb loans. New off-balance-sheet financing rebounded to Rmb183.8bn, mainly due to some banks grasping the last opportunity with non-standard investments before the new asset management regulation was formally launched. Direct financing remained weak in Dec with monthly corporate bond financing of Rmb62.1bn and monthly equity financing of Rmb79.2bn. Risks Domestic GDP growth is weaker than expected; sharp deterioration in banking asset quality; regulations more stringent than expected. 2
Jan 17, 218 Figure 1: Significant decline in Rmb deposits 3, 25, 2, 15, 1, 5, -5, -1, New Rmb deposits New Rmb loans Figure 2: Medium to long-term loans accounted for the majority (households) 7, 6, 5, 4, 3, 2, Figure 3: Medium to long-term loans accounted for the majority (corporates) 2, 15, 1, 5, 1, -1, Loans to households: short term Loans to households: medium-to-long term -5, Paper financing Loans to corporates: short term Loans to corporates: medium-to-long term -2, -1, 217-1 217-2 217-3 217-4 217-5 217-6 217-7 217-8 217-9 217-1 217-11 217-12 217-1 217-2 217-3 217-4 217-5 217-6 217-7 217-8 217-9 217-1 217-11 217-12 Figure 4: Rmb deposits structure 4, Figure 5: Rmb loans structure 2, 3, 2, 15, 1, 1, -1, -2, New deposits of households New deposits of non-financial enterprises New fiscal deposits New depsosits of non-bank institutions 5, -5, Loans to corporates Loans to households loans to non-bank financial institutions 217-1 217-2 217-3 217-4 217-5 217-6 217-7 217-8 217-9 217-1 217-11 217-12 217-1 217-2 217-3 217-4 217-5 217-6 217-7 217-8 217-9 217-1 217-11 217-12 3
214-1 214-4 214-7 214-1 215-1 215-4 215-7 215-1 216-1 216-4 216-7 216-1 217-1 217-4 217-7 217-1 Sector report Jan 17, 218 Figure 6: New off-balance-sheet financing 14, 12, 1, 8, 6, 4, 2, -2, -4, -6, New entrusted loans New trust loans New undiscounted bankers acceptances Figure 7: Money supply 3 25 2 15 1 5 M1 YoY M2 YoY 4
Jan 17, 218 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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