Equity Research Financials China Banking Sector Positive (maintained) Wang Wen SFC CE No. BGL298 wangwen@gf.com.cn +86 755 8826 1286 With contribution from the GF A-share research team. GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Differentiated regulations on provisions should form a positive feedback mechanism Investment recommendation The CBRC has published differentiated regulatory requirements on provisions to guide banks to accelerate the identification and disposal of non-performing assets to enhance asset quality. The move is expected to strengthen endogenous capital growth at banks and ease pressure on capital supplementation. With further financial deleveraging and the implementation of these new asset management regulations, the industry will come under pressure in terms of asset expansion (especially at small/medium-sized banks). But as asset quality continues to ease in 2018, we expect NIM at some banks to improve and fundamentals to stabilize and rebound. The sector s valuation is currently at a reasonably low range, and we therefore maintain our Positive rating on the banking sector and continue to recommend large state-owned banks with less exposure to policy risks, better asset structures and relatively cheap valuations, including ICBC (601398 CH/1398 HK), CCB (601939 CH/939 HK), ABC (601288 CH/288 HK) and BOC (601988 CH/3988 HK). In addition, we continue to like CMB (600036 CH/3968 HK) which has gained an advantage in its retail business, as well as small banks with growth potential and strong asset quality, including Bank of Ningbo (002142 CH). Differentiated provision regulations to form positive feedback mechanism 1) The CBRC has also published new regulatory policies on loan-loss provisions for commercial banks, with a relaxation of requirements for banks with sufficient NPL identification and proactive NPL disposal. The intention is to encourage and guide banks to control risks, improve asset quality and accelerate the identification and disposal of NPLs, thereby lowering provision requirements and establishing a dynamic and positive feedback mechanism. 2) According to our estimates, based on 1H17 and 3Q17 data, the minimum regulatory requirements on provision can be lowered for most banks, specifically the minimum requirements could be lowered to 120% for BOC, CMB and Wujiang Rural Bank (603323 CH), and to 130% for ICBC, ABC, Bank of Nanjing (601009 CH), Bank of Ningbo, Changshu Rural Commercial Bank (601128 CH), Wuxi Rural Commercial Bank (600908 CH), Jiangyin Rural Commercial Bank (002807 CH), and Zhangjiagang Rural Commercial Bank (002839 CH). Most joint stock banks fall into the range of 150%, mainly restrained by identification standards for NPLs and disposal efforts for NPLs. Reducing pressure on capital supplementation 1) For banks that meet the requirements to reduce the minimum regulatory requirements on provision, the relaxation will help to ease pressure on provisioning and increase the flexibility in provision adjustment, as well as strengthen endogenous capital growth and alleviate pressure on capital supplementation via retained earnings. 2) Regulatory documents also require that increased profits from reduced provisions should not be used for bonuses or dividends, to ensure that increased profits remain inside banks and to maintain capabilities to weather losses. Risks Bigger-than-expected downside risks in the economy; regulatory policies such as new asset management rules are more stringent than anticipated. This is a summary of a report originally written in Chinese. Please contact us for more information of the original report. The Chinese version shall prevail in the event of any discrepancy between the two versions.
Banks unlikely to alter prudent provision policies to a large extent The new requirements could increase banks flexibility in provision recognition; however, due to countercyclical considerations, we believe banks are unlikely to alter prudent provision policies to a large extent. Theoretically, for banks qualified for minimum provision requirement relaxation, the new policy provides more flexibility in adjustment for provisions. They can reduce provision s appropriately to ease pressure on provisions and to spur profits. However, due to banks prudent considerations on provision policies, we do not expect most banks to reduce provisions immediately. Relatively stable levels of provisions are likely to continue in line with the countercycle principle, to ensure an adequate safety buffer for steady operations in the future. Meanwhile, the regulation should further strengthen behavior management after provision relaxation. For banks with an actual provision lower than 150% or loan provision lower than 2.5%, regulatory authorities at all levels should urge these banks to make use of provision reductions for further disposal of NPLs and require the value of NPLs disposed in the current year to not be lower on a YoY basis, in order to ensure full play of its risk buffer function and to enhance NPL disposal. Figure 1: CBRC requirements for provision s according to loan classification ( Notice on Regulatory Requirements on Adjustments to Commercial Bank Loan-Loss Provision ) NPL/loans past due by over 90 days requirement on provision requirement on loan provision ratio 100% 120% 1.5% [85%-100%) 130% 1.8% [70%-85%) 140% 2.1% Below 70% 150% 2.5% Sources: www.cnstock.com, CBRC, GF Securities Development & Research Center 2
Figure 2: Estimates on provision requirement adjustment according to loan classification (Rmb m) NPL balance Loans more than 90 days overdue NPL/loans more than 90 days overdue requirement on provision coverage ratio China Construction Bank (601939 CH) 188,752 130,350 145% 120% Zhangjiagang Rural Commercial Bank 935 (002839 CH) 716 131% 120% China Merchants Bank (600036 CH) 60,459 48,462 125% 120% Bank of Ningbo (002142 CH) 2,955 2,421 122% 120% Wujiang Rural Commercial Bank (603323 CH) 814 680 120% 120% Agricultural Bank of China (601288 CH) 228,431 193,444 118% 120% Bank of Shanghai (601229 CH) 6,983 5,938 118% 120% Changshu Rural Commercial Bank (601128 927 CH) 798 116% 120% Industrial Bank (601166 CH) 36,623 32,066 114% 120% Industrial and Commercial Bank of China 217,072 (601398 CH) 196,366 111% 120% Bank of China (601988 CH) 147,025 133,325 110% 120% Wuxi Rural Commercial Bank (600908 CH) 837 816 103% 120% Jiangyin Rural Commercial Bank (002807 CH) 1,327 1,360 98% 130% Pudong Development Bank (600000 CH) 63,397 66,716 95% 130% Bank of Beijing (601169 CH) 11,868 13,167 90% 130% China Everbright Bank (601818 CH) 31,061 34,487 90% 130% Bank of Nanjing (601009 CH) 3,187 3,550 90% 130% Bank of Jiangsu (600919 CH) 10,057 11,238 89% 130% Bank of Communications (601328 CH) 65,953 82,923 80% 140% China CITIC Bank (601998 CH) 51,119 65,212 78% 140% Bank of Guiyang (601997 CH) 1,602 2,162 74% 140% China Minsheng Banking (600016 CH) 45,610 66,476 69% 150% Bank of Hangzhou (600926 CH) 4,401 6,522 67% 150% Ping An Bank (000001 CH) 28,037 43,209 65% 150% Huaxia Bank (600015 CH) 22,051 54,747 40% 150% Sources: Wind, Company data, GF Securities Development & Research Center Figure 3: CBRC requirements on provision according to proactive NPL disposal ( Notice on Regulatory Requirements on Adjustments to Commercial Bank Loan-Loss Provision ) Disposed NPLs/Newly formed NPLs requirement on provision requirement on loan provision ratio 90% and above 120% 1.5% [75%-90%) 130% 1.8% [60%-75%) 140% 2.1% Below 60% 150% 2.5% Sources: www.cnstock.com, CBRC, GF Securities Development & Research Center 3
Figure 4: Estimates on provision requirement adjustment according to proactive NPL disposals (Rmb m) Current period NPL write-off New formation of NPL in current period Proportion of disposed NPL to newly formed NPL requirement on provision coverage ratio Wuxi Rural Commercial Bank 160 107 150% 120% Agricultural Bank of China 28,320 25,917 109% 120% China Merchants Bank 9,836 9,174 107% 120% Changshu Rural Commercial Bank 347 341 102% 120% Wujiang Rural Commercial Bank 422 426 99% 120% Bank of China 40,392 41,414 98% 120% Ping An Bank 18,890 21,225 89% 130% China CITIC Bank 18,921 21,460 88% 130% 33,342 86% Industrial and Commercial Bank of China 38,613 130% Bank of Ningbo 1,156 1,346 86% 130% Bank of Beijing 3,965 4,648 85% 130% 237 79% Jiangyin Rural Commercial Bank 299 130% Bank of Nanjing 1,051 1,342 78% 130% Bank of Jiangsu 2,574 3,314 78% 130% Zhangjiagang Rural Commercial Bank 217 282 77% 130% Bank of Guiyang 475 625 76% 130% Huaxia Bank 5,005 6,708 75% 140% Bank of Hangzhou 1,051 1,448 73% 140% Bank of Communications 8,237 11,790 70% 140% China Minsheng Banking 8,700 12,875 68% 140% China Construction Bank 16,388 26,450 62% 140% Bank of Shanghai 775 1,259 62% 140% Pudong Development Bank 14,228 25,447 56% 150% Industrial Bank 2,237 4,444 50% 150% China Everbright Bank 2,036 4,395 46% 150% Sources: Wind, Company data, GF Securities Development & Research Center Figure 5: Requirement on provision from capital adequacy according to the Notice on Regulatory Requirements on Adjustments to Commercial Bank Loan-Loss Provision by the CBRC Capital adequacy ratio (Systemically important banks) Capital adequacy ratio (Non-systemically important banks) requirements on provision requirement on loan provision ratio 13.5% and above 12.5% and above 120% 1.5% [12.5%-13.5%) [11.5%-12.5%) 130% 1.8% [11.5%-12.5%) [10.5%-11.5%) 140% 2.1% Below 11.5% Below 10.5% 150% 2.5% Sources: www.cnstock.com, CBRC, GF Securities Development & Research Center 4
Figure 6: Estimates on the minimum regulatory requirement for provision for different banks based on 3Q17 capital adequacy data (Rmb m) Capital adequacy ratio (3Q17) requirement on provision China Merchants Bank 15.01% 120% Industrial and Commercial Bank of China 14.67% 120% China Construction Bank 14.67% 120% Bank of Communications 13.98% 120% Bank of China 13.87% 120% Wujiang Rural Commercial Bank 13.45% 120% Zhangjiagang Rural Commercial Bank 13.40% 120% Bank of Shanghai 13.27% 120% Jiangyin Rural Commercial Bank 13.11% 120% Bank of Nanjing 12.88% 120% Bank of Hangzhou 12.71% 120% China Everbright Bank 12.67% 120% Agricultural Bank of China 13.40% 130% Huaxia Bank 12.45% 130% Wuxi Rural Commercial Bank 12.26% 130% Bank of Ningbo 12.14% 130% Industrial Bank 11.99% 130% Changshu Rural Commercial Bank 11.88% 130% China Minsheng Banking 11.84% 130% Pudong Development Bank 11.82% 130% China CITIC Bank 11.75% 130% Bank of Guiyang 11.65% 130% Bank of Beijing 11.44% 140% Ping An Bank 11.28% 140% Bank of Jiangsu 10.95% 140% Sources: Wind, Company data, GF Securities Development & Research Center 5
Figure 7: requirement on provision after considering loan classification accuracy, proactive disposal of NPL and capital adequacy ratio NPL balance Loan classification accuracy Degree of proactive disposal of NPL Capital adequacy Minimum Current period regulatory Minimum Minimum Minimum NPL writeoff/new provision requirement on NPL/loans more regulatory Current period New formation regulatory Capital regulatory than 90 days requirement on NPL write-off of NPL in current requirement on adequacy ratio requirement on formation of NPL overdue provision period provision (3Q17) provision in current (estimated) 1 2 3 period max(1,2,3) Loans over 90 days overdue Provision (3Q17) Bank of China 147,025 133,325 110% 120% 40,392 41,414 98% 120% 13.9% 120% 120% 153.6% China Merchants Bank 60,459 48,462 125% 120% 9,836 9,174 107% 120% 15.0% 120% 120% 235.2% Wujiang Rural Commercial Bank 814 680 120% 120% 422 426 99% 120% 13.5% 120% 120% 183.5% Industrial and Commercial Bank of China 217,072 196,366 111% 120% 33,342 38,613 86% 130% 14.7% 120% 130% 148.4% Agricultural Bank of China 228,431 193,444 118% 120% 28,320 25,917 109% 120% 13.4% 130% 130% 194.3% Bank of Nanjing 3,187 3,550 90% 130% 1,051 1,342 78% 130% 12.9% 120% 130% 459.0% Bank of Ningbo 2,955 2,421 122% 120% 1,156 1,346 86% 130% 12.1% 130% 130% 430.0% Changshu Rural Commercial Bank 927 798 116% 120% 347 341 102% 120% 11.9% 130% 130% 302.7% Wuxi Rural Commercial Bank 837 816 103% 120% 160 107 150% 120% 12.3% 130% 130% 210.3% Jiangyin Rural Commercial Bank 1,327 1,360 98% 130% 237 299 79% 130% 13.1% 120% 130% 195.3% Zhangjiagang Rural Commercial Bank 935 716 131% 120% 217 282 77% 130% 13.4% 120% 130% 196.8% China Construction Bank 188,752 130,350 145% 120% 16,388 26,450 62% 140% 14.7% 120% 140% 162.9% Bank of Communications 65,953 82,923 80% 140% 8,237 11,790 70% 140% 14.0% 120% 140% 151.1% China CITIC Bank 51,119 65,212 78% 140% 18,921 21,460 88% 130% 11.8% 130% 140% 161.0% Bank of Beijing 11,868 13,167 90% 130% 3,965 4,648 85% 130% 11.4% 140% 140% 245.7% Bank of Shanghai 6,983 5,938 118% 120% 775 1,259 62% 140% 13.3% 120% 140% 273.1% Bank of Jiangsu 10,057 11,238 89% 130% 2,574 3,314 78% 130% 11.0% 140% 140% 186.2% Bank of Guiyang 1,602 2,162 74% 140% 475 625 76% 130% 11.7% 130% 140% 269.0% China Minsheng Banking 45,610 66,476 69% 150% 8,700 12,875 68% 140% 11.8% 130% 150% 155.3% Industrial Bank 36,623 32,066 114% 120% 2,237 4,444 50% 150% 12.0% 130% 150% 220.4% Pudong Development Bank 63,397 66,716 95% 130% 14,228 25,447 56% 150% 11.8% 130% 150% 134.6% Huaxia Bank 22,051 54,747 40% 150% 5,005 6,708 75% 140% 12.5% 130% 150% 159.8% Ping An Bank 28,037 43,209 65% 150% 18,890 21,225 89% 130% 11.3% 140% 150% 152.1% China Everbright Bank 31,061 34,487 90% 130% 2,036 4,395 46% 150% 12.7% 120% 150% 154.0% Bank of Hangzhou 4,401 6,522 67% 150% 1,051 1,448 73% 140% 12.7% 120% 150% 192.6% Sources: Wind, www.cnstock.com, CBRC, Company data, GF Securities Development & Research Center Note: the capital adequacy ratio and provision for Wujiang Rural Commercial Bank are based on 1H17 data 6
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