1、Richard.XDaniel.FChiyao.HKatherine.XH.LAttractiveMORGAN STANLEY ASIA LIMITED+Richard Xu, CFAEQUITY ANALYST +852 2848-6729Daniel Fang, CFARESEARCH ASSOCIATE+852 2848-7368Chiyao HuangRESEARCH ASSOCIATE +852 3963-4624Katherine LiuEQUITY ANALYST+852 2239-1924China FinancialsAsia PacificIndustryViewPleas
2、e see our related reports:China Credit Growth Tracker X: Credit Easing CycleComing? Likely the Opposite for Now (25 Jan 2022)China Credit Growth Tracker IX: PBoC to supportdownside risks of credit growth (19 Jan 2022)China Credit Growth Tracker VIII: Rebound in billrediscount rates evidence of gradu
3、al rebound incredit demand (9 Jan 2022)China Credit Growth Tracker VII: How banks andlocal officials view credit growth after CEWC (19 Dec2021)China Credit Growth Tracker VI: The right path butnot the quickest path to tackle challenges; good forbanks (12 Dec 2021)China Bank and Credit Outlook 2022:
4、Steady returnsdespite local challenges, global uncertainty (6 Dec2021)China Financials | Asia PacificPolicy framework to supportfurther bank outperformanceLow chance of worse-than-expected bank earnings and systemrisks should support near-term growth in 2022. As such, weexpect healthy earnings and d
5、ividend growth after years ofNPL digestion to help close the valuation gap between banksand overall market amid the lukewarm macro environment.Recent policy trends and banks guidance confirmed our view of a low chance ofpoor bank earnings and financial system risks, supporting near-term growth.Notab
6、ly, controls on shadow banking, low quality infra projects and long-termproperty market risks remain intact. In addition, most major banks under ourcoverage indicated plans for rational and stable loan growth in 2022, whichindicates no pressure to undertake an irrational pick up in credit support. D
7、espitea very modest rate cut in Jan 2022, we believe quicker than expected Fedtightening will help PBOC and banks to defend pressure from other ministriesfor further rate cuts which should also support banks NIM. Even with 4% GDPgrowth in China (or around 6% nominal GDP growth), we do not believe Ch
8、inascurrent average loan yield of 4.5% and 10 yr government bond yield of 2.8%are high considering US tightening. Also, years of NPL digestion will allow banksto lower their credit costs and provisions despite slower economic growth; thiscombined with less policy guidance on banks earnings, should s
9、upport healthyprofit growth and rebound in ROE among banks.Policy combo with small initiatives to support growth should reduce long-termrisks and concerns on banks, albeit positive impact may take a bit longer tomaterialize. We believe 6%+ GDP growth targets by local governments gavecentral policy m
10、akers confidence in reaching reasonable GDP growth withoutlowering key risk control measures. Hence, there could a combo of smallinitiatives by various ministries and local governments which makes sense to us,although it may take longer to transmit to areas focused on by the market. Inaddition, a se
11、ries of policies on anti-monopoly, data protection and registrationbased IPO process will likely channel more capital to the manufacturing sectorand SME formation over time, and support more sustainable credit demand andhousehold financial asset shift to the banking system, although they may not bem
12、ost friendly to the equity market.Rational policy framework will help close the valuation gap between banks andthe market in our view. We believe the more balanced policy set up to containboth short-term and long-term risks should help close the valuation gapbetween banks and the market in the remai
13、nder of 2022. This in turn shouldsupport further bank outperformance into mid year in our view with theupcoming earnings and dividend season as catalysts.Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research. As aresult, investors should be aware that the firm
14、 may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research. Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section, located
15、at the end of thisreport.+= Analysts employed by non-U.S. affiliates are notregistered with FINRA, may not be associated persons ofthe member and may not be subject to FINRA restrictionson communications with a subject company, publicappearances and trading securities held by a researchanalyst accou
16、nt.1February 14, 2022 09:14 PM GMT Less likely to sacrifice financial system risks and bank earnings tosupport growth this timeOne of the key market concerns on the banks is that they will be used as policy tools tosupport economic growth in the event of an economic slowdown. We believe this risk is
17、notably lower this time, already confirmed by recent policy trends, in our view. This,combined with ahead of the curve NPL digestion and provision, should support healthyprofit growth at China banks despite economic slowdown. Major long-term risk containment measures are still firmly inplaceNotably,
18、 controls on shadow banking, low quality infra projects and long-term propertymarket risks remain intact. The continued focus on risk containment will limit the creditand monetary tools that were used in previous cycles. While this may mean it might takelonger to drive economic recovery during a dow
19、n cycle, it should lead to smaller long-term risks and side effects.Notably, Peoples Daily published an Op-Ed on February 10th with a clear focus oncontinued risk containment. The key takeaways include:More than 99% of credit supply channels are under proper regulations, whichreduces the chance of i
20、rrational credit expansion even if pushed by somegovernment agenciesAccording to our estimates, credit not captured in total social financial (TSF) hasdeclined from 13% of total credits in 2016 to 5% of total credits in 2020, and non-bank credits captured in TSF, which are considered somewhat higher
21、 risk, have alsodeclined from 12% of TSF in 2016 to 7% by 2020.In addition, credits from unregulated lending channels (largely underground/privatelending, some assets on financial exchanges, and effective debt classified as equityinvestments at private funds) reduced to 1% of total system credits, p
22、er our estimate.In light of the complex global environment and Chinas task of reform, China mustbetter balance development and risk, prepare for worst-case scenarios, raise thesense of urgency, and strengthen the ability of risk prevention of mitigation.The Party Central Committee attaches great imp
23、ortance to the prevention andresolution of major risks, and the 19th National Congress of the Communist Partyof China regards the prevention and Resolution of major risks as one of the threemajor battles.Next, China will continue to enhance risk management, strengthen the financial ruleof law, hold
24、accountable the local financial regulators and industry practitioners,ask enterprises to be more responsible for self-help, and strengthen themanagement and quality of financial supervisory agencies.2 Banks remain rational on full year credit growth plans due toregulatory focus on NPL containmentOur
25、 checks with policy makers and banks indicated that NPL and risk containmentremains a very important KPI on banks. Hence, most major banks under our coverageindicated plans for rational and stable loan growth in 2022. This is also reflected in stillconservative property loan growth at banks despite
26、some window guidance from policymakers to increase support to the property industry.Exhibit 1: Credit mix by proportion - credit not captured by TSF has declined notablyMix 2014 2015 2016 2017 2018 2019 2020 2021E 2022ELoan 54.1% 54.2% 53.5% 54.7% 58.0% 59.9% 60.5% 61.7% 62.3%Bond 7.5% 8.2% 8.8% 8.5
27、% 9.1% 10.2% 10.7% 11.2% 11.6%Non-bank credit in TSF 13.9% 12.5% 11.5% 11.9% 10.0% 8.6% 7.3% 6.4% 5.6%Non-bank credit not in TSF 8.3% 10.9% 12.7% 11.6% 8.9% 6.4% 5.3% 4.1% 3.4%Government 16.1% 14.3% 13.5% 13.3% 14.0% 14.8% 16.2% 16.6% 17.1%Source: CEIC, PBOC, CBIRC, China Trust Association, Wind, Mo
28、rgan Stanley Research (E) estimates3 Fed rate hike and tightening will help PBOC and banks defendrate levels in ChinaDespite a very modest rate cut in Jan 2022, we believe quicker than expected Fedtightening will help PBOC and banks defend pressure from other ministries for furtherrate cuts, which s
29、hould also support banks NIM. Even with 4% GDP growth in China (oraround 6% nominal GDP growth), we do not believe Chinas current average loan yieldof 4-5% and 10 yr government bond yield of 2.8% are high, considering our globalmacro team thinks the US 10 yr Treasury yield could pick up notably amid
30、 faster-than-expected inflationary pressure in the US.Exhibit 2: All the financial regulation that has been implemented in recent years, with its accompanying examination processes and focus oncontaining new forms of regulatory arbitrage, will continue to ensure a rational pace of credit growth in C
31、hina, we believe. Within the properregulatory framework, we believe total credit growth will remain at 9-10%, or close to Rmb30tn of total new credits in 2022, based on banks capitallevels and ROE, which determine the pace of growth in banks capital base.Corporate 2015 2016 2017 2018 2019 2020 2021E
32、 2022EManufacturing 2.9% 4.3% 0.3% 0.4% 1.6% 9.1% 12.1% 13.4%Wholesale retail trade 13.5% 14.6% 6.3% -9.2% -1.7% 8.3% 8.5% 8.4%Real estate 20.0% 13.1% 19.0% 9.5% 0.8% 5.4% 2.4% 5.3%Construction (building) 14.8% 11.2% 9.7% -2.6% 9.3% 12.7% 3.4% 4.5%Mining 7.8% -2.8% -4.0% -3.7% -0.7% 6.3% 8.7% 4.7%Fa
33、rming, forestry, animal husbandry & fishery 7.8% 8.9% -5.2% -10.9% 4.1% 9.1% 12.6% 16.1%Overseas 45.7% 21.4% 5.4% 11.1% 4.7% 12.4% 11.5% 4.3%Financial 689.5% 18.2% -5.4% 48.4% 14.9% 12.0% 12.0% 6.0%Other 19.6% 24.4% 7.5% 3.8% 11.6% -6.7% 10.1% 10.6%Subtotal Corp 17.1% 11.1% 6.4% 2.8% 3.5% 7.1% 7.9%
34、8.3%InfrastructureTransport, storage & postal service 11.4% 6.1% 6.0% 4.4% 8.7% 11.5% 10.4% 10.2%Water conservancy, environment & public utility mgt 28.1% 21.0% 8.3% -6.9% 1.2% 5.4% 8.6% 8.4%Electricity, gas & water production & supply 5.5% 3.4% 4.7% 3.4% 6.1% 12.1% 16.2% 14.5%Commercial services 28
35、.2% 29.2% 27.1% 0.9% 4.9% 5.8% 5.4% 3.6%Construction (civil engineering) 18.2% 13.8% 12.4% 2.6% 10.3% 17.2% 10.2% 7.3%Other basic services 9.9% -1.2% -3.7% -10.4% -6.1% 47.8% 6.6% 3.5%Subtotal Infrastructure18.0% 14.7% 12.0% -0.2% 5.1% 10.1% 9.1% 8.0%RetailMortgage 23.9% 37.9% 22.7% 19.7% 16.9% 14.6
36、% 11.4% 10.7%Credit card 40.5% 24.0% 39.2% 21.9% 11.4% 3.1% 11.5% 15.6%Retail operating 3.8% 3.0% 8.1% 12.3% 12.5% 20.0% 11.5% 7.9%Retail consumption 18.8% 25.0% 36.3% 8.7% 7.1% 9.2% 11.4% 15.3%Retail credit18.3% 24.6% 23.0% 16.8% 13.9% 13.4% 11.5% 11.3%GovernmentCentral government bonds 11.4% 12.6%
37、 12.2% 11.0% 12.3% 24.3% 10.0% 10.0%Local government bonds -4.2% 4.1% 7.5% 11.8% 15.4% 20.4% 15.0% 15.0%Government credit1.8% 7.7% 9.6% 11.5% 14.0% 22.1% 12.8% 12.8%Total credit to real economy 15.1% 13.9% 11.4% 5.7% 7.7% 11.6% 9.9% 9.7%GrowthSource: CEIC, PBOC, CBIRC, China Trust Association, Wind,
38、 Morgan Stanley Research (E) estimates4Our US Econ team suggests that US inflation is on course to remain elevated on a 12-month basis through much of this year. The consumer price index (CPI) for January camein above their expectations, with firm inflationary pressures continuing into the newyear.
39、Core CPI is now up 6.0% from a year ago, and the US team preliminarily sees thecore PCE inflation measure, to be released at the end of February, on track to reach5.2%. Both measures, in their forecasts, remain on course to reach peaks in 1Q22 beforebeginning to glide lower in 2Q.Our US Econ team al
40、so thinks that markets are now pricing pretty close to certainty of a50bp start to the hiking cycle, 100bp in hikes in the first half of the year, and nearly a20% chance that more than one of the Feds early hikes will be 50bp in magnitude.While market expectations may be more hawkish than the Fed, t
41、he new inflation dataand its implications make it easier for the Fed to see an open door and walk through it.We believe the below factors will reduce the risk of additional loan rate cuts andprovide further upside for the banks ahead of the dividend season in 2Q22:1) Rebound in economic growth follo
42、wing seasonal pick up in credit extension and frontloading of local government bond issuance in 1Q22.2) Policy debate should moderate following formal announcement of the economicdevelopment plan for 2022. We note that credit spread on corporate bonds in China hasremained stable since 2H21, which co
43、uld indicate low downside risk to GDP growth in1Q22.Exhibit 3: Chinas 10 year treasury yield currently remains at a lowlevel of 2.7%2.02.503.03.504.04.505.0 10 year Treasury yield (YTM, %)Source: CEIC, Morgan Stanley ResearchExhibit 4: New loan yield was 5% as of 3Q21, which we think hasalready drop
44、ped to new lows given recent rate cuts0.001.002.003.004.005.006.004.004.505.005.506.006.507.00 New Loan Yield (%)Avg loan rate: all loans Avg loan rate: general loans Avg loan rate: mortgage Avg loan rate: bill financing (RHS)Source: CEIC, Morgan Stanley Research5Exhibit 5: Credit spread on corporat
45、e bonds (medium term notes) remains stable, which shouldreduce concerns on economic downside risks1001502002503003504004505000501001502002503005-Jan-15 5-Jul-15 5-Jan-16 5-Jul-16 5-Jan-17 5-Jul-17 5-Jan-18 5-Jul-18 5-Jan-19 5-Jul-19 5-Jan-20 5-Jul-20 5-Jan-21 5-Jul-21 5-Jan-22China: 1 year medium te
46、rm notes spread (against 1 year treasury in bps)Medium Term Note (AAA+) Medium Term Note (AAA) Medium Term Note (AA+) Medium Term Note (AA) Medium Term Note (AA-) (Right Axis)Source: CEIC, Morgan Stanley Research6 Still healthy bank earnings despite slower economic growth givenahead of curve NPL dig
47、estion Ahead of the curve NPL digestion and provision and stableleverage in recent years implies that banks can reduce credit costeven when GDP growth slowsYears of NPL digestion will allow banks to lower credit cost and provision despiteslower economic growth; this combined with less policy guidanc
48、e on banks earnings,should support healthy profit growth and rebound in ROE among banks, in our view.According to the CBIRC, the overall banking sector digested Rmb2tn, Rmb2tn, Rmb3tnand Rmb3.1tn of NPLs annually in 2018, 2019, 2020 and 2021, respectively, with thetotal amount exceeding that digeste
49、d in the preceding 12 years (2005-2016). Proactiveand ahead-of-the-curve NPL digestion has helped lower the banking sectors new NPLformation, which reached multi-year lows in recent quarters. Stable total leverage since 2016 implies limited new risk factors,particularly on the back of Rmb15tn of NPL
50、 digestion since 2016Stable leverage since 2016 has also helped pave the way for further reduction in creditcost amid potential slowdown in GDP growth. Except for a 20ppt increase in totalleverage in 2020 due to Covid-19, two waves of notable de-leveraging helped keepleverage steady in recent years,
