1、Asia Pacific Equity Research 02 August 2010 China Banks Finance Street Newsletter, Issue 1 China Banks Samuel ChenAC (852) 2800-8557 Cindy Xu (852) 2800-8502 Sunil Garg (852) 2800-8518 J.P. Morgan Securities (Asia Pacific) Limited See page 16 for analyst certification and important disclosures, i
2、ncluding non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
3、as only a single factor in making their investment decision. Figure 1: China banks share price performances vs. MSCI China 4) CBRC may announce regulation on bank-trust company business in the near future; 5) NDRC may issue new guidance on service charges of commercial banks. Company news: 1) ICBC a
4、nnounced no more than a Rmb45bn rights offering in A+H shares at max.0.6 right for each 10 shares and the plan to privatize ICBC (Asia). 2) CCB A+H rights issue of max. Rmb75bn was approved by CBRC. 3) CSRC granted approval to Everbright Bank for its Rmb20bn A-share IPO. Open market operation: Total
5、 PBOC bill issuance in the week of July 26 was Rmb170bn, largely similar to that of the previous week. Net of Rmb86bn PBOC bills matured during the week, net drain was Rmb84bn, 17% lower w/w. With the ripple effect of liquidity injection by PBOC in May and June, market liquidity significantly improv
6、ed, leading to further pullback in SHIBOR rates. O/N SHIBOR rebounded 2bps on the last day of July, as banks usually boost liquidity at monthly end in order to meet regulatory requirements. Share price performance: China banking was trading flattish last week but delivered a strong rally on Monday l
7、ed by Citic-H, CMB-H and SPDB. H-share banks were mostly up by 2-3% and CMB-H rallied by 5.9% w/w. All H-share banks outperformed MSCI China during the period. In A-shares, CMB-A, Minsheng-A and Huaxia all rose by more than 3%, while the sector as a whole largely moved in tandem with CSI 300 index.
8、Valuation and trading view: H-share banks are trading at 10x 10E P/E and 2x 10E P/B, slightly less than 1 standard deviation below historical mean forward 12M P/B and P/E. A-shares are trading at c.10% discount to H share banks average valuation. We continue to expect a rebound in the sector. As ear
9、nings seasons will soon start, we expect relative outperformance may continue. Investors should focus on stocks with low valuation but may likely offer earnings surprise or price re-rating. We prefer Citic-H, BOC-H, and BoComm-H. In our A-share coverage universe, we would pay more attention to mediu
10、m-sized banks including SPDB, Minsheng-A and CMB-A. 2 Asia Pacific Equity Research 02 August 2010Samuel Chen (852) 2800-8557 Industry news CBRC stress test on property lending showed NPL may increase by 2.2% Recent stress tests conducted by CBRC revealed that if property price fall by 30% from Apri
11、ls level and interest rates are 108bps higher, the NPL ratio on property loans of the sample banks would increase by 2.2%. The situation in rural commercial banks could be worse - their property NPL ratio may rise by 3.5%. As CBRC mentioned, assumptions used are conservative and this represents seve
12、re stress scenario, which is not very likely to happen in our opinion. While we would not be surprised to see property prices possibly fall by 20-30% in some cities, especially in a few major tier-1 cities, we do not expect property-related NPL to rise as much as stress test results showed. Stress t
13、ests are based on many assumptions, and outcome in reality could be very different. In fact, history already proved banks resilience toward property market correction. During 2008, Chinas property market had experienced a notable pullback in both volumes and subsequently prices in many cities. Yet b
14、anks asset quality performance was much better than many investors feared. The deterioration in property-related NPL is much less than 2% mentioned in CBRCs stress tests. Meanwhile, most listed banks under our coverage have largely delivered better results from stress tests. In the same scenario, NP
15、Ls of property development loans of listed banks may rise by 0.9-1.2%, while mortgage NPL increase would be notably smaller, thanks to their prudent risk management and a low LTV on existing mortgage book. In our view, low leverage in Chinese households (low LTV on mortgage, improved leverage on rea
16、l estate developers since 2009) and banks relatively cautious view on property development loans over the past five years, significantly helped risk control on property-related loans. CBRCs ongoing cautious stance on Chinas property lending pushed banks to tightly manage their property development e
17、xposure. Importantly, while balances continued to grow, many banks are lending to less number of borrowers in the property development sector. That said, given the risk of prolonged credit tightening measures targeting the property sector, we do see risk of liquidity stress in some developers. Based
18、 on PBOC data, total new property development loans increased in 2Q10 was Rmb121.6bn, 62% less than 1Q10. New mortgage was also reduced by 22% Q/Q to Rmb409.6bn. In our view, overall cash flow may be more stretched for many developers in 4Q10, potentially leading to some defaults. However, we believ
19、e the impact to banks may be much more modest than CBRCs stress test may suggest, thanks to good collateral. In the table below, assuming 1% additional of the incremental mortgage over the past 12 months defaults, and 3% additional of 1H10E outstanding property development loans defaults, as seen in
20、 the table, downside to 10E earnings would be about 3-4% on average, with potentially bigger impacts in some smaller banks. This, however, assumes every bank would have the same additional default rates, which may not be true. 3 Asia Pacific Equity Research 02 August 2010Samuel Chen (852) 2800-8557
21、 Table 2: Assessing earnings impact from possible new additional property-related NPLs Rmb bn ICBC CCB BOC BoCom CMB Citic Minsheng SPDB SZDB Huaxia Total 1H09 mortgage balance 699 715 608 148 195 76 93 114 50 22 2,719 1H10E mortgage balance 979 972 856 234 306 116 106 157 68 31 3,825 Add. NPL 1%*1Y
22、r new mortgage 4.2 3.9 3.7 1.3 1.7 0.6 0.2 0.7 0.3 0.1 16.6 new mtg NPL as % of 1H10 mortgage 0.43% 0.40% 0.43% 0.55% 0.55% 0.52% 0.18% 0.42% 0.39% 0.41% 0.43% 10E property corporate loans 460 380 266 142 69 41 110 93 27 37 1,625 new NPL 3%* 1H10E balance 13.8 11.4 8.0 4.3 2.1 1.2 3.3 2.8 0.8 1.1 48
23、.8 Total additional property NPLs 18.0 15.3 11.7 5.6 3.8 1.8 3.5 3.4 1.1 1.2 65 10E bank total new NPLs in models 45.5 23.1 34.0 9.7 3.2 3.9 3.2 3.4 1.6 2.6 130 10E NPL balance 81.7 67.0 70.8 25.1 9.9 9.5 7.7 7.7 2.6 6.3 288 As % of 09 loans 0.31% 0.32% 0.24% 0.30% 0.32% 0.17% 0.40% 0.37% 0.30% 0.29
24、% 0.30% Additional provisioning 7.7 6.5 4.7 2.4 1.4 0.7 1.7 1.5 0.5 0.6 27.7 Top line impact 1.0 0.8 0.6 0.3 0.2 0.1 0.2 0.2 0.1 0.1 3.6 Estimated Net 10E earning impact (3.2%) (3.3%) (3.0%) (4.0%) (3.6%) (2.5%) (7.1%) (5.9%) (4.9%) (6.7%) (3.5%) Source: J.P. Morgan estimates. For a detailed discuss
25、ion on property tightening, investors may refer to our earlier report “China banks tighter mortgage policy to impact near-term share price performance, but not operating performance“, published on 19 April 2010. PBOC reiterated moderately loose monetary policy in view of lower PMI in July Chinas NBS
26、 manufacturing PMI eased again in July, to register the lowest level in 17 months, but still staying above the expansionary threshold of 50. This suggests that industrial activity growth has decelerated steadily, along with the monetary normalization and policy curbs targeting the property market an
27、d local government investment activities. On the back of lower PMI, as the market expected, PBOC stated to maintain the stance of moderately loose monetary and expected 2010 full-year loan growth to be within Rmb7.5trn as planned at the beginning of the year. During 1H10, total new loan increase alr
28、eady hit Rmb4.6trn, accounting for 61% of annual growth target of Rmb7.5trn. Given typical seasonality in loan growth, its indeed entirely within the markets and our expectation that credit growth in 2H10 will further slow down. The quota of “3-3-2-2“ in quarterly new loan increase set up by CBRC/PB
29、OC earlier this year indeed already reflected a slowdown in 2H10. We do not think there is any major change to loan growth forecasts. While slowdown in fixed asset investment and industrial production may reduce credit demand in some sectors, we believe there is still enough demand to fulfill Rmb7.5
30、trn loan growth targets. On the other hand, although we believe the policymakers are ready to be flexible in monetary and fiscal policies, we do not expect any significant policy change, or major relaxation in some monetary/credit tightening measures. In fact, rather than loan growth, PBOC and China
31、 banks are more focusing on adjusting loan mix. During 1H10, SME loans presented higher growth rate than average, accounting for nearly 41% of total loans, according to PBOC. Credit resources have also been used more balanced across China as loan growth to central 4 Asia Pacific Equity Research 02 A
32、ugust 2010Samuel Chen (852) 2800-8557 and western areas are outpacing eastern areas. In 1H10, growth rates in property developer loans have significantly fallen as a result of property tightening policies. Under limited loan quota, more banks, small and medium-sized joint stocked banks in particula
33、r, have switched their business focus to SME and retail consumption loans for higher loan yield. Notably, Minshengs Shang Dai Tong loans balances even doubled in single 2Q10to over Rmb80bn. This may help improve overall credit pricing and thus support sequential NIM trend. Despite sharp slippage in
34、property transaction volumes since April and an expected sharp decline in new mortgage growth, we believe banks are still on the track to deliver nearly 30% y/y mortgage growth for the entire 2010, (or about Rmb1.4trn, similar to 2009s annual increase). In 1H10, mortgage balance in China has grown b
35、y over Rmb9.3trn. Thus a full-year growth of Rmb1.4trn already implied a 50% decline h/h in new mortgage increase. Table 3: Breakdown of annual Rmb loan increase by types Rmb bn 2007 2008 1H09 h/h 2009 1H10 H/H % growth 2010E 10E y/y 09A y/y Personal 1,085 794 1,075 2,473 1,948 42% 2,700 33.0% 43.3%
36、 Consumer 813 498 666 1,812 1,206 26% 1,700 30.7% 48.7% Personal business 272 296 409 661 742 16% 1,000 37.8% 33.3% Enterprise/establishment 2,549 4,137 6,323 7,149 2,679 58% 4,800 15.1% 29.0% ST working capital 1,277 1,190 1,341 1,403 328 7% 900 7.5% 13.2% Discounted bills (394) 646 1,707 457 (651)
37、 -14% (200) -8.4% 23.7% MLTM loans 1,681 2,188 3,169 4,988 2,970 64% 4,100 24.6% 42.8% Others (14) 113 106 300 32 1% 100 13.9% 72.1% Total Rmb loan increase 3,634 4,931 7,398 9,622 4,637 100% 7,500 18.8% 31.7% Source: J.P. Morgan estimates. China banking sector continued healthy growth with double d
38、igit declines in NPL balance and ratio in 2Q10 On July 22, CBRC disclosed the key data of the China banking sector. Asset growth in the China banking sector slowed down to 18% y/y in 2Q and system assets reached Rmb87 trillion. Growth rates of city commercial banks and joint stock banks remained rob
39、ust at 33% y/y and 25% y/y respectively, which help further expand their aggregated asset market shares by 0.5% in the second quarter. In contrast, the “big 5” state-controlled commercial banks saw further slowdown in growth to 13% y/y vs. 17% in 1Q10, but still accounted for 50% of total sector ass
40、ets. On a sequential basis, state-controlled commercial banks grew by 1.5% q/q, while joint-stock commercial banks and city commercial banks grew by 6.9% and 10.3% q/q, respectively. Due to accumulated impact of monetary tightening, system liquidity is tighter. An obvious slowdown in liabilities gro
41、wth reflects deposit growth slowdown during 2Q10. Total liabilities grew by 3.5% q/q during 2Q10. The big state-controlled banks have the lowest growth rate of 13% y/y since 2007 due to the competition from small banks who have been aggressively taking deposits, given the pressure to lower L/D ratio
42、. 5 Asia Pacific Equity Research 02 August 2010Samuel Chen (852) 2800-8557 Figure 2: Total asset growth of China banking sector Rmb Bn 19.0%17.2%18.6%25.1% 27.7% 26.9% 26.3%21.3%18.3%020,00040,00060,00080,000100,0002Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q100.0%10.0%20.0%30.0%State-controlled bank
43、 Joint-stock CBs City commercial banksOthers Total asset grow th rateSource: CBRC. Figure 3: Total liabilities of China banking sector Rmb Bn 18.4%16.6%18.2%25.4% 28.2% 27.5% 26.8% 26.8%18.0%020,00040,00060,00080,000100,0002Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q100.0%10.0%20.0%30.0%State-controll
44、ed bank Joint-stock CBs City commercial banksOthers Total liab. grow th rateSource: CBRC. Meanwhile, the asset quality of China banks in 2Q remained benign. Sectors total NPL balance was down by Rmb15.2bn (-3.2% q/q) and system aggregate NPL ratio improved by 10bps to 1.3%. The improvement was mainl
45、y reflected in the reduction of the amount of subordinated and doubtful loans. Meanwhile, system aggregate NPL coverage ratio further increased from 170% to 186% in 2Q10, well above regulatory requirement of 150%. State-controlled banks NPL balance decreased by Rmb17bn and NPL ratio was 1.46%, 13bps
46、 lower than 1Q10. Joint stock banks NPL balance saw small reduction at 2bn, leading to low NPL ratio of 0.8%. Although NPL balance rebounded slightly for city commercial banks and rural commercial banks, both managed to have lower NPL ratios than 1Q10 as well. Figure 4: NPL of China banking sector R
47、mb mn/% 1,265560 550 518505 497 4704555.492.422.041.771.66 1.581.41.302004006008001,0001,2001,4003Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q100.01.02.03.04.05.06.0NPLbalance NPL ratioSource: CBRC. Figure 5: Average NPL coverage ratio of China banking sector % 116.4123.9134.3144.1155.0170.2180.605010015020
48、04Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10Source: CBRC. CBRC may announce new regulations on bank-trust company business in the near future After the temporary suspension of bank-trust business on July, 3, CBRC is actively working on a new regulation to specify the business management of trust loan, etc. a
49、nd capital requirement for qualified trust companies. According to Sina Finance, the co-operation between banks and trust companies may be resumed after the regulation announced. 6 Asia Pacific Equity Research 02 August 2010Samuel Chen (852) 2800-8557 Bank trust products have gained popularity among the mass affluent market and have been growing very rapidly
