1、Richard.XJoey.XKatherine.XH.LLu.LuMorganSJohn.CIn-LineMORGAN STANLEY ASIA LIMITED+Richard Xu, CFAEQUITY ANALYST +852 2848-6729Joey XuRESEARCH ASSOCIATE+852 3963-0337Katherine LiuRESEARCH ASSOCIATE +852 2239-1924Lu LuEQUITY ANALYST+852 2239-1568John CaiEQUITY ANALYST +852 2239-1885China FinancialsAsi
2、a PacificIndustryViewChinas Financial Cleanup - Roadmap VII | Asia PacificManaging city bank risks; anecessary step with manageableliquidity risksWe believe dealing with city/rural bank risks is a necessarystep in the financial cleanup process. We think regulators canstrike a balance between driving
3、 rational asset growth atsmall banks and keeping high risk credit growth in check, whilemaintaining stable overall liquidity.We expect the takeover of Baoshang Bank to help set up a market-oriented riskassessment process in the interbank market. While accelerated risk digestionand deleveraging at so
4、me city/rural banks could follow, we see regulators aswell prepared, with the creation of direct emergency credit lines to all banks, thedeposit insurance program, a regional-based liquidity monitoring system andnotably slower asset growth and less liquidity mismatching at many small banks.Around Rm
5、b4.8tn of city and rural banks wholesale funding base could face apotential decline, which we see as quite manageable. As banks will likely bemore selective in the interbank lending business, we see downside risks at thewholesale funding base for three types of rural/city banks: 1) those with assets
6、 inregions where the GDP growth slowdown has been notable, 2) banks with nofinancial reports in recent years and 3) banks downgraded by rating agencies inrecent years. Our analysis shows that Rmb4.8tn of the wholesale funding basefor small banks, which is 30% of their total wholesale funding base an
7、dsupports 7% of their total assets, will face some downside pressures. In light ofthe manageable impact in 2016-18, we see some further moderation in city/ruralbank asset growth as also manageable.We see limited downside risk to our forecast of 9.5% growth in total financialcredits (TSF + government
8、 bonds + all shadow credits), implying 11.5% growthin reported TSF, as we had factored in a further slowdown in small bank assetgrowth given high NPL and capital constraints. We think the Baoshang Banktakeover will slow city/rural banks asset growth to 5% in 2019 from 10% now.We think the effective
9、removal of the implicit guarantee for city/rural banks is amore permanent and market-oriented solution to keep rapidly expanding banksand high risk credit growth in check than the various regulatory measures overthe past few years have been. This will also reduce long-term systemic risks andsector N
10、PL formation over time. From an earnings perspective, we think it willbenefit NIM for state-owned and shareholding banks but not city banks underour coverage. We still like a few market oriented mid-sized banks such as ChinaMerchants Bank, Industrial Bank and Ping An Bank. We also like PSBC.Morgan S
11、tanley does and seeks to do business withcompanies covered in Morgan Stanley Research. As aresult, investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research. Investors should considerMorgan Stanley Research as only a single fac
12、tor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section, located at the end of thisreport.+= Analysts employed by non-U.S. affiliates are not registered withFINRA, may not be associated persons of the member and may notbe subje
13、ct to NASD/NYSE restrictions on communications with asubject company, public appearances and trading securities held bya research analyst account.1June 16, 2019 08:00 PM GMT每 日 免 费 获 取 报 告1、 每 日 微 信 群 内 分 享 7+最 新 重 磅 报 告 ；2、 每 日 分 享 当 日 华 尔 街 日 报 、 金 融 时 报 ；3、 每 周 分 享 经 济 学 人4、 行 研 报 告 均 为 公 开 版 ， 权
14、 利 归 原 作 者所 有 ， 起 点 财 经 仅 分 发 做 内 部 学 习 。扫一扫二维码关注公号回复：研究报告加入“起点财经”微信群。 Report in five chartsExhibit 1: Regulators have consistently taken various measures over the past few years, such as tightening regulations, establishing variousprocesses, and managing expectations, that have laid a solid foundat
15、ion for the takeover of Baoshang Bank and the potential slowdown of assetgrowth at some banks2014 2015 2017 2018 2019PBOC branches closelymonitor local interbankliquidity and provideStanding Lending Facility(SLF) liquidity support.Deposit insurancescheme. Financial StabilityCommittee set up toenhanc
16、e regulatorycoordination.Stricter bank shareholdingentry and management. Expectation building:1) Wang Zhaoxing on liquidity risk managementfor mid/ small banks;2) Guo Shuqing on market-oriented exitmechanism for high risk financial institutions;3) China Banking and Insurance RegulatoryCommission Par
17、ty Committee on dealing withhigh risk mid/ small banks and insurance firms.Liquidity risk managementrules announced. Thoughtful design of the takeover procedure,including prompt liquidity injection.Large amount risk exposurerules announced. Deposit Insurance Fund Management Co.,(DIFM) set up.Targete
18、d Required Reserve Rate cut for mid/small banks in JunSource: PBOC, CBIRC, Morgan Stanley ResearchExhibit 2: City and rural banks asset growth has significantlydecelerated, from more than 25% in 2016 to 10% in 2018Source: CEIC, Morgan Stanley ResearchExhibit 3: Rmb4.8trn of wholesale funding, 1.8% o
19、f total assets ofbanking industry, at small banks in provinces with notably slowingeconomic growth could face downward pressureSource: CEIC, Wind, Morgan Stanley Research*Regional banks also includes banks such as those that have not made regular disclosures and those thathave been downgraded recent
20、ly2Exhibit 4: We think potential slower asset growth at small banks willbe offset by slightly higher asset growth at big/midsized banks, stillresulting in around 9.5% total financial credit growth0.0% 5.0% 6.0% 7.0% 8.0% 9.0% 9.4%6.5% 7.4% 8.6% 8.8% 9.1% 9.3% 9.6% 9.7%6.7% 7.5% 8.7% 9.0% 9.2% 9.5% 9
21、.7% 9.8%7.0% 7.7% 9.0% 9.2% 9.5% 9.7% 10.0% 10.1%7.5% 8.1% 9.3% 9.6% 9.8% 10.1% 10.3% 10.4%8.0% 8.5% 9.7% 10.0% 10.2% 10.5% 10.7% 10.8%8.5% 8.9% 10.1% 10.3% 10.6% 10.8% 11.1% 11.2%Big andmidsizedbanksassetgrowthSmall bank asset growthTotal financialcredit yoySource: CEIC, Wind, Morgan Stanley Resear
22、chExhibit 5: The yield for AA corporate bonds, whose key investors arecity and rural banks, remains largely stable3.54.04.55.05.56.03Y A corp bond yield 5Y A corp bond yield 10Y A corp bond yield%Source: Wind, Morgan Stanley Research3Investment summaryWhile the market is concerned about the timing o
23、f the takeover of Baoshang Bank onMay 24 (for more details, please refer to our report: China Financials: Baoshang Banktakeover a pilot case for containing risks at small banks (25 May 2019) , we believe itis a necessary and unavoidable step in the multiyear financial cleanup process. Webelieve this
24、 will further ensure more rational growth and encourage more prudentoperations at smaller city and rural banks. We believe regulators are well prepared forthis type of event and major liquidity and systemic risks are manageable. Risk at city andrural banks is one of the key reasons that we do not ex
25、pect a credit impulse despitesupportive measures from PBOC. We also do not see much downside risk to our 9.5%forecast for total financial credit growth (TSF + all shadow banking channels), which willbe enough to meet most high-quality rational credit demand in China, in our view.However, this will l
26、ead to a continuation of the decline of interbank business at city andrural banks, particularly those highly levered city and rural banks, which will lead to afurther slowdown in credit supply to capital market leverage, some nonbank financialfirms, smaller property firms and LGFVs, which is also a
27、continuation of the impact fromfinancial cleanup efforts in recent years.A necessary and unavoidable step of the financial cleanupprocess, and regulators are well prepared for such eventsRegional banks such as city and rural commercial banks have seen rapid NPL additionssince 2018, as well as climbi
28、ng NPL ratios, mostly caused by the economic growthslowdown and a tighter NPL recognition policy, leading to necessary measures as thefinancial cleanup process continues.Since 2016, regulators have been driving the financial cleanup process step by step. Asthis process progresses, and in dealing wit
29、h city/rural bank risks, regulators may have totake action to help establish a proper risk assessment process in the interbank market.We believe early action will help improve capital allocation over time and improve thestability of the financial system.Exhibit 6: We have seen a faster increase in n
30、et NPL additions at cityand rural banks since 2018.(100)(50)-501001502001Q162Q163Q164Q161Q172Q173Q174Q171Q182Q183Q184Q181Q19Big banks Stockholding banks City commercial banksRural commercial banks Foreign banksQuarterlyNPL additionSource: PBOC, CEIC, Morgan Stanley Research.Exhibit 7: .while city an
31、d rural bank NPL ratios also rose to 1.88%and 4.05%, respectively, in 1Q19 versus 1.52% and 3.16% in 20170.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5% Big banks JSB City banks Rural banksNPLratioSource: PBOC, CEIC, Morgan Stanley Research.4We believe regulators had prepared for the takeover of Baoshang B
32、ank and potentialasset slowdown of some banks for a few years in the following ways:1) They launched the deposit insurance program run by PBOC in 2015.2) They designed a liquidity monitoring process for all banks, with thousands of PBOCbranches monitoring city and rural banks operating in each regio
33、n.3) They established an emergency credit line to all small banks on a local PBOC branchlevel in case of liquidity shocks.4) They designed and issued a major risk digestion process and coordination proceduresbetween PBOC and CBRC.5) There is still a 70%-80% guarantee for even large corporate and int
34、erbank deposits,showing a gradual process to remove the implicit guarantee expectation.6) PBOC carried out more mature open market operations to ensure stable liquidityconditions in the broader interbank market.Analysis of size of city and rural bank assets at riskCity and rural banks accounted for
35、25% of bank assets and provided around 20% ofnew total credits in 2018, down from 24% in 2015 based on our calculations. Assetgrowth at city and rural banks slowed from around 25% in 2016 to around 10% in 2018.In light of the manageable impact between 2016 and 2018, we believe some furthermoderation
36、 in city and rural bank asset growth should also be manageable.As banks will likely be more selective in the interbank lending business, we believe thewholesale funding base for three types of rural and city banks will face some downsiderisks; these types are 1) city and rural banks with assets in r
37、egions where the GDPgrowth slowdown has been particularly notable, 2) banks with no financial reports inrecent years and 3) banks downgraded by rating agencies in recent years. Our analysisshows that around Rmb4.8tn of the wholesale funding base for small banks, which isaround 30% of the total whole
38、sale funding base for such banks and supports around7% of their total assets, will face some downside pressures.However, we think, for these types of banks, the overall risk of a regulator takeover issomewhat limited as local governments are major shareholders of many small banksand will help bridge
39、 the capital needs, liquidity and risk digestion process to maintaintheir bank licenses, which are still valuable in China.We also do not expect a major decline in the total asset base at city and rural banks,for the following reasons:- Local governments are large shareholders at most city and rural
40、 banks, hence, localSOEs and governments will still keep their deposits there.- Retail deposits are still guaranteed by PBOC.- Following the the initial sharp drop in NCD issuance volume, we believe the NCD5issuance volume will recover for stable small banks, particularly given still ampleoverall in
41、terbank liquidity conditions.- The repo market is less impacted as this type of funding is collateralized and can stillprovide funding in addition to regular deposit growth at small banks.- While negotiable certificates of deposit (NCDs) will be somewhat impacted, theyprovide around only around 8% o
42、f funding to small banks, and we expect NCD issuancefor stable small banks will recover over time as well.- PBOC has provided a credit enhancement program for NCDs at some small banks.No credit impulse but also no sharp credit growth slowdownWe had expected 9.5% growth in total financial credit (whi
43、ch implies 11.5% growth inreported TSF) as we had factored in a further slowdown in small bank asset growthgiven high NPL and capital constraints. We believe the Baoshang Bank takeover willslow asset growth at city and rural banks to around 5% in 2019 from 10% currently.In the event of a greater tha
44、n expected asset growth slowdown to 0% at city and ruralbanks, we believe total financial credit growth could still remain in line with the 2018level of 8.5% and policy makers could approve more government bond issuance tooffset the impact and maintain total credit growth at around 9%. In addition,
45、policymakers can also encourage state-owned banks to lend a bit more.However, we think a credit impulse is unlikely despite PBOCs liquidity support such ascredit enhancement for some small banks NCD issuance. We think PBOCs creditenhancement will help in terms of downside risk protection and market
46、sentimentsupport. However, similar to the impact on bond issuance by private firms, the creditenhancement program will likely only serve as temporary rather than substantialsupport given the currently low NCD sell-through rate and the upcoming wave of NCDsdue.We continue to believe the growth in rat
47、ional credit demand is also limited at around 8-9% despite the recent support for infrastructure financing. We believe more prudentcredit growth is good for long-term risk control and would control financial investmentspeculation that could have more negative effects. However, after front loading of
48、credit in 1Q19, new credits in coming quarters could be more rational at around Rmb4-5tn per quarter.Who will be negatively impacted?We see a small impact on SME loans given dedicated MLF and TMLF to small banksfrom PBOC, but capital market leverage, local LGFVs and property developers mightstill be
49、 more impacted, which is essentially a continuation of the cleanup of interbankand nonstandard credit assets. There is room to cut RRR and lower rates on MLF, whichwould provide incentives to large banks to differentiate between small banks andcontinue to provide some funding to stable small banks.Some evidence of manageable impact from the Baoshang Bank6takeoverWhile we believe the NCD market will be somewhat impacted by the Baoshang banktakeover, we believe small banks can still rely on
