China strategy: Banks’ exposure to Russia is limited
Market volatility has surged in the wake of Russia’s shock invasion of Russia’s full-scale invasion of Ukraine in an attempt to depose the government. It has been swiftly followed by increased sanctions on Russia. The latest sanctions & measures were expanded to include restrictions on the Russian Central Bank, & the banning certain Russia banks from the SWIFT system was announced. In this note, we assess HK & Chinese banks’ exposures to Russia & the potential impact.
Based on regulators & banks’ disclosure, HK & Chinese banks’ direct exposure to Russia is relatively small. For HK banks, credit exposure to Russia is estimated to be about 0.01% of the industry-wide assets. While China is the biggest trade partner with Russia, Chinese banks’ exposure to Russia is insignificant. ICBC (1398 HK) & CCB (939 HK) disclosed they have subsidiaries operating in Russia but their exposure remains small, accounting for less than 0.05% of their total assets/ net assets/ net profits as of 1H21. While the Big-4 Chinese SOE banks have branches in Russia, the contribution is minimal, with Russia branches accounting for 0-4bps of their total assets / net assets / net profits as of end-2020. We believe there is no immediate risk for secondary sanctions on banks operating in Russia or dealing with Russia entities at this stage. Having said that, the situation remains highly fluid, & the market would keep monitoring the development.
In our view, key risk to our constructive view on HK banks, which is a proxy to rising interest rates, would be if there are any changes to Fed rate hike expectations owing to macro uncertainties. We believe share price volatility in HK banks is likely to remain high in the near-term due to rising geopolitical risks. Within HK banks, we prefer Bank of China HK (2388 HK). We believe HK domestic banks and Chinese banks would be defensive plays in light of rising geopolitical tensions. With a stable dividend payout ratio & a relatively high dividend yield, we maintain our view that a near-term trading opportunity for Chinese banks is approaching towards 4Q21 results announcement. Among the Big-4 Chinese banks, we prefer China Construction Bank (939 HK) for a relatively stronger capital position. In the medium- to long-term, we prefer those with a more retail-focused strategy and a comprehensive wealth management platform. We prefer China Merchants Bank (3968 HK) & Postal Savings Bank of China (1658 HK).