Highlighted Companies
Bank of China ADD, TP HK$4.20, HK$2.68 close
We like Bank of China’s (BOC) exposure to a rising US rate hike cycle via its HK subsidiary. We also like its inexpensive valuations (lowest of the big four banks’ FY22F P/BV ratio) and its high FY22F dividend yield (highest of big four banks)
China Merchants Bank ADD, TP HK$84.10, HK$38.95 close
China Merchants Bank (CMB) is our top sector pick. We believe its ROE and better-than-peer net profit will be sustained, driven by its retail banking operations. We think continued rising ROE under the new president could be a re-rating catalyst.
Ping An Bank ADD, TP Rmb22.70, Rmb12.43 close
Ping An Bank (PAB) is a key beneficiary of the ongoing recovery in credit card asset quality. It could also benefit notably from any loss of market share for fintech players given a stricter fintech regulatory environment.
The story of China’s consumer
- We remain unconcerned about consumer credit quality, with Aug’s monthly overdue formation rates stable for both credit cards and mortgages (Fig 3-4).
- Of concern is consumer (mortgage and non-mortgage) yoy loan growth (at a 16-year low; Fig 8-9), with mortgage prepayments accelerating (Fig 10).
- Retail sales data and Aug new monthly household short-term consumer loans are improving yoy and mom, respectively, albeit off a low base.
- Remain sector Neutral rating. Top picks CMB, PAB and BOC.
Still unconcerned about consumer credit quality based on Aug data
We continue to believe that China’s consumer credit quality remains healthy in Aug, for both credit cards and mortgages. This is based on an analysis of securitised loan data — CMB’s Aug 2022 ratio of credit card loans that were less than 30 days overdue continued falling mom to 0.49% (Jul: 0.55%; Jun: 0.58%; Fig 3), while CCB’s was stable at 0.14% (Jul: 0.15%; Jun: 0.13%). An analysis of Bank of Zhengzhou’s mortgage-backed securities (MBS) indicates that mortgage defaults (which are still low) remain largely a Zhengzhou issue, with no clear impact on other regional banks’ accumulated mortgage default rates (Figs 5-6).
Consumer credit growth is a bigger concern
With consumer (mortgage and non-mortgage) yoy loan growth at a 16-year low (Fig 8-9), it is clear there is little appetite to borrow. This is despite mortgage rates falling to record lows (even lower than 2009’s; Fig 12-13) and a statistically significant relationship between mortgage rates and mortgage growth (Fig 14-15). Consumers appear confident of their finances, as there is clear evidence they are accelerating early repayments of mortgages, rather than boosting consumption. For example, CMB’s ratio of actual repayments to initially projected repayments for mortgages (data sourced from mortgages securitised in 2020 and 2021) rose to 204% in Aug 2022 (from Apr’s 120%; Fig 10).
Unemployment not an issue; an uncertain outlook could be
While 2Q22’s unemployment data was weak, Jul and Aug data have shown clear signs of improvement (Fig 26-29). Coupled with policymaker’s strong focus on social stability and structural reasons relating to the nature of China’s economy, we remain comfortable about the outlook for consumer credit quality. We believe the weak credit data is more due to an uncertain outlook, than current consumer financial stress.
Some green shoots are emerging, though off a low base
Retail sales are improving yoy (Fig 30) and Aug monthly new household short-term consumer loans have rebounded mom (Fig 11), albeit off a low base.
Retain sector Neutral rating; top picks: CMB, PAB & BOC
We value the banks using a stress-test-adjusted GGM (Fig 31). Upside/downside risks: better-/worse-than-expected economy and an increase/decrease in policy risks.