Bank of China ADD, TP HK$4.20, HK$2.60 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$34.40 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, Rmb11.47 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.
Mortgage prepayments: What does it signal?
- Heightened investor interest relating to accelerating mortgage prepayments in China have led us to explore its historical drivers via a regression analysis.
- Consumption, property sales, the sharemarket, mortgage rates and growth of household operating loans are statistically significant drivers of prepayments.
- With all these variables expected to remain subdued, in our view, we see mortgage prepayments continuing to remain elevated well into FY23F.
- We thus do not expect a return to double-digit mortgage growth before FY24F. Retain Sector Neutral rating. Top picks: CMB, PAB, BOC & CITIC.
Exploring the key drivers of accelerating mortgage prepayments
We had flagged in The story of China’s consumer, dated 21 Sep 2022 that mortgage prepayments in China were accelerating (Fig 3) and had opined that this was in part a reflection of weak consumer sentiment, where borrowers would rather use their excess cash to accelerate repayment of their mortgage, rather than boost consumption. We subsequently had numerous conversations with investors about the reasons for China’s accelerated mortgage repayments. In this report, we explore the key drivers of mortgage prepayments, using monthly mortgage repayment data over the 2008–2022 period, sourced from mortgage-backed securities issued by CCB in 2005 and 2007.
Significant drivers: consumption, property sales & the sharemarket
Regression analysis (Fig 1) indicates that statistically significant drivers of mortgage prepayment include (in order of R-square): i) Consumption, with this proxied by retail sales (R-square: 55%) or the consumer confidence index (R-square: 23%), with both these variables having negative coefficients; ii) residential property sales (R-square: 31%, negative coefficient); iii) mortgage rates (R-square: 16%, negative coefficient); iv) the CSI300 sharemarket index (R-square: 14%, negative coefficient); and v) Household operating loan growth (R-square: 8%, positive coefficient).
We think mortgage prepayments could remain elevated
With most of the above variables expected to remain subdued, in our view, we expect mortgage prepayments to remain elevated. With residential property sales still falling yoy (Fig 9) amidst an environment of rising property developer bond defaults (Fig 13), we do not believe mortgage growth would return to double-digit growth levels before FY24F. Mortgage growth in China had fallen to 6% yoy in 2Q22 (Fig 6) and we expect it to fall to below 5% in 3Q22F. Consequently, we believe that China banks are likely to continue to meet their loan quotas via corporate loans (including bills) in FY23F.
Retain sector Neutral rating; top picks: CMB, PAB, BOC & CITIC
We value the banks using a stress-test-adjusted GGM (Fig 14). While we see weakening FY22F and FY23F pre-provisioning operating profit (PPOP) growth amidst falling net interest margins and subdued fee income growth, we expect slower provisioning expense growth to help banks achieve stable profits. Upside/downside risks: better-/worse-than-expected economy and an increase/decrease in policy risks.