Bank of China ADD, TP HK$4.20, HK$2.55 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 FY22F P/BV ratio of the big four banks) and its high FY22F dividend yield (highest of big four banks).
China Merchants Bank ADD, TP HK$84.10, HK$30.10 close
China Merchants Bank (CMB) is our top sector pick. We believe its ROE and better-than-peers 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, Rmb11.34 close
Ping An Bank (PAB) is a key beneficiary of the ongoing recovery in credit card asset quality. It could also benefit noticeably from any loss of market share by fintech players given the stricter fintech regulatory environment.
Easy to offer water; hard to make one drink
- While Sep system corporate loan growth accelerated yoy to a six-year high, we wonder whether corporates are actually spending the borrowed funds.
- Corporate time deposit growth is accelerating, especially among the big four banks (the main driver of loan growth) that tend to lend more to large SOEs.
- Requiring banks to lend to higher-risk sectors may accentuate this trend, as we think loans go to large safer firms that are less likely to need these funds.
- This could exacerbate net interest margin compression, with provisioning buffer drawdowns needed to ensure stable profitability. Retain Sector Neutral.
Strong Sep loans driven by corporate loan growth (a 6-year high)
Sep 2022’s new Rmb loans were Rmb2.47tr (Bloomberg consensus Rmb1.8tr), with corporate loans the key driver. Sep Rmb loan growth yoy was 11.2% (Aug: 10.8%), with Sep corporate loans (including bills) growth at 13.4% (Aug: 12.8%) and the highest since Feb 2016’s 13.5% yoy (Fig 9). Excluding bills, Sep corporate loan growth yoy was 11.7% (Aug: 10.7%). Household loan growth continued to be weak in Sep at 7.2% yoy (Aug: 7.4%), with Sep household short term loan growth yoy at 7.6% (Aug 7.9%) and Sep household long term loan growth yoy at 7% (Aug 7.3%) (Fig 7).
You can lead someone to water, but you cannot make them drink
A concern is that small banks have been increasingly filling up their loans with banks bills (Fig 5). Big four banks on the other hand, that lend more to large state-owned enterprises (SOE) than small banks and has been driving loan growth (Fig 10), are seeing much faster corporate time deposit growth (Fig 1). We had alluded to this twin phenomenon in Plenty of money but where to invest? dated 13 Sep 2022. We think this signals corporates are unwilling to invest the borrowed funds to grow their businesses and would rather place these funds in a time deposit, even if time deposit rates fall (see Deposit rate cuts: History shows little benefit, dated 16 Sep 2022).
Property credit quotas = higher corporate time deposit growth?
Bloomberg reported on 30 Sep 2022 that China’s financial regulators told China’s big six banks to each extend at least Rmb100bn (total of Rmb600bn), in the form of mortgages, loans to property developers and corporate bonds in the final four months of 2022. We estimate this Rmb600bn equates to 1.1% of total system financing to these property segments in Sep 2022 (Fig 27). We believe it is likely this credit is extended to large property developers and think corporate time deposit growth could continue accelerating.
Underlying credit demand improving qoq, except for property
Interestingly, PBOC survey data indicates there was an improvement in 3Q22 underlying corporate credit demand qoq, except to the property developer sector (Fig 29).
Retain sector Neutral rating; top picks: CMB, PAB & BOC
We value the banks using a stress-test-adjusted GGM (Fig 34). Upside/downside risks: better-/worse-than-expected economy and an increase/decrease in policy risks.