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China Banking Sector - Pressure on asset quality and NIM persists

作者: Felix LUO,Allen Feng
時間: 2019年11月27日
重要性: 一般報告
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摘要: Report title:China Banking Sector - Pressure on asset quality and NIM persists
Analyst:Felix LUO,Allen Feng
Report type:Industry
Date:20191127
[Summary]

■ Deteriorating growth of industrial enterprises’ revenue put pressure on banks’ loan quality
■ NIM under continuous pressure
■ Maintain NEUTRAL

Growth of industrial enterprises' revenue worsened
As released on Nov 27 (Figures 1-2), cumulative growth of industrial enterprises’ revenue came in at 4.2% yoy through October (worsened, compared with September’s 4.5% and August’s 4.7%). Cumulative growth of industrial enterprises’ profit came in at -2.9% yoy through October (worsened, compared with September’s -2.1% and August’s -1.7%). Given that manufacturing and mining sectors are significant sources of non-performing loans (NPLs), growth of industrial enterprises' revenue/profit in the past had a notable negative correlation with major banks’ NPL formation ratio. Currently the sector lacks short-term catalysts as aforementioned data indicate increasing pressure on banks’ asset quality.

D-SIB evaluation might increase capital replenishment need
On Nov 26, PBOC released a draft of “measures for the evaluation of D-SIBs (domestic systemically important banks)” to solicit public opinions. The proposed evaluation methodology employs quantitative indicators to calculate system importance scores of 30 participating banks. The major indicators being evaluated include "scale", "interconnectedness", "substitutability" and "complexity". Banks that obtain a certain score are to be included in the initial list of D-SIBs. State Council's Financial Stability and Development Committee will determine the final list after taking into account other relevant quantitative and qualitative information. Additional capital requirement, along with other regulatory measures, may be imposed for the banks on the final list. Thus, the upcoming D-SIB evaluation might increase capital replenishment need across the sector. Figure 5-6 show some potential candidates to be included in the D-SIB list. Banks such as CITIC (998 HK, NR) are under more pressure to replenish capital if they are on the list.

Continuous pressure on banks’ NIM
Per PBOC’s latest data release, the weighted average loan rate declined to 5.62% in 3Q from 1H19’s 5.66%. Our research show large banks’ aggregate NIM is mainly driven by the asset side since 2016. Weighted average loan rate led large banks’ aggregate NIM by approximately 1-2 quarters (Figure 4). PBOC launched the LPR reform in August and subsequently lowered 1Y LPR (in September and November) and 5Y LPR (in November). PBOC also completed an RMB400bn MLF operation with a bid rate of 3.25% on Nov 5, representing a 5bp MLF rate cut (previously 3.3%). In the past, one MLF rate adjustment was often followed by another within a few months. Thus, another MLF rate cut will likely take place soon, paving the way for further LPR cuts. As PBOC hopes to pursue lower effective borrowing costs, banking sector’s aggregate NIM might be under pressure in the short to medium-term.

Valuation and risks
China’s banking sector is currently trading at ~0.64x 2019E P/B ratio. We maintain our “NEUTRAL” rating for the sector given continuous NIM and asset quality pressure. We prefer large banks with optimized loan structures (i.e., reduced loan exposure to manufacturing/retail & wholesale/ mining sectors), who are better equipped to preserve a relatively stable loan quality. Key catalysts: NIM expansion, upward asset quality trend. Key downside risks: NIM pressure, downward asset quality trend.

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