Deutsche Bank
Markets Research
Asia
Hong Kong
Banking / Finance
Banks
Industry
Chinese banks -
2018 Outlook
Date
2 January 2018
Recommendation
Change
Positioning in policy tightening and
reforming
Another year of divergence among banks; still prefer retail-oriented banks
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. THE CONTENT MAY NOT BE
DISTRIBUTED IN THE PEOPLE’S REPUBLIC OF CHINA (“THE PRC”) (EXCEPT IN COMPLIANCE WITH THE APPLICABLE LAWS
AND REGULATIONS OF PRC), EXCLUDIN SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAU.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.
Hans Fan, CFA
Research Analyst
(+852 )2203 6353
hans.fan@db
Jacky Zuo, CFA
Research Analyst
(+852 )2203 6255
jacky.zuo@db
Edward Du
Research Associate
(+852 )2203 6185
edward.du@db
Key Changes
Company Target Price Rating
1398.HK 6.52 to 7.52(HKD) -
601398.SS 5.98 to 6.50(CNY) -
601939.SS 7.04 to 7.67(CNY) -
601288.SS 3.75 to 4.09(CNY) -
601988.SS 4.38 to 4.54(CNY) -
601328.SS 5.98 to 6.30(CNY) -
600036.SS 24.06 to
27.13(CNY)
-
601998.SS 4.28 to 4.56(CNY) -
600016.SS 7.15 to 7.51(CNY) -
600000.SS 12.75 to
13.61(CNY)
-
601166.SS 14.92 to
16.38(CNY)
-
601818.SS 2.97 to 3.22(CNY) -
000001.SZ 9.48 to
10.89(CNY)
-
601169.SS 9.34 to 9.69(CNY) -
601009.SS 5.65 to 6.21(CNY) -
002142.SZ 9.37 to
10.81(CNY)
-
0939.HK 7.68 to 8.87(HKD) -
1288.HK 4.10 to 4.73(HKD) -
3988.HK 4.78 to 5.25(HKD) -
3328.HK 6.53 to 7.29(HKD) -
3968.HK 26.27 to
31.38(HKD)
-
1988.HK 7.80 to 8.68(HKD) -
0998.HK 4.67 to 5.28(HKD) -
6818.HK 3.24 to 3.72(HKD) Sell to Hold
3618.HK 6.05 to 7.00(HKD) Hold to Buy
3698.HK 3.14 to 3.49(HKD) -
1963.HK 5.65 to 6.50(HKD) Sell to Hold
Source: Deutsche Bank
Top picks
Bank of China (3988.HK),HKD3.84 Buy
Agri. Bank of China (1288.HK),HKD3.64 Buy
Source: Deutsche Bank
China has made containing financial risks a top priority. Financial deleveraging
may last longer than expected, with higher market rates and more coordinated
but tighter regulations. This may lead to moderate credit growth but slower
leverage build-up and hence, less financial stability risk. On the banks’ asset
side, we expect supply-side reform will be strictly followed and SOE reform
may accelerate, leading to improving corporate financial health. Thus, we stay
positive on the Chinese bank sector. We expect wider divergence between
retail banks (big-4/CMB/CRCB) and the rest, as funding strength remains the
key differentiating factor; upgrading CRCB to Buy – top picks: BOC & ABC.
Financial deleveraging: market rate hikes, new committee, tighter regulations
In the past year, China’s financial deleveraging campaign has made progress.
Yet we are probably still in the first half of the process, as M2/GDP and credit-
to-deposit ratios remain elevated. We expect monetary policy and macro-
prudential policy to stay on the tightening side. Our rates strategist expects a
hike total of 20-45bps in OMO rates until 2018 (note). New regulations on asset
management (note) and liquidity risks (note) will be phased in. With the
Financial Stability and Development Committee – the new committee
coordinating financial regulators – leading, more regulations are likely to be
followed. System wise, we expect slower credit growth, shrinking shadow
banking and less reliance on wholesale funding. Retail banks should benefit
from higher rates and yield curve steepening due to solid deposit franchises.
The other smaller banks will experience ongoing funding and capital pressure.
Supply-side and SOE reforms to relieve asset quality risks
China has pledged to deepen supply side reform. Our recent field trips showed
that local governments are rigorously carrying out de-capacity efforts that
rebalance supply-demand dynamics. SOE reform has also been accelerating,
with a rising number of mixed-ownership pilot runs and notable progress in
removing social responsibilities. As a result, the improvement in corporate
financial health, especially for industrial enterprises (22% of China’s debt) and
SOEs (35%), will probably be sustained in the coming quarters (note), albeit
with slower net profit growth. This should lead to less NPLs, rising provision
write-backs and reduced asset yield pressure given fewer “evergreening” loans.
Our proprietary study shows that c. 8-13% of China’s corporate debt was
evergreening, dropping from 9-14% in 2016 and likely to decline further.
Valuation gap to widen; earnings forecasts, valuation, catalysts and risks
In 2017, retail banks (big-4/CMB/CRCB) have outperformed other banks by
28ppt. We re-rate further on stabilizing ROE. We forecast 6.5%/8.5% yoy
growth in 2018/19 vs. 4.3% yoy in 2017E. Reflecting the rollover of book value
into 2018E and exchange-rate adjustment, we lift TPs by 15%/8% for H/A-
share banks. We upgrade CRCB to Buy and CEB-H and BOCQ to Hold. Our
pecking order is: BOC/ABC/CCB/ICBC/CRCB. Catalysts include results: intro-
duction of CCyB and D-SIB and Southbound inflow. For smaller banks, we
might turn positive if the PBOC starts loosening. Upside risks: removal or
softened GDP target and more aggressive SOE reforms. Downside risks:
disorderly deleveraging and property price correction.
This report includes changes to our ratings and target prices for several
companies under coverage; see above right and page 33.
Distributed on: 02/01/2018 03:36:30 GMT
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2 January 2018
Banks
Chinese banks - 2018 Outlook
Page 2 Deutsche Bank AG/Hong Kong
Financial deleveraging:
market rate hikes, new
committee, tighter
regulations
Containing financial risks at top of government’s agenda
China has de-emphasized the growth target and made containing financial
risks a top priority. The Central Economic Work Conference, concluded on 20
December 2017, has listed three policy priorities in 2018-2020: containing and
resolving major financial risks, poverty reduction and environmental protection.
This is consistent with signals from the 19th party congress, where
policymakers emphasized growth quality over quantity.
The tighter policy bias is warranted by the still-elevated leverage in China’s
financial sector and real economy. In the financial sector, M2 balance
accounts for 207% of GDP currently, and the credit-to-deposit ratio in the
China banking system stands at 118% (Figure 1). In the real economy, we
estimate that total non-financial sector debt made up 276% of GDP as of
September 2017, with local governments and SOEs highly levered (Figure 2).
While the pace of leverage build-up has slowed due to recent financial
deleveraging efforts, the elevated leverage suggests that we cannot safely
assume that the risks have disappeared. Meanwhile, the tolerance level of the
Chinese government has not been reached. Economic growth has surprised on
the upside and employment conditions remain resilient.
Figure 1: Leverage in China’s financial sector has stayed