China Banks 13 August 2018Contents
PIVOTAL QUESTIONS ... 4
Q: Will recent policy loosening benefit China banks ........... 4
PIVOTAL QUESTIONS ... 8
Q: Is potential slower deleveraging a risk for China banks .. 8
I. Re-rating less likely now due to delayed deleveraging and NIM peaking .... 8
II. Switching to a range-bound trade view for the medium term .... 14
Company pages ...... 15
Rating change
Agricultural Bank of China . 16
Chongqing Rural Commercial China .......... 22
Price-target revision
China Construction Bank ... 28
China Industrial & Commercial Bank of China ........ 31
China Merchants Bank ....... 34
May Yan
Analyst
may.yan@ubs
+852-2971 7157
Alex Zhou
Analyst
alex-huanan.zhou@ubs
+852-3712 4218
Alex Ye
Analyst
alex.ye@ubs
+852-3712 3594
Noel Chan
Analyst
S1460516100001
noel-y.chan@ubssecurities
+86-213-866 8845
Julie Hou
Analyst
S1460518080002
julie.hou@ubssecurities
+86-213-866 8871
Donna Kwok
Economist
donna.kwok@ubs
+852-3712 3160
Jason Bedford
Analyst
jason.bedford@ubs
+852-2971 8235
China Banks 13 August 2018China Banks – H
P2
UBS Research THESIS MAP a guide to our thinking and what's where in this report
MOST FAVOREDLEAST FAVORED
CCB, ABC, ICBC, CMB Huishang
PIVOTAL QUESTIONS Q: Will recent policy loosening benefit China banks
Yes, in the near term. Over-tightening of shadow banking could result in financing difficulties at
private, SME, local government financing vehicle (LGFV) companies as well as corporate bond
issuance. We believe major easing measures by policymakers in recent months should help support
credit growth in H218, and alleviate market concerns about over-tightening or a hard-landing for
the economy.
more
Q: Is potentially slower deleveraging a risk for China banks
While slower deleveraging in the short term could relieve some concerns about over-tightening, it
also gives rise to questions about the sustainability of China’s deleveraging plan, of which a setback
would be viewed as a long-term negative for China banks due to the build-up of systemic risks.
Given lower visibility on the pace and intensity of the deleveraging progress and a grim outlook for
bank margins, we are now more cautious on a medium-term re-rating thesis for China banks and
see a higher chance of stocks returning to a range-bound trading pattern in the medium term.
more
UBS VIEW We believe a medium-term re-rating for China banks is now at risk, due to higher uncertainties
about deleveraging and banks' opaque margin outlook, and we view range-bound trading as a
more likely scenario in the next 12 months. We like banks with strong funding, less exposure to
shadow banking, stable asset quality and low equity-raising pressure. We have Buy ratings on CCB,
ABC, ICBC, and CMB.
EVIDENCE The government’s policy stance has recently eased in light of mounting concerns about credit
tightening and rising uncertainties due to escalating trade friction with the US. Against the easing,
banks' asset yields are under pressure due to falling bond yields and interbank rates. However, deposit
costs could remain sticky on fierce competition and a long-term disintermediation trend.
WHAT'S PRICED IN China banks are trading at 0.73x one-year forward P/BV, still below the historical average since 2010.
The below-the-book valuation, despite banks’ decent reported ROE, may suggest the market remains
concerned about a potential debt crisis, given China’s rising debt leverage and likely under-recognition
of NPLs at SOEs. Factors such as decelerating economic growth and disintermediation could also weigh
on banks’ long-term ROE, in our view.
China banks avg. one-year forward P/BVChina banks avg. one-year forward PE
Source:Datastream, UBS
0.00
0.50
1.00
1.50
2.00
2.50
Jul
-10
De
c-1Ma
y-1Oc
t-1Ma
r-1Au
g-1Jan
-13
Jun
-13
No
v-1Ap
r-1Sep
-14
Feb
-15
Jul
-15
De
c-1Ma
y-1Oc
t-1Ma
r-1Au
g-1Jan
-18
Jun
-18
1-year forward PB ratioHistorical avg.
+1SD-1 SD
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
Jul
-10
De
c-1Ma
y-1Oc
t-1Ma
r-1Au
g-1Jan
-13
Jun
-13
No
v-1Ap
r-1Sep
-14
Feb
-15
Jul
-15
De
c-1Ma
y-1Oc
t-1Ma
r-1Au
g-1Jan
-18
Jun
-18
1-year forward PE ratioHistorical avg.
+1SD-1 SD
China Banks 13 August 2018China Banks UBS Research
Sector Q1
PIVOTAL QUESTIONS return
Q: Will recent policy loosening benefit China
banks
UBS VIEW
Yes, in the near-term. Over-tightening of shadow banking could result in
financing difficulties at private, SME, LGFV companies as well as corporate
bond issuance. We believe major easing measures by policymakers in recent
months should help support credit growth in H218, and alleviate market
concerns about over-tightening or a hard-landing for the economy.
EVIDENCE
The government’s policy stance has loosened recently in light of mounting
concerns about credit tightening and rising uncertainties due to escalating trade
friction with the US. While the government targets maintaining steady monetary
policy while adopting a proactive fiscal policy, we note signs of loosening on the
financial regulatory front as well, especially the relaxation of the new asset
management plan (AMP) rule implementation and window guidance to trust
companies to accelerate the release of funding for new projects.
WHAT'S PRICED IN
The performance of China bank stocks has remained weak after a strong rally at
the start of the year and despite a still solid outlook for the sector's Q2 results.
MSCI China Banks index dropped 23% from a peak in January to a trough in
July, but has rebounded since the fine-tuning of the AMP rule on 20 July. We
believe market concerns about over-tightening and downward pressure on
domestic growth have been alleviated to some extent.
Policy easing to support near-term performance
Against the backdrop of still robust GDP growth in H118 but rising external
uncertainties caused by escalation of the US-China trade dispute, the debate over
whether China will need to adjust the pace of deleveraging and again resort to
easing policies has been in the spotlight throughout the first half of the year.
While the PBOC's earlier moves such as RRR cuts, window guidance on banks' loan
quotas and the offering of medium-term lending facilities (MLF) for bond
investments (Figure 1) are perceived by the market as policy fine-tuning to ensure
system liquidity, the recent fine-tuning of AMP rules by the PBOC, however, has
sent a strong easing signal, in our view.
To recall, the announcement clarified that during the transition period, old types of
AMP are allowed to invest in new non-standard debt assets (NSD) that finance
national strategic projects and SMEs. In addition, the regulator will introduce
support measures to help financial institutions to bring NSD back on-balance sheet.
The easing bias in monetary policy was confirmed at the recent Politburo meeting
at end-July. Although the communique set the tone by stating prudent
monetary policies, there was no longer a mention of neutral stance. In addition
to the requirement to ensure appropriately ample liquidity, proactive, flexible and
effective policies were emphasised. While the communique stated that。