August 2016 banking volume - Temporary credit growth recovery

Deutsche Bank Markets Research Asia Hong Kong Banking / Finance Banks Industry Chinese Banks Date 15 September 2016 Industry Update August 2016 banking volume - Temporary credit growth recovery Stronger-than-expected credit driven by government projects and mortgages ________________________________________________________________________________________________________________ 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Hans Fan, CFA Research Analyst (+852 ) 2203 6353 hans.fan@db.com Stephen Andrews, CFA Research Analyst (+852 ) - 2203 6191 stephen-a.andrews@db.com Jacky Zuo Research Associate (+852 ) 2203 6255 jacky.zuo@db.com Vincent Gu Research Associate (+852 ) 2203 6185 vincent.gu@db.com Top picks ICBC (1398.HK),HKD4.82 Buy China Merchants Bank (3968.HK),HKD18.96 Buy Source: Deutsche Bank Companies Featured ICBC (1398.HK),HKD4.82 Buy China Construction Bank (0939.HK),HKD5.81 Buy Agri. Bank of China (1288.HK),HKD3.28 Buy Bank of China (3988.HK),HKD3.55 Buy Bank of Communications (3328.HK),HKD5.94 Buy China Merchants Bank (3968.HK),HKD18.96 Buy China CITIC Bank (0998.HK),HKD5.22 Hold China Minsheng Bank (1988.HK),HKD8.59 Hold CEB (6818.HK),HKD3.73 Hold Shanghai Pudong Bank (600000.SS),CNY16.40 Sell Industrial Bank (601166.SS),CNY15.73 Sell Ping An Bank (000001.SZ),CNY9.06 Hold Bank of Beijing (601169.SS),CNY9.08 Buy Bank of Nanjing (601009.SS),CNY10.11 Sell Bank of Ningbo (002142.SZ),CNY15.38 Sell Source: Deutsche Bank We value Chinese banks using a three-stage Gordon Growth Model (PV= (ROE-g)/(COE-g)), with target prices based on 2016E book values. New RMB loans and total social financing printed Rmb949bn and Rmb1,470bn in August, rebounding strongly from a low in July, with both exceeding consensus. Adding back Rmb839bn of municipal bonds, total new credit in August amounted to Rmb2.3tr, equivalent to a system credit balance (TSF and municipal bonds) growth of 16.9% yoy following three consecutive months of decline (Figure 1). The stronger-than-expected credit expansion was mainly driven by government borrowing (43% of new credit) and mortgages (23%). However, we expect credit growth momentum to soften in the remaining four months, due to less municipal bond issuance and shadow banking tightening. Who is borrowing? Government (infrastructure) and household (mortgages) In August, new credit mix still leaned toward the government and households, while corporate credit picked up a bit (Figure 2). We estimate credit to corporate borrowers accounted for 25% of new credit during the month, primarily driven by recovery in bill financing and corporate bond issuance. Meantime, households and the government continued to lever up, making up 29% and 43% of new credit respectively. Mortgage loans balance grew by 28% yoy and new mortgage made up 23% of new credit during the month. While we believe there is still some room to leverage up China’s households (household debt makes up c.40% of GDP and c.12% of household net worth), excessive mortgage lending might add asset bubble risks to China’s property market. We expect mortgage loan growth to slow modestly in rest of the year. Who is lending? City/rural commercial banks and policy banks Lenders wise, we believe smaller city/rural commercial banks and also policy banks, whose assets in combine made up 43% of the system total, continued to be the major lenders with asset growth of 17-24% yoy (Figure 3). In contrast, the asset growth of the big-five banks (38% of banking assets) and joint-stock banks (19%) slowed to 5.5% and 11.9% as of July, respectively. Resuming M2 growth and narrowing M1-M2 gap On the liabilities side, system deposit growth recovered to 10.8% yoy in August from 9.5% in July. Notably, corporate deposits grew by Rmb1.38tr, while fiscal deposits fell Rmb181bn despite a stronger municipal bond issuance. We think it points to accelerating project starts with usage of local government funds. As such, M2 growth resumed to 11.4% yoy in August from 10.2% in July (still below 13% government target), while M1 growth held up well at 25.3% yoy, leading to a narrowing M2-M1 gap of 13.9% (July: 15.2%). Still expecting credit growth to slow down in the rest of the year We estimate China’s credit impulse – measured by 3-month rolling adjusted TSF (including municipal bonds) as a percentage of GDP – improved to above the 10-year average in August (Figure 5). However, we still