September 2016 banking volume – all sectors leveraging up

Deutsche Bank Markets Research Asia China Banking / Finance Banks Industry Chinese Banks Date 18 October 2016 Industry Update September 2016 banking volume – all sectors leveraging up Stable credit growth, with corporate sector resuming leveraging-up ________________________________________________________________________________________________________________ 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),HKD4.68 Buy China Merchants Bank (3968.HK),HKD18.90 Buy Source: Deutsche Bank Companies Featured ICBC (1398.HK),HKD4.68 Buy China Construction Bank (0939.HK),HKD5.64 Buy Agri. Bank of China (1288.HK),HKD3.21 Hold Bank of China (3988.HK),HKD3.42 Buy Bank of Communications (3328.HK),HKD5.75 Hold China Merchants Bank (3968.HK),HKD18.90 Buy China CITIC Bank (0998.HK),HKD5.06 Hold China Minsheng Bank (1988.HK),HKD8.73 Hold CEB (6818.HK),HKD3.60 Hold Shanghai Pudong Bank (600000.SS),CNY16.28 Sell Industrial Bank (601166.SS),CNY15.98 Sell Ping An Bank (000001.SZ),CNY9.05 Hold Bank of Beijing (601169.SS),CNY9.16 Buy Bank of Nanjing (601009.SS),CNY10.01 Sell Bank of Ningbo (002142.SZ),CNY15.60 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. The PBOC has today reported new RMB loans/total social financing (TSF) of Rmb1.2tr/Rmb1.7tr, 22%/24% ahead of consensuses estimates. However, municipal bond issuance was only Rmb273bn (down 67% mom). As such, system credit growth moderated slightly, to 16.8% yoy (August: 16.9%). Credit-mix-wise, all sectors, including the government, household and corporate sectors, are leveraging up. Mortgages were still the biggest driver, accounting for 39% of new loans. Corporate debt growth recovered, on accelerating PPP projects. Looking ahead, we expect credit growth to soften in 4Q16, owing to less municipal bond issuance and property market tightening. Who is borrowing? Corporate sector has resumed leveraging-up In September, new credit to corporates picked up visibly, probably due to the accelerating launch of PPP projects (Figure 2). We estimate that credit to corporate borrowers accounted for 42% of new credit (August: 25%) during the month. Meanwhile, households and the government continued to lever up, making up 27% and 33%, respectively, of new credit. In September, new mortgages amounted to Rmb476bn, accounting for 39% of total new loans. With dozens of cities rolling out tightening policies to curb property bubble risks during the National holidays, we think mortgage growth should gradually decline in the coming months, which would be a drag to new credit growth. Who is lending? City/rural commercial banks and policy banks On the lending side, smaller city/rural commercial banks and policy banks, whose combined assets made up 43% of the system total, remained the major lenders, with asset growth of 17-28% yoy (Figure 3). In contrast, the asset growth of the big-five banks (38% of banking assets) and the joint-stock banks (19%) slowed to 6.4% and 12.1%, respectively, as of August. In September, the big-four banks made only Rmb312bn of new loans, accounting for 26% of the system total, compared with a 38% share in August. M2 growth uninspiring, with smaller M1-M2 gap Despite strong loan growth, system M2 grew only Rmb540bn mom in September (11.5% yoy, below the 13% target). We think this mainly reflected a large Rmb338bn FX reserve drop in September (largest monthly drop this year, except January). M1 grew 24.7% yoy, leading to a narrowing M1-M2 growth gap of 13.2% (August: 13.9%). System deposits grew 11.1% yoy (August: 10.8%), but were largely flat mom in absolute terms, due to the withdrawal from fiscal deposits (down Rmb402bn) and non-bank FIs (down Rmb343bn). Expecting credit growth to slow down going forward We estimate that China’s credit impulse – measured by three-month rolling adjusted TSF (including municipal bonds) as a percentage of GDP – was still above the 10-year average in September (Figure 5). Nevertheless, we expect cre