20160620-招商证券_香港_-China_Banks__Overreaction_to_China_s_government_debt__23页_2mb_2mb

China Banks Sector Summary

Core Content

This report discusses the current state of asset quality and valuation for H-share China banks, focusing on the impact of economic slowdown and government debt management on non-performing loan (NPL) ratios and overall financial health. It highlights that while NPLs are expected to rise, the majority will come from the corporate sector, not government-related loans.

Main Points

• NPL Trends:
  The NPL balance and ratio for H-share China banks are projected to increase significantly in FY16-17E due to the slowing economy. However, the increase is expected to be mainly driven by the corporate sector, not government-related loans.

• Government Debt:
  The government sector has a relatively low debt-to-GDP ratio (44.4% in FY15), and the asset quality of local government financing vehicle (LGFV) loans is considered benign due to the debt replacement plan and reduced repayment pressure.

• Corporate Debt:
  The non-financial corporate sector has a much higher debt-to-GDP ratio (210.4% in FY15), significantly above that of other countries, and is the main source of asset quality issues for banks.

• Valuation:
  The sector is currently trading at 0.67x FY16E P/B and 4.90x FY16E P/E, which is ~1SD below the mean, suggesting that the market has priced in a very pessimistic scenario. The report argues that the valuation is attractive compared to historical averages.

• Catalysts for Improvement:
  Positive catalysts include solutions to ease asset quality pressures, further monetary easing, favorable fiscal policies, and potential regulatory changes like lower minimum coverage ratios and mixed-business operations.

Key Information

• NPL Ratio Implied by Market: 11.4% by end of FY16E, which is much higher than the actual NPL ratio of 1.75% in 1Q16.
• Valuation Metrics:
  • P/B: 0.67x FY16E
  • P/E: 4.90x FY16E
  • Dividend Yield: 6.08% for FY16E
• Sector Mean:
  • P/B: 0.67x FY16E
  • P/E: 4.90x FY16E
  • ROE: 14.4% for FY16E
• Recommendations:
  • OVERWEIGHT rating for the sector, with BOC as the top pick.
  • BUY ratings for ICBC, CCB, BOCOM, and CQRCB.
  • SELL ratings for CITIC and Minsheng due to less favorable positioning in a down cycle.

Valuation Table

Sector Overview

• The report indicates that while the market has overreacted to the potential risks associated with government debt, the actual risk remains manageable.
• The corporate sector, however, is the primary concern for NPLs, with a significantly higher debt-to-GDP ratio and more frequent default cases.
• The valuation of the sector is seen as attractive, with a potential upside given the market's overly pessimistic assumptions.

Economic Outlook

• Real GDP growth in China is expected to remain at 6.7% YoY in FY16E, with a mild recovery in the second and third quarters followed by a moderation in the fourth quarter.
• The macroeconomic environment is characterized by a lackluster outlook, with weak industrial production, fixed asset investment, and retail sales growth.
• The report also notes that the RMB is expected to depreciate against the USD due to US rate hikes and the lack of further rate cuts in China.

Conclusion

The report concludes that while the sector faces pressure from corporate NPLs, the government-related asset quality is relatively stable. The valuation is considered attractive, and the sector is recommended with an OVERWEIGHT rating, with BOC as the top pick.