德银-中国-银行业-拨备覆盖率要求低的影响-20180307-14页_613kb

Summary of the Implications of Lower Provision Coverage Requirements for Chinese Banks

Core Content

This document discusses the implications of the Chinese banking regulator (CBRC) lowering the minimum provision coverage requirements for commercial banks in China, effective from 28 February 2018. The policy changes are part of a broader effort to improve the banking sector's asset quality and capital strength by reducing the burden of loan-loss provisions.

Main Points

• Policy Changes:

  • The NPL (Non-Performing Loan) coverage ratio requirement was reduced from 150% to 120%–150%.
  • The provision-to-loan ratio requirement was lowered from 2.5% to 1.5%–2.5%.

• Qualification Criteria:

  • Banks must meet three criteria to qualify for lower provision requirements: strict NPL classification, fast NPL resolution, and strong capital adequacy.
  • A bank that classifies 100% of overdue loans over 90 days as NPLs, resolves more than 90% of new NPLs, and has a CAR (Capital Adequacy Ratio) above 12.5% (or 13.5% for SIBs) may qualify for the lowest requirements.

• Impact on Banks:

  • The policy is seen as a positive move for the banking sector, especially for large banks with strong NPL classification and capital.
  • It may reduce credit costs and improve earnings forecasts for major banks like ICBC and CCB.
  • Smaller banks may face near-term earnings pressure due to increased NPL recognition and higher credit costs.

• Sector Outlook:

  • The report highlights that the policy aligns with the government's confidence in improving asset quality, driven by supply-side reforms and SOE (State-Owned Enterprise) reforms.
  • The policy could lead to a more transparent lending book and encourage banks to clean up their balance sheets.

Key Information

• Credit Cost Sensitivity:

  • A 10bps decrease in credit cost could boost earnings by 4% and CET1 ratios by 6bps.
  • Conversely, a 10bps increase in credit cost could reduce earnings by 3%–6%.

• Valuation and Recommendations:

  • Deutsche Bank uses a three-stage Gordon Growth Model to value Chinese banks, with target prices based on 2018E book values.
  • Some banks, such as ICBC, CCB, and BOC, are recommended as "Buy" due to their potential to benefit from the policy.
  • Others, like Huishang Bank and Bank of Nanjing, are recommended as "Sell" due to weaker NPL classification and capital adequacy.

• Risks and Considerations:

  • Downside Risks: Inflation, large-scale debt restructuring (DES), over-tightening in real estate and infrastructure, and significant property price corrections.
  • Upside Risks: Removal or softening of GDP targets and more aggressive SOE reforms, which could lead to improved profitability and asset quality.

Bank Classification

Conclusion

The relaxation of provision coverage requirements aims to reduce the financial burden on Chinese banks, particularly large banks, while encouraging smaller banks to improve their NPL recognition and resolution. This policy is expected to positively impact the banking sector's earnings and capital adequacy, but also poses challenges for smaller institutions with weaker asset quality. The report highlights the importance of NPL classification and capital strength in determining the benefit of the new policy.