20220606-招银国际-China_Financials_Weekly__Expect_higher_NPL_in_2Q___2H__P_C_loss_ratio_improved_during_COVID_lockdowns_24页_2mb

China Financials Weekly Summary

Core Content

This report provides an analysis of the financial sector in China, focusing on the banking and insurance industries, with key insights on asset quality, lending rates, and investment performance.

Main Points

Banking Sector

• NPL Ratio Trends:

  • The sector's NPL ratio dropped 4 bps QoQ to 1.69% in Q1 2022, but the SML ratio remained stable at 2.31%.
  • NPL ratios for SOEs and JSBs dropped by 2 bps QoQ, while city banks saw an increase of 6 bps QoQ.
  • Rural commercial banks showed a 27 bps QoQ drop in NPL ratio, but some in North China showed high uncertainty.
  • Due to the Shanghai lockdown in April 2022, asset quality is expected to deteriorate in Q2 and 2H22, leading to higher NPL and SML ratios across all sub-sectors.

• Lending Rates:

  • The PBOC has guided banks to cut lending rates to support the real economy.
  • 1-yr LPR and 5-yr LPR dropped 15 bps and 20 bps respectively since November 2021.
  • Loan rates fell to 4.65% at the end of Q1 2022, down 11 bps QoQ and 45 bps YoY.
  • The decline in corporate loans was the main driver of the loan rate drop.
  • A 15 bps cut in the 5-yr LPR in May 2022 is expected to slightly reduce mortgage rates in 2H22 and lead to a bigger fall in Q1 2023 after existing mortgages are repriced.
  • The 1-yr LPR may drop 5-10 bps in 2H22 as the negative impacts of lockdowns fade.
  • Consumer loan and credit card lending rates are likely to remain unaffected.

• Rating and Target Prices:

  • The banking sector is maintained with an OUTPERFORM rating.
  • Key picks include PSBC (1658 HK, BUY) with a target price of HK$8.40 and a 46% upside.
  • Other BUY ratings include CCB-H (0939 HK), CCB-A (601939.SH), PSBC-A (601658.SH), and several others.
  • SELL ratings are given to China Life (601628 CH) and PICC Group (1339 HK).

Insurance Sector

• P&C Insurance:

  • P&C insurers experienced a substantial reduction in loss ratio during the April-May 2022 lockdowns, similar to the first wave of the pandemic in early 2020.
  • The loss ratio improved YoY in Q2 YTD due to lower-than-usual claims in auto insurance.
  • Auto insurance premium growth is expected to rebound starting in June 2022 due to policy incentives and easing lockdowns.
  • Non-auto underwriting (UW) is expected to improve as well.

• Life Insurance:

  • Life insurance saw slow momentum into Q1 2022.
  • The report prefers P&C over life insurance in H1 2022.

• Rating and Target Prices:

  • PICC P&C (2328 HK) is the top pick with a BUY rating and a target price of HK$11.64.
  • Ping An (2318 HK) is also highlighted as a preferred stock due to its proactive agency reform.
  • China Life (2628 HK) and CPIC (2601 HK) are rated BUY with target prices of HK$18.18 and HK$30.49, respectively.
  • Zhong An (6060 HK) is also a BUY with a target price of HK$33.20.
  • SELL ratings are given to China Life (601628 CH) and PICC Group (1339 HK).

Key Information

• NPL Ratio: Expected to rise in 2H22, with a Q1 2022 ratio of 1.69%.
• Lending Rates: Declined to 4.65% in Q1 2022, with further cuts anticipated in 2H22 and Q1 2023.
• Premium Growth: Auto insurance is expected to rebound in June 2022, driven by policy incentives and easing lockdowns.
• Management Changes: Recent changes at PICC are unlikely to impact operations significantly as SOEs typically make internal adjustments before formal announcements.
• Valuation Metrics:
  • P/B and P/E ratios are provided for various banks and insurers.
  • PSBC (1658 HK) has a P/B of 0.8x and P/E of 6.1x, with a 46% upside.
  • PICC P&C (2328 HK) has a P/B of 0.7x and P/E of 5.6x, with a 52% upside.
  • Zhong An (6060 HK) has a P/B of 1.5x and P/E of 31.5x, with a 33% upside.
  • China Life (2628 HK) has a P/B of 0.5x and P/E of 4.9x, with a 52% upside.

Summary Table

Banking Sector Highlights

Insurance Sector Highlights

Valuation Summary

• P/B (x): Ranges from 0.3x to 1.5x.
• P/E (x): Ranges from 3.1x to 31.5x.
• Dividend Yields: Ranges from 0.0% to 13.7%.
• ROE: Ranges from 5.8% to 13.7%.
• ROEV: Ranges from 5.5% to 10.3%.

Conclusion

The report highlights the anticipated challenges for asset quality in the banking sector during the second half of 2022 due to the ongoing impact of the lockdowns, but notes that SOEs are well-prepared with sufficient provisions. It also forecasts improved P&C insurance loss ratios and potential premium growth in June 2022. The banking sector is maintained with an OUTPERFORM rating, with PSBC as the top pick, while PICC P&C and Ping An are highlighted in the insurance sector.