20180228-川财证券-2018_China_Equity_Market_Banking_Outlook_26页_1mb

Banking Sector Summary: 2017 and 2018 Outlook

Core Content

The banking sector in China showed strong performance in 2017, outperforming the broader Shanghai Composite Index. The sector rose by 12.86% by December 25, 2017, while the Shanghai Composite increased by 5.7%, resulting in an annual excess return of 7.48%. This performance was driven by improved asset quality and net interest margins, with the four largest banks (e.g., CMB, PAB, ICBC) leading the gains.

In 2018, the sector is expected to maintain steady growth, with a focus on improving net interest margins and the return of off-balance sheet activities. The central bank (PBOC) is anticipated to continue with a prudent and neutral monetary policy, which may lead to mild interest rate increases but not a complete shift in policy. The implementation of new accounting standards and enhanced financial supervision will influence the sector's performance and balance sheet structure.

Main Points

2017 Performance Highlights

• Sector Growth: The banking sector outperformed the Shanghai Composite by 7.48% in 2017.
• Top Performers: CMB (600036.SH), PAB (000001.SZ), and ICBC (601398.SH) saw significant gains of 72.08%, 47.76%, and 42.31%, respectively.
• Profit Growth:
  • Four largest banks: 3.85% YoY
  • Joint-equity banks: 0.22% YoY
  • City commercial banks: -1.45% YoY
  • Rural commercial banks: 5.36% YoY
• Valuation: The banking sector's P/B (LF) was at 1X, with some stocks showing lower valuations, indicating potential for valuation repair.
• Asset Quality: Improved overall asset quality and lower NPL ratios contributed to better performance.

2018 Outlook

• GDP Growth: Expected to slow slightly but improve in terms of quality and structure.
• Monetary Policy: PBOC will maintain prudent neutrality, with mild interest rate increases and a focus on open market operations.
• RRR Cuts: A targeted RRR cut for inclusive finance is expected to benefit joint-equity banks.
• Asset Management Reform: New regulations will change the balance sheet structure of commercial banks, reducing liquidity risks and promoting deleveraging.
• Non-Interest Income: Banks with strong retail and investment capabilities are expected to benefit from differentiated non-interest income.
• Capital Adequacy: All 25 listed banks announced refinancing plans, expected to alleviate capital pressures in 2018.

Key Information

Monetary Policy

• Shifted from "prudent" to "prudent and neutral" in 2017, ending six years of monetary easing.
• PBOC aims to balance growth and structure, while curbing risks and strengthening financial regulation.
• NCDs (Negotiable Certificates of Deposit) will be included in MPA starting from Q1 2018, increasing the assessment pressure on banks.

Financial Supervision

• Asset management supervision is expected to deepen, with banks required to set up subsidiaries for independent asset management.
• Rigid payment (guaranteed returns) is being phased out, and net value products are becoming more prevalent.
• Deleveraging is expected to reduce liquidity risks and increase transparency.

Net Interest Margin

• Expected to widen in 2018 due to rising interest rates and increased loan demand.
• Four major banks and joint-equity banks are expected to see improved net interest margins.
• City and rural commercial banks face more pressure due to their reliance on inter-bank liabilities.

Asset Growth and NPL Ratio

• Asset growth rate is expected to slow down in 2018, in line with M2 growth.
• Non-performing loan ratio is projected to remain low, with improvements in corporate and personal credit quality.
• Deleveraging and better risk control are contributing to lower NPL ratios.

Investment Opportunities

• Undervalued banks are likely to see valuation repair in 2018.
• Joint-equity banks such as CMB, PAB, and INDUSTRIAL BANK are expected to benefit from targeted RRR cuts.
• Small and medium banks with high deposit and loan premiums may see greater-than-expected performance.
• Local government investment could serve as a catalyst for stock prices, particularly for NJCB and BANK OF SHANGHAI.

Risks

• Weaker-than-expected economic growth
• Macro-policy changes that could impact the sector's performance

Summary Table

Analysts and Contact

• Analysts: Li CHEN, Peng WANG, Ouwen Yang
• Contact: Wenyi ZHOU, Yanzi LIANG
• Research Division: Beijing, Shanghai, Shenzhen, Chengdu

Conclusion

The banking sector in China is expected to maintain steady growth in 2018, driven by improved net interest margins, low NPL ratios, and targeted monetary policy adjustments. Financial supervision is expected to deepen, promoting structural changes and deleveraging, which could reduce risks and improve sector valuation. Undervalued banks and those with strong retail and investment capabilities are likely to see significant opportunities.