20160112-申万宏源研究_香港_-港股中资银行_实际不良率超预期_下调至标配_33页_2mb

Equalweight Downgrade: Summary

Core Content

This report from Vivian Xue on 12 January 2016 discusses the downgrade of the Hong Kong-listed Chinese banking sector from Overweight to Equalweight, based on asset quality risks, profitability concerns, and monetary policy outlook. The analysis is grounded in the real non-performing loan (NPL) ratio and implied NPL ratios, which are calculated using both bottom-up and top-down approaches.

Main Points

1. Downgrade Reasoning

• Asset Quality Risks: The real NPL ratio for the banking sector is expected to rise due to deteriorating corporate solvency and increasing defaults.
• Profitability Concerns: The real NPL ratio is projected to exceed the implied NPL ratio for tier-1 banks, leading to pressure on provisions and net profits.
• Monetary Policy Constraints: The negative real deposit rate and pressure on the RMB reduce the central bank's ability to implement further stimulus, limiting valuation recovery.

2. Real NPL Ratio Analysis

• The real NPL ratio is calculated by analyzing the solvency of A-share companies and projecting the impact on the banking sector.
• 2014: Real NPL ratio was 6.6%.
• 3Q15: Real NPL ratio rose to 11.3%, with enterprise loans accounting for 65% of total loans and an average NPL ratio of 0.84%.
• 2016E Base Case: Real NPL ratio is expected to reach 10.8%, which is above the tier-1 implied NPL ratio of 9.1%, but below the tier-2 implied NPL ratio of 12.5%.
• 2016E Worst Case: Real NPL ratio could reach 12.4%, which is close to the tier-2 threshold.

3. Sector Performance

• The banking sector outperformed the HSCEI in 2014 by 14 ppts.
• In 2015, the sector corrected by 15%, but still outperformed the HSCEI by 4 ppts.
• The report suggests that 2016 is unlikely to see further outperformance due to limited monetary stimulus and increasing asset quality risks.

4. Industry-Specific Analysis

• High real NPL ratio industries: Steel, non-ferrous metals, construction materials, animal husbandry, and commercial trade.
• Low real NPL ratio industries: Transportation, public utilities, non-bank financials, home decoration, and media.
• The real NPL ratio of enterprise loans for H-share banks in 3Q15 was 9.7%, which is slightly lower than the overall real NPL ratio of 11.3% for all Chinese banks.

5. Banks' Real NPL Ratio

• Best asset quality: CCB (China Construction Bank) and CRCB (Chongqing Rural Commercial Bank).
• Worst asset quality: Citic and ICBC (Industrial and Commercial Bank of China).
• Real NPL ratio of total loans for H-share banks in 3Q15 was 6.6%.
• 2016E Best Case: Real NPL ratio of total loans would be 7.7%.
• 2016E Base Case: Real NPL ratio of total loans would be 9.3%.
• 2016E Worst Case: Real NPL ratio of total loans would be 10.7%.

6. Implied NPL Ratio

• The tier-1 implied NPL ratio for 2016 is 9.1%, which is the maximum NPL ratio that banks can tolerate without net losses or refinancing pressure.
• If the real NPL ratio exceeds 12.5%, tier-2 banks would face refinancing pressure.
• If the real NPL ratio exceeds 15.8%, tier-3 banks would face losses.

7. Pair Trade Recommendation

• Based on the difference between real and implied NPL ratios, the report suggests buying CRCB and selling CMB.
• CRCB has the highest real NPL ratio (13.9%) and the lowest implied NPL ratio (7.2%).
• CMB has the lowest real NPL ratio (0.85%) and the highest implied NPL ratio (12.5%).

Key Information

• Real NPL ratio is calculated using bottom-up analysis of A-share companies.
• Implied NPL ratio is calculated using top-down analysis, considering provisions, capital, and valuation.
• GDP growth is expected to slow to 6.8% in 2016, leading to increased NPLs and reduced profitability.
• Interest rates have fallen to 1.5%, while CPI is forecasted to rise to 1.7%, leading to negative real deposit rates.
• M2 growth is at 13.7%, exceeding the PBoC's target of 12%, limiting monetary stimulus.
• Banks' exposure to risky industries is a key factor in their real NPL ratio.
• Valuation recovery is expected to be limited due to monetary policy constraints and increasing NPLs.

Conclusion

The report concludes that the banking sector is unlikely to outperform the market in 2016 due to increased asset quality risks, reduced profitability, and limited monetary stimulus. It recommends downgrading the sector to Equalweight and suggests a pair trade strategy of buying CRCB and selling CMB based on their real and implied NPL ratios.