20220419-招银国际-China_Banking_Sector_High_provision_banks_will_outperform_3页_486kb

China Banking Sector Summary

Core Content

The document provides an analysis of the China banking sector, focusing on the impact of recent monetary policy changes, particularly the reduction in the reserve requirement ratio (RRR), and the outlook for bank performance in the fiscal year 2022. It also includes a valuation table, analyst ratings, and sensitivity analysis on earnings based on changes in provision strategies.

Main Views

• RRR Cut Impact: The People's Bank of China (PBOC) cut the RRR by 25 bps on 15 April 2022, which is below the market consensus of 50 bps. This move was aimed at injecting RMB 530 billion in long-term liquidity and reducing the weighted average RRR for financial institutions to 8.1%.

• Economic Headwinds: The 1Q22 loan data indicates ongoing economic challenges, and the document suggests that more aggressive monetary easing is needed to achieve the 5.5% GDP growth target for 2022.

• Provision Strategy: Regulators encourage state-owned banks to lower provision coverage to support profit growth. The document suggests that the allowance to total loan ratio should not be less than 2.5%, and the provision coverage ratio should not be less than 150%.

• Stock Performance Outlook: The banking sector is maintained as "OVERWEIGHT," indicating it is expected to outperform the broad market. PSBC (1658 HK) is highlighted as the top pick with a "BUY" rating and a target price of HK$8.40.

Key Information

RRR Cut Details

• Effective Date: 25 April 2022
• Cut Size: 25 bps for all banks, with an additional 25 bps for small commercial banks and selected rural lenders
• Liquidity Impact: RMB 530 billion in long-term liquidity
• Cost Savings: Estimated to save RMB 6.5 billion for banks, which could translate into lower interest rates for the real economy

Sector Outlook

• Growth Target: The 5.5% GDP growth target for 2022 may be difficult to achieve without more aggressive stimulus measures.
• Future Policy Expectations: Additional RRR and LPR cuts are anticipated to stimulate the economy further.

Valuation Table Highlights

Sensitivity Analysis on Provision Strategy

• Allowance to Total Loan Ratio Cut:
  • 50 bps: PSBC and ABC show significant earnings impact.
  • 100 bps: PSBC and ABC show even higher earnings potential.
• Provision Coverage Ratio: PSBC has the highest provision coverage ratio, indicating stronger resilience.

Analyst Information

• Analysts: Eric Wang and Gigi Chen, CFA
• Contact Details: Eric Wang - (852)63670561, ericwang@cmbi.com.hk; Gigi Chen - (852) 3916 3739, gigichen@cmbi.com.hk

CMBIG Ratings

• BUY: Potential return of over 15% over next 12 months
• HOLD: Potential return of +15% to -10% over next 12 months
• OUTPERFORM: Industry expected to outperform the broad market benchmark

Disclosures

• The report is prepared by CMB International Global Markets Limited (CMBIGM), a subsidiary of China Merchants Bank.
• Important Disclosures:
  • The report is not investment advice and should not be relied upon for making investment decisions.
  • CMBIGM does not guarantee the accuracy or completeness of the information.
  • The report may be subject to conflicts of interest due to CMBIGM's business relationships with the companies mentioned.
  • The report is intended for specific investors and may not be distributed to others without prior consent.

Regulatory Compliance

• The report is subject to different compliance requirements based on the recipient's location (UK, US, Singapore), with restrictions on distribution and use.

Conclusion

The banking sector in China is expected to outperform the market, with PSBC being the top recommendation. The RRR cut and potential for further monetary easing are seen as key drivers for the sector, though the impact on growth is expected to be limited without additional measures. Analysts emphasize the importance of provision strategy and highlight the sensitivity of certain banks to changes in these ratios.