20211209-招银国际-China_Banking_Sector__Looking_for_the_safe_harbor_48页_4mb

China Banking Sector Summary

Core Content

The China banking sector is currently facing pressure on asset quality due to a weak economy and rising default rates in the property sector. However, systemic collapse is unlikely as banks have sufficient capital to withstand these challenges. The sector is trading at a historical low valuation (0.4x 22F/PB), suggesting that many banks are undervalued and could benefit from a re-rating if positive policy changes occur.

Main Points

1. Asset Quality and Valuation

• Asset Quality: Overall NPL ratio is expected to increase slightly to 1.78% by the end of 2022, up from 1.76% in 1H21. The increase is primarily due to the rising default rate in property-related loans.
• Valuation: The sector is at a historical bottom, with A-share banks trading at 0.58x P/B and H-share banks at 0.44x P/B, suggesting that all current negatives have been priced in.
• Key Risk: The default rate on property development loans is the main risk factor for banks, but the current valuation already reflects these risks unless a "default contagion" occurs.
• Valuation Implications: Banks with strong balance sheets are likely to outperform as the sector re-rates.

2. Sector Re-rating Drivers

• RRR Cut: The People's Bank of China (PBOC) is expected to cut the Required Reserve Ratio (RRR), which could lead to a re-rating of the banking sector.
• Inflation Concerns: Current low core CPI levels suggest that RRR cuts are unlikely to cause inflationary pressures.
• Policy Bottom: The PBOC has signaled support for the property sector, indicating a policy bottom. Any positive liquidity injections or easing of property-related restrictions will likely drive re-rating.

3. Investment Strategy

• Short-term: Focus on banks with less exposure to property developers, strong provision coverage, and better NPL indicators. PSBC is the top pick due to its low property loan exposure and strong asset quality.
• Long-term: Look for banks with good asset quality, strong profitability, and growth potential. PSBC and CMB are leading in their respective segments.
• Defensive Play: High dividend yield and stable earnings growth are key for defensive investors. The "Big 4" banks (ICBC, CCB, ABC, BOC) offer attractive dividend yields (6%-7%) and sustainable payouts.

Key Banks and Valuation

Key Risks

• Property Sector Defaults: A 10% default rate on property development loans could lead to a 59 bps increase in NPL ratio and a drop in provision coverage ratio to 143%, which is below regulatory recommendations.
• Capital Requirements: While banks currently have sufficient capital, the Total Loss Absorbing Capacity (TLAC) rules may require additional capital in the future, especially for the "Big 4" banks.

Sector Outlook

• NIM Compression: NIM is expected to remain weak in 2022, but the compression will be less severe than in previous years.
• Loan Growth: Loan growth is expected to accelerate in 2022, while deposit growth remains muted, leading to an increase in LDR.
• Valuation Re-rating: With the current valuation reflecting all negatives, a re-rating is likely if positive policy changes occur, especially related to liquidity injection and property sector support.

Investment Recommendation

• Top Pick: PSBC (1658 HK) with a target price of HK$7.20, implying a 0.82x 2022F P/B.
• Reasons for Pick: PSBC has the lowest exposure to property development loans, strong provision coverage, and a solid balance sheet. It is also well-positioned to benefit from RRR cuts due to its deposit-funded model.

Conclusion

The China banking sector is currently undervalued, with the most attractive opportunities in banks that have strong asset quality, sufficient capital, and lower exposure to the property sector. The sector is expected to re-rate if positive policy changes occur, and PSBC stands out as the top recommendation due to its strong fundamentals and low exposure to property-related risks.