20180531-兴业金融证券-Modest_Impact_From_Yield_Spike_8页_267kb

Summary of Document: Banks - Modest Impact From Yield Spike

Core Content

This document provides an analysis of the impact of rising bond yields on the performance of Chinese banks, particularly focusing on earnings and capital adequacy. It outlines the current market conditions, the effects of IFRS9 on financial reporting, and the implications for bank valuations. The report also maintains an "Overweight" rating for the banking sector, with specific recommendations for top picks.

Main Points

1. Impact of Yield Spike on Banks

• Earnings Impact: A 50bps parallel upward shift in the yield curve would reduce FY18F net profit by approximately 0.9% and lower the CET1 capital ratio by 14bps.
• Bank-Specific Impact:
  • China Construction Bank (CCB): Minimal impact, only a 0.4% decline in profit.
  • China Minsheng Banking Corp (MSB) and China Everbright Bank (CEB): More vulnerable, with 3.6% and 2.9% profit declines, respectively.
• Capital Ratio Impact: The CET1 ratio is expected to decline by 14bps on average, with MSB experiencing the largest drop at 12bps.

2. Market Conditions and Defaults

• Yield Increase: The yield for 1-year AA-rated corporate bonds has increased by 49bps since April.
• Credit Spread Widening: The credit spread has widened by 26bps.
• Bond Defaults: YTD defaults have risen by 25% YoY to CNY17.9bn.
• Reason for Defaults: The recent increase in defaults is attributed to tightening in financing channels, especially from the unwinding of off-balance sheet financing due to the new asset management rules.
• Social Financing Growth: Total social financing growth has slowed to CNY7.1trn in Jan-Apr 2018, down by CNY1.2trn YoY, despite stable loan growth.

3. IFRS9 and Financial Reporting

• Classification of Financial Assets: Under IFRS9, financial assets are classified as:
  • At Fair Value Through Profit or Loss (FVPL)
  • At Fair Value Through Other Comprehensive Income (FVOCI)
  • At Amortised Cost
• Impact on P&L Volatility: IFRS9 has increased the volatility of banks' income statements due to higher provisions and mark-to-market losses for FVPL assets.
• Asset Value Recognition: Changes in asset value for FVPL and FVOCI are reflected in income statements and shareholder equity, respectively. Amortised cost assets only reflect changes upon sale.

4. Valuation and Investment Outlook

• Sector Rating: Overweight (maintained).
• Top Picks: Agricultural Bank of China (ABC) and Bank of China (BOC) are highlighted as BUY recommendations.
• Target Prices:
  • ABC: HKD5.80 (45.4% upside)
  • BOC: HKD5.90 (45.3% upside)
• Valuation Metrics:
  • P/E Ratio (2018E): Ranges from 4.7x to 8.3x
  • P/BV Ratio (2018E): Ranges from 0.55x to 1.31x
  • Dividend Yield (2018E): Ranges from 3.1% to 6.4%
  • ROE (2018E): Ranges from 11.2% to 16.7%

5. Outlook on Credit and NIM Expansion

• Credit Demand-Supply Dynamics: Expected to remain favourable, supporting NIM expansion.
• Asset Quality Recovery: Anticipated in the coming quarters.
• Preference for Large Banks: Banks with a strong deposit base and limited shadow banking exposure are preferred.

Key Information

• Yield Spike Drivers: Liquidity tightening and accelerating defaults.
• Default Trends: Likely to continue due to tighter financing channels, but not due to corporate fundamentals.
• Corporate Fundamentals: Positive trend in profitability and debt servicing ability for A-share listed non-financial corporations.
• Gearing Ratios: Real estate and construction sectors have gearing ratios above historical means, indicating potential for more defaults.

Investment Recommendations

• BUY: Agricultural Bank of China (ABC), Bank of China (BOC), China CITIC Bank (CITIC), China Merchants Bank (CMB), and ICBC.
• NEUTRAL: Bank of Communications (BoCom), China Minsheng Banking Corp (MSB), and China Everbright Bank (CEB).

Conclusion

Despite the modest impact from the yield spike, the report maintains an Overweight rating for the banking sector, highlighting the resilience of large banks and their potential for earnings growth and capital adequacy improvements. The analysis suggests that the earnings impact is manageable, with CCB being the least affected and MSB and CEB facing greater challenges. The overall outlook remains positive, with continued NIM expansion and recovery in asset quality expected.