20140602-Maybank_KERPL-Diversified_Financials_Shadow_banks_-_H_idden_treasures_64页_2mb

Diversified Financials Summary

Core Content

This document provides an analysis of the shadow banking sector in China, highlighting its current state, regulatory changes, and future outlook. The key focus is on the potential for consolidation, improvement in asset quality, and investment opportunities for leading shadow banks. The sector is initiated at OVERWEIGHT, with Credit China (8207 HK) rated HOLD and China Financial Services Holdings (CFSH, 605 HK) and Far East Horizon (FEH, 3360 HK) rated BUY.

Main Points and Key Information

1. Regulatory Changes and Market Consolidation

• Regulatory liberalization of micro-finance business for small-loan finance companies is expected.
• New regulations on online P2P lending and tightening of commercial banks' investments in shadow bank assets will lead to consolidation in the industry.
• Leading shadow banks with strong expertise, cheap funding, proactive diversification, and disciplined risk management are likely to benefit.

2. Asset Quality Improvement

• Trust companies have maintained a low default rate, with only five defaults over the past two decades.
• Micro-finance and secured P2P lending are expected to improve asset quality due to conservative LTV ratios and better risk management.
• Pawn loans have a near-zero loss ratio due to conservative lending practices.

3. Growth Drivers

• Micro-finance is expected to grow at a 28.3% CAGR from 2013 to 2016.
• P2P lending is projected to grow at a 57.2% CAGR during the same period, with secured lending helping to reduce default rates.
• Financial leasing is growing at a 54.3% CAGR from 2009 to 2013, with low NPL ratios due to conservative lending policies.

4. Valuation and Investment Recommendation

• Credit China is initiated at HOLD due to rich valuation.
• CFSH and FEH are initiated at BUY due to strong fundamentals, undemanding valuations, and growth potential.
• The foreign reserves of China (USD3.8t in Dec 2013) are expected to cover 24.4% of shadow bank assets, indicating a level of credit risk mitigation.

Key Financials of Listed Shadow Banks

Outlook and Risks

1. Definition of Shadow Banks

• Shadow banks are categorized into three groups under Document 107:
  • Unregulated intermediaries (e.g., internet finance, wealth management companies).
  • Institutions with minimal regulation (e.g., pawnshops, small-loan finance companies).
  • Fully regulated financial institutions (e.g., banks, trust companies, fund managers) with some unregulated activities.

2. Trust Companies

• Trust companies are under the supervision of the CBRC.
• Tightened capital rules and risk management measures are expected to improve asset quality and reduce risky investments.
• Despite the recent default of two coal-related trust products, the overall asset quality remains strong.

3. Risks

• Potential NIM pressure for Credit China due to the expansion of micro-finance in Chongqing and Hefei.
• Higher default rates in unsecured P2P lending.
• Funding constraints for online P2P and micro-finance businesses.

Conclusion

• The shadow banking sector in China is expected to grow at a slower pace due to regulatory tightening.
• CFSH and FEH are positioned as top picks due to their strong fundamentals and growth potential.
• Credit China is rated HOLD due to its current valuation.
• Asset quality is expected to improve with the exit of weaker players and better risk management practices.
• The government's support for financing guarantee companies and regulatory reforms are key factors in shaping the future of the sector.