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China Financial Daily:PBOC Xu,Limited System Impact from Inc

DB Research

Banking quarterly data 2Q17: wider divergence between big and smaller banks

    Chinese Banks - July 2017banking volume – A temporary rebound in creditGrowth

    The CBRC released 2Q17 operating data for China’s all commercial banks, withquarterly net profit at Rmb477bn, up 11.6% yoy (1Q17: +4.6%). The earningsrecovery was driven by moderating NPL formation, lower credit cost and mildNIM expansion (Fig 1). For the big banks, we see gradual improvements inearnings quality, characterized by an NIM recovery, lower NPL ratio andstronger provision coverage. Hence, we expect the big banks to report solid2Q17 results, which should help drive a re-rating. In contrast, joint-stock banks(JSBs) slowed asset growth notably and reported further NIM contraction amidfinancial deleveraging. We stay cautious on JSBs. Top picks: ICBC and BOC.

    The PBOC reported July 2017new loans of Rmb826bn and new TSF ofRmb1.22trn, both exceeding consensus estimates. Adding back strongmunicipal bond issuance of Rmb845bn, system credit growth rebounded to15.4% yoy from 14.7% in June (Fig. 1). We attribute the stronger-thanexpectedcredit data to 1) banks bringing off-B/S shadow credit into on-B/S, and 2)accelerating bond financing on lower rates. Given the still healthy macro data,we expect the financial deleveraging campaign to continue in order to deleverfinancial markets and contain the asset bubble. Thus we maintain our forecastthat system credit will fall to 13%-14% yoy by end-2017.(Hans Fan, 85222036353)

    NIM trend: big banks (recovered) vs. JSBs/city banks (compressed)

    Chinese Banks - Better earnings quality should drive big banks' re-rating

    NIM for the entire banking sector was up 2bps qoq to 2.05% (1Q17: down19bps), due to gradual asset repricing. Average yield for new corporate loanspicked up 40bps YTD. Specifically, big banks’ NIM was up 3bps qoq, whileJSBs & city commercial banks’ NIMs were both down 2bps qoq (Fig 4). Thisshows continuing funding pressure for smaller banks. We think NIM pressurewill continue for JSBs in the near term, given still elevated market rates andmore intense competition for deposits.

    The CBRC released 2Q17operating data for China’s all commercial banks, withquarterly net profit at Rmb477bn, up 11.6% yoy (1Q17: +4.6%). The earningsrecovery was driven by moderating NPL formation, lower credit cost and mildNIM expansion (Fig 1). For the big banks, we see gradual improvements inearnings quality, characterized by an NIM recovery, lower NPL ratio andstronger provision coverage. Hence, we expect the big banks to report solid2Q17results, which should help drive a re-rating. In contrast, joint-stock banks(JSBs) slowed asset growth notably and reported further NIM contraction amidfinancial deleveraging. We stay cautious on JSBs. Top picks: ICBC and BOC.(Hans fan, 85222036353)

    Asset quality risk further relieved; NPL formation stayed low

    We estimate annualized NPL formation to be 85bps in 2Q17, higher than49bps in 1Q17 but lower than 126bps in 2016. As a result, banks only set asidecredit cost of 92bps, much lower than 136bps in 2Q16. Sector NPL ratio wasflattish qoq at 1.74% (Fig 6). Big five banks saw NPL ratio falling further by4bps qoq to 1.60%, while rural financial institutions saw rising NPL ratio (up26bps qoq to 2.81%). We expect strict implementation of supply-side reformsand moderated property risks to relieve overall asset quality. However, forsmaller banks with higher shadow banking exposure and looser NPLclassification, the pressure could persist.

    Banking asset growth slowed, dragged mainly by JSBs

    China’s domestic banking assets amounted to Rmb236.5tr as of June 2017, up11.4% yoy. Total banking asset growth slowed from 16.5% yoy in 2016, whichwas mainly dragged down by slower growth at smaller banks, especially JSBs.

    Total assets of joint-stock and city/rural banks (44% of total banking assets)slowed notably to 12% yoy at end-June from 19% in 2016 (JSBs down to 8.4%from 17.2% in 2016). This was mainly because smaller banks slowed shadowbanking asset growth when facing tighter regulations (Fig 12). In contrast, theBig Five banks (36% of total banking assets) are growing their asset basemodestly faster at 8.8% yoy vs. 6.9% in 1H16.

    2Q17 – expecting NPAT growth of 4.6% yoy with better quality at big banks

    We expect the 17 listed banks under our coverage to report NPAT growth of4.6% yoy in 2Q17 (Fig 17). Big banks could see gradual improvements inearnings quality with a strong recovery in PPoP (11% yoy, excluding BOC’sNCB disposal gain) and a stronger coverage ratio. But JSBs are likely to besubjected to NIM shrinkage, asset growth slowdown and less asset qualityimprovement (PAB is an example, see our 2Q17 note: Fundamental recoverytakes time). As a result, smaller banks may report a decline in PPoP (down3.5% yoy) and then have to lower loan-loss provision charges (down 21% yoy).

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