德银-中国-银行业-中国银行业：德银AccessChina会议要点-20180121-16页_550kb

Summary of DB AccessChina Conference Highlights (2018)

Core Content

This report provides a detailed analysis of the China banking sector based on insights from the DB AccessChina conference, which included meetings with 12 banks and a two-day trip to visit unlisted banks in Eastern China. The key themes revolve around bank earnings, funding strength, regulatory impact, and investment strategies.

Main Views

Bank Earnings Outlook

• A modest recovery in bank earnings is expected for 2018.
• Listed banks are forecast to achieve 6.5% yoy net profit growth in 2018, compared to 4.3% in 2017.
• Retail-oriented banks (such as the big-four, CMB, and CRCB) are expected to deliver better quality results due to their diversified revenue streams and lower risk exposure.

Earnings Drivers

• Net Interest Margin (NIM): Most banks expect a modest expansion in NIM, driven by faster increases in asset yields than in funding costs.
• Loans: Loan growth is expected to remain similar to 2017, with a retail-to-corporate ratio of 50:40:10. Banks are focusing more on consumption loans and credit card installments in retail and manufacturers and SMEs in corporate.
• Fee Income: While WMP-related fees are under pressure due to tighter regulations, credit card fees and a low base are expected to offset this. Many banks, especially JSBs, anticipate decent growth in fee income.
• Asset Quality: Asset quality is expected to improve, with lower NPL ratios and higher provision coverage. However, there is mixed outlook on credit cost due to pending IFRS9 implementation.
• Credit Cost: Big banks are expected to increase credit cost to raise provision coverage, while others may see a decline if IFRS9 is not considered.

Funding Strength

• Funding strength is highlighted as the key differentiator among banks.
• Tighter regulations, such as the ban on negotiated deposits and compression of non-standard credit assets, have increased funding costs and reduced NIM for banks reliant on wholesale funding.
• The market may have underestimated the impact of tighter regulations on smaller banks, which are more vulnerable to funding pressures.

Key Information

Investment Strategy

• Banks are re-emphasizing SME lending and reducing exposure to overcapacity sectors.
• Retail banking is a strategic focus, with efforts to transform outlets and invest in fintech.
• Deposit growth is expected to rebound, supported by off-B/S WMPs returning to deposits and supply chain financing.

Capital and Funding

• Capital raising plans vary: some banks are issuing preferred shares and convertible bonds to enhance CET1 and CAR.
• Capital position is expected to be stable or slightly improved, with a focus on liquidity management and financial leverage.

Regulatory Impact

• IFRS9 implementation is expected to increase provisions and lower capital but has a mild impact overall.
• New asset management rules are expected to have a smaller impact due to a grace period.

Top Picks

• Bank of China (3988.HK) – Buy, Target Price: HKD4.43
• Agricultural Bank of China (1288.HK) – Buy, Target Price: HKD4.50
• Industrial and Commercial Bank of China (1398.HK) – Buy, Target Price: HKD7.19
• China Construction Bank (0939.HK) – Buy, Target Price: HKD8.48
• Bank of Communications (3328.HK) – Buy, Target Price: HKD6.51
• Chongqing Rural Bank (3618.HK) – Buy, Target Price: HKD6.57

Downside and Upside Risks

• Downside risks: Inflation, large-scale DES on government intervention, over-tightening, and property price correction.
• Upside risks: SOE reforms and removal or softening of GDP targeting.

Summary of Key Bank Performance

Conclusion

The report underscores the modest recovery in the banking sector in 2018, with a shift in investor focus from asset quality to revenue growth and differentiated strategies. Retail banks are favored for their better performance and lower risk. Funding strength and regulatory compliance are critical factors affecting performance, with tighter regulations impacting wholesale-funded banks more significantly. The market's underestimation of the impact on smaller banks and the focus on SME lending are key differentiators in the sector.