07/07/2015
China / Financials
The sector reforms will give China bank a boost in the long run as the changes should enhance their efficiency.
We see Chinese banks’ asset quality and earnings growth to recover. We do not expect much more pressure on net interest margin (NIM) during the rate cut cycle since China has largely completed its interest rate liberalisation process. There is still a lot of room for requirement reserve ratio (RRR) cuts to boost liquidity and loan growth. Concerns on local government loans should be largely eased by local government’s debt swap programme. With GDP growth to stabilise at around 7% in the second half – which is the New Normal – China banks’ non-performing loan (NPL) formation ratio and credit cost should stabilise, although overall NPL ratio will likely rise and top at 2% by 2017.
The mixed-ownership reform will make a difference as the better ownership structure will pave the road for a market-oriented compensation system, multi-divisional reforms and potential subsidiary spinoffs, and the employee stock ownership plan (ESOP). These should enhance banks’ efficiency in the long run. Overseas markets can be a new growth driver as banks expand alongside clients due to China’s One-Belt-One-Road Plan. In future, we also expect higher contribution from private banking and wealth management businesses, in tandem with the development of China’s capital markets. BoCom’s recent acquisition of Hua Ying Securities signals the potential mixed-operation reform in the financial sector and the rise of universal banks.
After the pull-back in the past month, H-share China banks are trading at an attractive 0.9 times fiscal year 2015 price-to-book value ratio on average, creating a good entry opportunity. We are looking for at least a 20% upside for H-share China banks, and A-share banks should see a short-term boost driven by the market bailout plan. We like banks that will benefit from financial sector reforms and have strong innovative ability in developing new businesses, including internet financing. We revised up our mid-term growth assumption for BoCom to factor in impact from reforms and slightly increased our target price.
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