Académique Documents
Professionnel Documents
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China banks
EQUITY RESEARCH
June 24, 2011 Research analysts China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
Shadow banking exposure less than feared and more than priced in
Policy focus on total social financing rather than just bank loan growth to bring an estimated CNY8.5tn of shadow banking loans into view. Our in-depth study of Chinas shadow banking suggests it accounts for a much smaller proportion of GDP than the US experience in 2007, and comprises mostly SME loans rather than structured derivatives. With pre-emptive policies already slowing these loans, we think the recent correction in bank valuations is a buying opportunity. ICBC is our top pick, with the least exposure to shadow loans on our analysis. CCBs risk of entrusted products is much higher than peers and we downgrade it to NEUTRAL. Key analysis in this Anchor Report includes:
Study of trust and entrusted loans, with scenario analysis of the impact
on various banks capital adequacy.
Regulation changes shifting to quality of capital from quantity. Public housing unlikely to become another LGFV issue. Detailed
scenario analysis.
Bigger role for rural financial institutions and opportunities for ABC and
CRCB, given extensive rural networks.
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non-US affiliates are not registered or qualified as research analysts with FINRA in the US.
China banks
Banks
EQUITY RESEARCH
Shadow banking exposure less than feared and more than priced in
Chinas shadow banking is different from that of the US The deleveraging of the US shadow banking system magnified the impact of falling housing prices on the financial system. With Chinas total shadow banking loans reaching CNY8.5trn (our estimate), we think the market is rightly concerned. But we point out that: 1) Chinas shadow bank loans accounted for 21% of GDP and 17% of loans in 2010, vs 44% and 96% for the US in 2007; 2) some shadow operators lend to under-financed SMEs in China, unlike in the US where the majority relate to mortgage-backed structured derivatives; 3) the CBRC has already undertaken pre-emptive measures on overheated shadows like trust loans and credit guarantee companies, the growth of which has since declined substantially. Tighter liquidity could suffocate SMEs, but still ample policy power We believe there is potential for a gradual shift in liquidity monitoring from M2 and bank loans to total social financing, which could lead to stricter regulation of shadow banking in China and an even tighter liquidity environment. SMEs may be at the forefront of such risk given their less diversified funding channels and vulnerability to any economic slowdown. However, we think the Chinese regulators success in managing financial institution reform, with over 40% legacy NPLs, puts it in a strong position to manage this challenging and delicate task. The central bank also has ample balance sheet capability to ensure the soundness of the financial system, which remains its top priority. Stocks: market discounting more than it should again We cut our rating on CCB and trim our TPs for ICBC, CCB, BOCOM, CMB and CRCB. Our analysis indicates that valuations (P/BVs of 1.0-1.4x for FY12F, implying ROEs of 12-14%) more than factor in the combined bleak scenarios of LGFV NPL write-off, interest rate deregulation, and higher normalized credit cost and tier-1 ratios in our three-stage Gordon Growth model. We expect positive catalysts to re-emerge ahead of the interims.
Fig. 1: Stocks for action: H-share China banks
Potential upside/ downside (%) 32 28 9 38 15 37 31 2 38
Anchor themes We think the operating environment remains favourable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continues to weigh on valuations. Nomura vs consensus We downgrade CCB to NEUTRAL on its exposure to shadow credit and possible shortfall in capital against the backdrop of increasing regulatory oversight.
Research analysts
China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
Bloomberg Company China (H-share) ABC ICBC CCB BOC BOCOM CMB CITIC Bank Minsheng CRCB ticker 1288 HK 1398 HK 939 HK 3988 HK 3328 HK 3968 HK 998 HK 1988 HK 3618 HK Rating BUY BUY NEUTRAL BUY NEUTRAL BUY BUY NEUTRAL BUY
Price target (HK$) 5.20 7.50 7.02 5.20 8.30 24.82 6.50 7.40 6.52
Current price (HK$) 3.94 5.84 6.44 3.77 7.24 18.08 4.97 7.29 4.71
Note: Prices as of 21 June close. Source: Bloomberg, Company data and Nomura research
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Contents
4
Executive summary
7
Regulation on new capital framework shift in focus to quality from quantity of capital Bail-out of LGFV loans
10
11
Catalysts
13
14
17
Regulation changes
17
23
24
28
31
33
34
34
SME business has drawn more attention from banks over the past year...
36
37
38
38
40
40
40
41
41
42
43
45
Rural financing
45
45
46
46
47
48
Agricultural Bank of China ICBC China Construction Bank-H Bank of China (H-share) Bank of Communications China Merchants Bank China CITIC Bank China Minsheng Bank - H Chongqing Rural Commercial Bank Appendix A-1
54
60
66
71
77
83
88
93
99
Executive summary
In the past five to seven weeks, the market has showed more signs of weakness with the Hang Seng Index down by 6.1%-6.5% vs a 5.8%-6.7% fall in the HSCEI. Globally, weak economic data, the end of QE2, and more problems in Greece are reminding the market of all the ills that still plague the US and global economies. China stocks, particularly Chinese banks, have their own issues arising from recent negative news pieces, such as a 2trn to 3trn LGFV bail-out (reported by Reuters), the CBRCs new rules on increasing the risk weighting of 1/3 of banks asset classes, as well as elevated inflation in June vs. sluggish industrial production. This points to more downside risk to economic growth, with little scope for easing monetary policy in the near term. Against this backdrop, the sectors valuation quickly reverted to the years beginning level, with an average return of -5.3% YTD vs. +12% at the end-April peak. The shadows did not only come from the shadow banking system. In this Anchor Report we dive into the details of loans and credit that are hidden from banks balance sheets and analyse the driving forces that shape investor sentiment and banks performance: 1) regulatory changes are ongoing (ie, more capital and provisioning); 2) the boom of the underground credit market amid tight liquidity and capped banking loans; and 3) the inflation curve and rate hikes (when will they peak?). While we believe uncertainty surrounding the provision and capital requirements for LGFV (Local Government Financing Vehicle) loans capped banks absolute performance earlier this year, rate hikes which raised banks net interest margin in 4Q10 and 1Q11 are the key driving force of Chinese banks outperformance in the first quarter, in our view. Nevertheless in view of our expectation that banks NIMs are likely to peak in 2Q11, together with renewed talk about the new capital framework and the governments bail-out plan on LGFV loans since early June, the outperformance of Chinese banks has been largely removed. With the market and banking stocks remaining in correction mode, it is time to review our risk/reward scenario by looking at the potential damage to the market from a perceived LGFV crisis vs. the real deterioration in sector fundamentals (earnings, asset quality, long-term ROEs): In below charts and tables we list all the upcoming regulatory and operational changes/risks that the sector faces, which we map into banks earning metrics through a 3 stage Dupont analysis. Then we derived the bear case LT ROEs, which we compared with the market-implied ROEs. Our reversed Gordon Growth approach highlights some interesting conclusions drawn by the market: Bail-out. It believes that a CNY2-3bn bail-out may happen and this could wipe out onethird of the banks earnings and cut sector ROE to 10.5%-20.7%. Rate liberalization. The market believes that China banks NIMs will drop to 1.8% to 2.4% in the medium term after rate liberalization. It also believes that fee income growth will never pick up to 20% of operating income in the long term, albeit from a 40%-50% CAGR since 2005 (company data). Recurring capital raising. The market believes listed banks will raise USD124bn (CNY800bn) in equity capital in the next three years because Core Tier 1 will decrease by 2% (vs. our estimate of 1.3%) from implementation of BASEL 3 hence risk weighting changes. Credit cycle. The market believes Chinese banks credit cost will increase to 80-90bps due to 3% pa of gross NPL formation in the long run, which is more than triple the current level of below 1%. There is always a possibility that one or all of the above could happen in the not too distant future. Yet the long-term return of Chinese banks will likely be above the mid-teens, in our view, with solid growth in fee income encouraged by policy makers through further deregulation. We consider this the single most important factor to support the sectors long-term prospects.
In our view, assuming a proportion of 25%-40% for fee revenue, China banks can weather a much lower NIM of 1.8% to 2.2% (for the big five banks), moderate credit growth of 8%-10%, and an increase in credit cost to 80-90bps due to 3% pa of gross NPL formation in the long run. In short, at 1.1x-1.6x P/B (2011F) and 0.97x-1.36x P/B (2012F), we see little downside and a 10%-15% re-rating of sector stock prices seems almost possible with potential solid interims around the corner in August.
Fig. 2: Bear Case Three-Stage ROE outlook under various assumptions on risks and challenges
As % of total assets Current (%) Distressed level (2011) Chg Medium term (2012-14) Interest rate deregulation leading to lower margins Chg Long term (2015-19) Interest rate deregulation leading to lower margins Chg
2.02-2.59
unchanged
0bp
(40bps)
(40bps)
unchanged
0bp 2.87-3.31
Fee income continued to increase by 20% y-y albeit with slowing loan volume growth
Fee income continued to increase by 20% y-y albeit with slowing loan volume +10-17bps growth 2.58-3.06
+10-17bps 2.58-3.06
unchanged
0bp 1.75-2.25
unchanged
0bp 1.62-2.08
unchanged
0bp 1.62-2.08
(0.14)-(0.39)
unchanged
0bp
30% increase in through-thecycle average credit cost to guard against soft landing economy
(9-34bps)
30% increase in throughthe-cycle average credit cost to guard against soft landing economy
(9-34bps)
LGFV provision Operating pretax (%) Business tax & surcharges Profit tax Normalised ROA (%) Non-operating gain/(loss) Reported ROA (%) (0.44)-(0.59) 1.02-1.37 (0.05)-0.02 1.02-1.37 1.49-1.95
Take one-off write-off on 2011F earnings, by 1) 20% haircut for 30% of LGFV loans spun off to Chinese government; 2) 50% provision on remaining lower grade LGFV loans not sold to the government (25-60 bps) unchanged 0.98-1.67 unchanged unchanged 0bp 0.62-1.15 unchanged 0bp 0.62-1.16 unchanged unchanged unchanged 0bp 0.73-1.09 0bp 0.73-1.09 1.06-1.62
unchanged 1.06-1.62 unchanged unchanged 0bp 0.73-1.09 unchanged 0bp 0.73-1.09 Higher tier 1 ratio given risk weighting changes or higher requirement on core capital
Equity multiplier (x) Normalised ROE (%) Market PB - 2011 (x) Implied PB (x)
unchanged
0bp 10.5-20.7
unchanged
0bp 13.6-18.1
(1.5-4.7bps) 10.2-15.2
0.78-2.24
1.22-1.87
0.74-1.45
We would like to respond to investor questions about how to model a potential LGFVs crisis with the area having deep China characteristics, which some investors may not be completely familiar with. Typically people say that any credit crisis around the globe can be summed up in five stages of grieving: denial, anger, bargaining, sadness and acceptance. Below, we draw a parallel between the five widely accepted stages of grieving and the potential for a perceived crisis of LGFV sequel. In April 2011, Chinese banks assured investors during annual results briefings that LGFV risks were under control after one year of clean-ups (un-bundling, reclassifications, top up collaterals and provisioning). Sector stock prices rose by 10% on average in March and April on strong earnings and relief from concern about local government debts. Two
months later, bank stocks began a slide that ultimately eroded 14.6% of its total market cap (the stage of anger in our view).
Fig. 3: Chinese banks earnings and capital estimated impact from regulation overhang (LGFV loans, new capital framework and shadow banking)
Impact on 2011F earnings on LGFV loan write-off and provisioning RMB'mn % of haircut as 2011F PBT Total impact on 2011F PBT ABC 13.0% 29.0% ICBC 13.6% 13.6% CCB 13.8% 33.9% BOC 12.8% 38.9% BCOM 16.3% 38.5% CMB 16.4% 16.4% Citic Minsheng 18.9% 18.9% 38.1% 46.8% CRCB 19.2% 19.2% Ave. 18.0% 28.4% Base case: we assume Chinese banks write off 20% of LGFV loans (RMB2.5trn) sold to government in the bail-out plan Worse case: in addition to the write-off, Chinese banks take 50% loss provisioning on lower grade of LGFV loans not taken up by government
Tier 1 ratio impact from new capital framework 2010 (RMBmn) Incremetnal RWA as % of total RWA Total tier 1 impact ABC 15% (136) ICBC 14% (127) CCB 14% (131) BOC 14% (135) BOCOM 11% (95) CMB 11% (80) CITIC Minsheng 11% (88) 11% (84) CRCB 17% (234) Ave. 13% (123)
Tier 1 ratio impact from charging 50% risk weighting on entrusted loans (43% of shadow banking loans) RMB'bn % of total loans Total tier 1 impact ABC ICBC 5.8% (27) CCB 13.7% (63) BOC BOCOM 5.6% (24) CMB 7.3% (28) CITIC Minsheng 7.9% (29) 3.7% (12) (31) CRCB Ave.
Note: ABC, BOC, CRCB did not release entrusted loan for 2010
Source: Nomura estimates
In our view, market participants appear of the view that LGFV risks werent contained, hence, we think investors are convinced that the outcome of ongoing negotiations will result in the government paying a CNY2-3tn (source: Reuters; 31 May) bill to buy the toxic assets from the banks. This implies to us that bank stocks would be headed to a hard-landing before a hard-landing for the toxic assets arrived. We believe credit cycles arrive in phases and LGFVs is a symptom, not the problem. Regardless of a potential government bail-out or not, a solution like this is to buy time and simply pushed the risks further into the future, in our view. Much like the reduction in the risk weighting of SMEs, it helps less on allocating credit to the much needed private sector but is more likely to cause loose credit prudence on a false belief of low risk.
Fig. 4: YTD, H-share banks sector performance against indices with events
(%) 115 110 105 100 95 90 85 12/31/2010 Sector 1/31/2011 2/28/2011 Hang Seng Index Announcement of new capital framework by Market reports of CBRC CBRC 's proposing new capital rules 3/31/2011 HSCEI 4/30/2011 5/31/2011 1st rate hike in 2011
representsRRRhike
MSCI Financials - US
Note: closing prices as of 21 June, 2011 (20 June for MSCI index) Source: Bloomberg, Nomura research
25 20 15 10 5 0 -5
(%) 85 80 75 70 65 60 55 50
Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Regulation on new capital framework shift in focus to quality from quantity of capital
The new capital framework proposing a more stringent asset-risk weighting reported by the 21st Century Business Herald is not what the market generally expected. We think many believe that the minimum requirement on tier 1 ratio (8.5%) and CAR (10.5%) by the CBRC is already stricter than BASEL III. In particular, we think the magnitude of the capital shortage more than CNY400bn (for all H-share listed banks) significantly depressed market sentiment, especially given the substantial amount of equity raising completed in 2010.
Fig. 9: Estimated impact on Tier-1 ratio of new CAR rule
2010 (RMBmn) Tier 1 ratio CAR RWA (RM B'm) Core capital Total capital Property Incremental RWA as % of total RWA Tier 1 ratio impact Interbank assets Incremental RWA as % of total RWA Tier 1 ratio impact Retail claims excluding mortgage Incremental RWA as % of total RWA Tier 1 ratio impact Operating risk Incremental RWA as % of total RWA Tier 1 ratio impact S ME Incremental RWA as % of total RWA Tier 1 ratio impact Corporate loan over 5 years Incremental RWA as % of total RWA Tier 1 ratio impact Total tier 1 impact ABC 9.8% 11.6% 5,383,694 524,910 623,970 ICBC 10.0% 12.3% 7,112,357 709,102 872,686 CCB 10.4% 12.7% 6,015,329 625,594 762,744 BOC 10.1% 12.6% 5,887,170 594,015 740,606 BOCOM 9.4% 12.4% 2,370,648 222,130 293,012 CMB 8.0% 11.5% 1,446,883 116,329 165,957 CITIC 8.5% 11.3% 1,385,262 117,055 156,673 Minsheng 8.1% 10.4% 1,280,847 103,364 133,720 CRCB 14.8% 16.3% 148,206 21,905 24,172
5.0% (47) 2.8% (27) -1.9% 19 8.5% (76) -1.2% 11 1.8% (17) (136)
3.6% (35) 1.6% (15) -1.9% 19 8.8% (81) -1.2% 12 2.9% (28) (127)
3.3% (34) 1.1% (11) -1.2% 12 9.0% (86) -1.2% 12 2.4% (25) (131)
3.7% (36) 3.6% (35) -1.4% 14 7.8% (73) -1.2% 12 1.8% (18) (135)
3.0% (27) 2.0% (18) -1.6% 15 6.9% (61) -1.2% 11 1.6% (15) (95)
3.9% (30) 4.0% (31) -3.4% 28 7.7% (58) -1.9% 15 0.6% (5) (80)
2.6% (22) 4.2% (34) -1.0% 9 6.2% (49) -1.7% 15 0.7% (6) (88)
5.1% (39) 4.6% (36) -0.4% 4 6.4% (49) -4.7% 39 0.4% (3) (84)
4.1% (58) 8.7% (118) -3.1% 48 7.9% (108) -1.5% 23 1.4% (21) (234)
Note: Approximately half of the Tier 1 ratio reduction for CRCB comes from risk weighting changes on interbank assets. This negative impact can more likely be absorbed by CRCB if the bank shortens the maturity of interbank assets. By the new CAR rule, interbank assets with an original maturity within 3 months are required to have less than half the risk weighting of a maturity over 3 months. Source: 21st Century News, Nomura estimates
In our view, the consultation paper on the new CAR rule, if confirmed, reflects: 1) the shift in the regulators focus to quality of capital; and 2) the regulators intention to apply the CAR framework to support the central governments restructuring of economic growth. We think the CBRC stresses the quality of capital by differentiating risk weightings on asset categories. The risk weighting is divided into 10 categories under the new CAR rule. For example, risk weighting of high-risk sectors like properties are revised up to 150% and 100%. The highest group of risk weighting at 1,250% is assigned to investments in some equities and properties. Likewise, risk weighting is also differentiated with a downward revision for asset classes favoured by the central government, like small enterprises and retail loans, and upward adjustment for those sectors that are discouraged, such as LGFV loans and long-term corporate loans. In this sense, we reckon the new capital framework, if implemented, is a platform for the CBRC to dynamically fine-tune its capital requirement for commercial banks in China. We cannot rule out the possibility that the CBRC will unveil new guidelines contingent on macro conditions and the central governments industrial policy. The above table shows the estimated impact on the tier 1 ratio of Chinese banks if the new capital framework is implemented. We estimate a net reduction of 80bps to 234bps
for H-share banks. Joint stock banks like Citic, Minsheng and CMB would be less affected thanks to their exposure to retail and small enterprise loans and lower exposure to long-term loans and property loans, in our view. The initial underperformance of large banks to joint stock banks following the news report appears contradictory to large banks more prudent risk management with regards to provision policy, diversified loan portfolios and lower LGFV loan exposure. As mentioned, greater loan exposure to more traditional industries probably explains the difference, in our view. However, we continue to favour large banks on account of their current strong capital base and conservative risk management practices. Hence, the risk weighting changes on interbank assets are more absorbable through proactive balance sheet management. In particular, if a phase-in period is suggested along with the official unveiling of the new rule, the real negative effect on large banks may be muted, in our view, as they would accelerate the pace to be better aligned with the regulators policy direction. In addition, the transparency offered by a comprehensive capital framework integrating BASEL III as well as Chinas specialized economic conditions will likely be a long-term positive for Chinese banks, in our view.
Fig. 10: Difference between Tier 1 ratio (1Q11) and CBRCs minimum requirement
Minsheng and CRCB's figure is 4Q10, assumes CBRC requires 9.5% tier 1 ratio for big 5 banks and 8.5% for others
(%) 6.5 5.5 4.5 3.5 2.5 1.5 0.5 (0.5) (1.5)
CRCB CCB BOCOM CITIC ICBC CMB BOC ABC Minsheng
(%) 15 14 13 12 11 10 9 8 7 6
BOCOM Minsheng CRCB CCB CITIC ICBC CMB BOC ABC
Fig. 12: Estimated impact on 2011F earnings by LGFV loan write-off and provisioning
RMB'mn ABC ICBC CCB BOC BCOM CMB Citic Minsheng CRCB Ave.
Base case: we assume Chinese banks write off 20% of LGFV loans (RMB2.5trn) sold to government in the bail-out plan as a haircut total LGFV as of Dec 2010 total LGFV as % of total loan 30% of LGFV loan spin off 20% write-off on the spin off write off as % of 2011F PBT 395,300 8.0% 108,718 21,744 13.0% 649,600 9.6% 178,658 35,732 13.6% 540,000 9.5% 148,515 29,703 13.8% 380,000 6.7% 104,510 20,902 12.8% 177,400 7.9% 48,790 9,758 16.3% 135,100 9.4% 37,156 7,431 16.4% 118,400 9.4% 32,563 6,513 18.9% 197,200 18.6% 54,235 10,847 38.1% 18,500 15.1% 5,088 1,018 19.2% 18.0% 10.5%
Worse case: in addition to the write-off, Chinese banks take 50% loss provisioning on lower grade of LGFV loans not taken up by government total lower grade LGFV loans remaining lower grade LGFV loans not spin off 50% provision on remaining lower grade LGFV to 2011F PBT Total impact on 2011F PBT
Source: Company data, Nomura estimates
162,073
162,400
234,681
190,000
75,395
14,402
710
59,160
37
53,355
86,166
85,490
26,605
4,925
16% 29%
0% 14%
20% 34%
26% 39%
22% 39%
0% 16%
0% 19%
9% 47%
0% 19%
10.3% 28.4%
Some market participants have compared the proposal with the banking sector restructuring starting from 1998, citing the similarities in worrisome asset quality problems subsequent to high credit growth led by policy loans. Nevertheless, banks overall asset quality is much more benign at this stage compared with the late 1990s, in our view. The NPL ratio for state-owned banks reached 39.3% in 2008, compared with 1.1% for all commercial banks in 2010, while the provision coverage ratio reached 180% in the same period, per company data and CBRC. In the late 1990s, the substantial NPLs could have resulted in negative equity for stateowned banks, if all were written down, based on our calculations. The NPL-to-equity ratio hit 3.8x in 1998 and stayed elevated at 2.5x in 2001 even following a CNY270bn capital injection for the big four banks in 1998 and CNY1.4trn in non-performing assets spun off in 1999. The current (2010) ratio of NPL to equity is 0.28x. Hence, in our worst case, where 30% of existing LGFV loans (CNY14.4trn) turn into NPLs, the NPL-to-equity ratio would still be below 1x.
10
Chinese banks at 10.1% as of 2010. In our worst case, when all shadow banking loans are restructured as bank assets, there is a potential capital shortfall of CNY599bn.
Fig. 13: Shadow banking system as % of total loans
Small loan companies, 0.4%
Trust companies, 1.3% Financing lease companies, 1.4% Credit guarantee companies, 1.8% Private lending (), 4.8%
Source: CBRC, Nomura research
Capital Ratio Capital adequacy ratio Core capital adequacy ratio Capital Shortage (if capital ratios unchanged) Capital adequacy Core capital adequacy Assumptions Shadow Banking System Loans (RMB'bn) bear case (all shadow banking loans) base case (entrusted loans + trust loans) On-balance sheet risk-weighted assets Total loans On-balance sheet risk-weighted assets as % of total loans
Source: CBRC, Nomura estimates
12.2 10.1
10.7 8.8
11.4 9.4
0 0
724 599
366 303
8,500 4,300 35,537 50,923 70% 41,469 59,423 70% 38,538 55,223 70%
Catalysts
1) 10% rebound on valuation call we are near the 1Q09 trough Given the recent sell-down on regulation and macro risk, Chinese banks are approaching attractive territory from a valuation perspective, in our eyes. We view the trough valuation in 1Q09 as the support level, considering the risks from weak US/EU economic data, potential share disposal by foreign strategic shareholders after lock-up expiry, a macro-economic slow-down, a sharp decline in NIM led by asset yields in 1Q09 at least as serious as current concerns on unfavourable regulation changes and continued monetary tightening. From this perspective, we believe the 1Q09 trough PB (as displayed in the below table) offers value to long-term investors, with risk/reward skewed to the upside.
Fig. 15: Market implied ROE vs 2011F ROE
(%) 25 20 15 10 5 0
BOCOM Minsheng CMB BOC CRCB ICBC CCB Citic ABC
Minsheng
BOCOM
Note: historical low is used for ABC, Minsheng and CRCB as they were not yet listed in 1Q09 Source: Bloomberg, Nomura estimates
CRCB
CCB
ICBC
CMB
BOC
Citic
11
2) Weak GDP growth and peaking inflation may trigger an easing of monetary policy We believe that below 9% real GDP growth may trigger a series of social and economic problems in China, which may force Chinese banks to loosen their harsh stance. If Chinese banks lead the underperformance of the market due to increasing worries on a potential hard landing scenario, we expect the financial sector to bottom ahead of other industries. Our economics team forecasts real GDP growth of 9-9.5% y-y in the next six quarters. 3) 2011 interim results still strong and solid but only a few will likely surprise on the upside We believe the net interest margin for 2Q11 will be a non-event for Chinese banks. The implementation of daily monitoring of the loan-to-deposit ratio, deposit re-pricing and potential asymmetric rate hikes to contain the inflation will likely compress banks margin in 2H11 on rising funding cost pressure. Net fee income growth could still surprise on the upside in 2Q11, given the continuing robust sales of wealth management products in April and May. Credit cost and NPL ratios are still satisfactory, filtering through strong PPOP to bottom line. Downgrading FY11F earnings forecasts on more cautious margin view We have slightly cut our forecasts for FY11F earnings growth by 2-5% mainly to reflect our more cautious view on margin expansion. On 7 May 2011, we cut our FY11F NPAT forecast by narrowing margin expansion in 2Q11. We continue to believe that NIM expansion will likely peak in 2Q11, and remain flattish in 3Q11 before contracting in 4Q11. Since we see rising likelihood of asymmetric rate hikes for the rest of this year, we think Chinese banks are likely to face margin contraction in 2H11, especially if the PBoC raises the demand deposit rate by a larger magnitude in the coming months, given that re-pricing on time deposits and demand deposits should be completed by then. We now expect 12bps NIM expansion in FY11F for CMB, 10-11bps for ABC, ICBC and CCB and 5-9bps for the other H-share banks. Based on our lower earnings forecasts for FY11F, we have cut our FY11F target prices for ICBC (to HKD7.50 from HKD7.60), downgraded CCB to NEUTRAL from Buy (to HKD7.02 from HKD8.60), BCOM (to HKD8.30 from HKD9.00), CMB (to HKD24.82 from HKD26.86) and CRCB (to HKD6.52 from HKD6.68).
12
Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecast are end of period; other measures are period average. All forecast are modal forecasts (i.e., the single most likely outcome). Table last revised 10 June 2011. Source: CEIC, Nomura Global Economics.
According to the PBoCs 5,000 entrepreneurs survey, the diffusion index of inventory level dipped to 49.6% in 1Q11 from 50.3% in 4Q10, suggesting that firms started destocking at the beginning of this year, given that a reading of below 50 indicates contraction in activity. If this trend continues in the coming quarters, we are concerned that a de-stocking process similar to that of late 2008 and 2009 when inventory dragged down real GDP growth by 0.2pp and 0.4pp, respectively, based on our estimates, might repeat itself this year, albeit in a milder way. Provided this proves to be true, we think it would further weigh on Chinas economic growth and we expect to see increasing signs of a slowdown in 2Q11.
13
(%) 60 55 50 45 40 35 30
Jun-92 Mar-93 Dec-93 Sep-94 Jun-95 Mar-96 Dec-96 Sep-97 Jun-98 Mar-99 Dec-99 Sep-00 Jun-01 Mar-02 Dec-02 Sep-03 Jun-04 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11
Source: CEIC, PBoC, Nomura research
14
(%) 85 80 75 70 65 60 55 50
Apr-03 Oct-05 Apr-08 Aug-01 Sep-03 Aug-06 Nov-02 Nov-07 Sep-08 Dec-04 May-05 Dec-09 Jan-02 Jun-02 Jan-07 Jun-07 May-10 Feb-04 Mar-01 Mar-06 Feb-09 Oct-10 Jul-04 Jul-09 Mar-11
After six hikes since the beginning of this year and 12 hikes since 2010, the RRR level for both large banks and smaller ones has reached a historical (since 2003) high at 21.5% and 19.5%, respectively, and we think the PBoC might have overdone on this. We think the consecutive RRR hikes will only drain liquidity from the system and inevitably hurt certain industries such as residential property. While the CBRC recently rolled out measures to encourage Chinese banks to make more loans to SMEs, including a lower risk weight for SME loans, we do not think this will solve the financing problem for SMEs.
Fig. 21: RRR
Historical high level
(% y-y) 25 20 15 10 5 0
21-Sep-03 21-Dec-03 21-Mar-04 21-Jun-04 21-Sep-04 21-Dec-04 21-Mar-05 21-Jun-05 21-Sep-05 21-Dec-05 21-Mar-06 21-Jun-06 21-Sep-06 21-Dec-06 21-Mar-07 21-Jun-07 21-Sep-07 21-Dec-07 21-Mar-08 21-Jun-08 21-Sep-08 21-Dec-08 21-Mar-09 21-Jun-09 21-Sep-09 21-Dec-09 21-Mar-10 21-Jun-10 21-Sep-10 21-Dec-10 21-Mar-11
Source: CEIC, PBoC, Nomura research
RRR: Large depository institution RRR: Small and medium depository institution
By contrast, we think the PBoC is already behind the curve in terms of rate hikes as the real deposit rate has remained negative since February 2010 with the gap between CPI inflation and one-year deposit rate increasing. With slowing economic growth yet elevated CPI inflation, we think there is a high possibility that the PBoC will announce asymmetric rate hikes over the rest of the year. If this turns out to be the case, we see greater pressure for Chinese banks earnings growth in 2011F.
15
(% p.a.) 10 8 6 4 2 0 -2 -4
Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11
16
Regulation changes
CBRC rolls out stricter regulatory rules for China banks
On 3 May, 2011, China's banking regulator announced stricter regulation rules for commercial banks to improve the ability of the country's banking and financial institutions to combat risks. The China Banking Regulatory Commission (CBRC) said it would set the minimum capital adequacy ratio for banks of systemic significance at 11.5%, while that for banks with non-systemic significance at 10.5%. The banks need to meet the new standards by the end of 2013 and the end of 2016, respectively. The criterion of a bank's significance will be determined within this year, the CBRC said on its website. Banks will be restricted from engaging in structurally complicated and highly leveraged transactions to prevent excessive risk taking. The systemically important banks are also being told to reduce their share of loans to a single debtor or customer group among their total capital assets. The new regulation standards will be implemented starting 1 January 2012.
Fig. 23: New regulatory framework for China banks
Regulatory Framework
Timetable to meet the new requirement Standard level (%) Capital Core T1 capital T1 capital Total capital Conservation buffer Counter-cyclical buffer Additional capital for systemically important banks 5.00 6.00 8.00 2.50 0-2.50 1.00 By end-2013 By end-2014 By end-2015 By end-2016 By end-2017 By end-2018 By end-2016 By end-2017 By end-2018 By end-2019 By end-2020 By end-2021 SIB non-SIB
Provision Coverage ratio Loan-loss provision ratio 150.00 Current requirement 2.50 By end-2013 Current requirement By end-2016;
The new rules are in line with our expectation and largely the same as those reported in February when the rules were approved by the State Council. However, the new rules are stricter than the international standard in terms of: 1) core T1 CAR is introduced at a level of 5%, 0.5pp higher than the Basel III requirement; 2) leverage ratio is 1% higher than the Basel III requirement, at a level of 4%; 3) loan-loss provision ratio is confirmed to be 2.50% with 150% requirement for coverage ratio at the same time, while the Basel Committee is still working on the specifications for this criteria, per the Committee; and 4) the new rules are enacted one year earlier than required by Basel III and banks will have to meet the new standards by the end of 2013 for SIBs and the end of 2016 (for non-SIBs) versus the end of 2018 as required by Basel III.
17
Fig. 24: Differences between the CBRCs new framework and Basel III
CBRC's new framework Common Equity (%) T1 Leverage Ratio (%) Provision Ratios Commence Period Grace Period
Source: CBRC, Nomura research
5.00 4.00 2.5% for loan loss ratio and 150% for coverage ratio 1-Jan-12 by end 2016
Given that most Chinese banks already meet the new requirement on Tier 1 CAR and total CAR, we do not see another round of capital-raising plans from China banks in the near term due to the new regulation. However, we believe that most joint-stock banks might face pressure from the new requirement on the loan loss provision ratio of 2.5%. That said, given the six-year grace period, we believe these banks should be well positioned to weather the headwinds from higher credit costs in order to meet the new requirement. Overall, we do not think the new rules will have material impact on the sector. Rather, we believe it should be positive for the development of China banking sector in the long run.
Fig. 25: Financial ratios of China banks (1Q11)
Financial ratios
(%) Tier 1 CAR Total CAR Provision Coverage Ratio Loan Loss Provision Ratio ICBC 9.7 11.8 247 2.5 CCB 10.3 12.5 229 2.5 BOC 10.0 12.4 206 2.1 ABC 9.6 11.4 197 3.5 Bocom 9.2 12.1 198 2.1 CMB 7.7 10.9 335 2.1 Citic 8.2 11.1 231 1.5 Minsheng 8.0 11.0 301 2.0 CRCB 14.8 16.3 173 4.1
Regulation proposed new CAR rule on Chinese banks According to an unconfirmed Chinese-language report in the 21st Century Business Herald (8 June), the CBRC recently issued a consultation paper on "the New Administrative Rules on Capital Adequacy Ratio" to commercial banks. The draft, according to the newspaper, has consolidated 11 complementary guidelines on the implementation of new capital rules as well as the yet to be officially released "the Guideline on the Calculation of Capital Adequacy Ratio for Commercial Banks". If the report is accurate, the new framework would appear to place a more stringent capital requirement for Chinese banks in the aspects of minimum core tier 1 and CAR ratio, credit asset risk weighting, operating risk and the definition of tier 2 capital. 1) Minimum core tier 1 and CAR ratio As the draft of "the Guideline on the Calculation of Capital Adequacy Ratio for Commercial Banks" was revealed by 21st Century Business Herald in early May, commercial banks will be obliged to maintain tier 1 and CAR ratios no lower than 6% and 8%, a conservation buffer of 2.5%, a counter-cyclical buffer of 0-2.5% and an additional 1% for systemically important banks. In our view, the forthcoming capital raising plans by CMB, Minsheng and Citic Bank are tied in with the likely revised requirements on tier 1 ratio and CAR. 2) Operating risk Under the consultation paper, operating risk would require bank capital. According to the abovementioned news report, basic indicator approach, standard approach and standard replacement approach are advised in the draft of the new guideline. The basic indicator approach, the simplest, measures the asset risk weighting on operating risk taking into account banks' operating revenue. We estimate the inclusion of operating risk could weigh negatively on H-share banks' tier 1 ratio by 49-108bps, with joint-stock banks (except CRCB) less affected than the big five banks.
18
3) Credit asset risk weighting Credit asset risk weighting is expected to have the greatest impact on tier 1 ratio and CAR on commercial banks, because 10 different risk weightings are set aside including 0%, 50%, 75%, 100%, 150%, 1,250%. The CBRC has the discretion to adjust risk weighting for high-risk assets to above 150% contingent on economic conditions and government policies on specific industries. In comparison, the highest category of credit asset risk weighting in the existing CAR rule is 100%. a) Risk weighting on property would be revised up to 150% from 100%. H share banks tier 1 ratios would decline accordingly by 22 to 58bps; Bocom, CITIC and CMB would be less impacted, based on our estimates, given lower exposure to real estate loans. b) Risk weighting on inter-bank assets would be lifted from 0-20% to 20-100%. H-share banks tier 1 ratios would, by our estimation, about to drop by 11 to 118bps (CRCB is the outlier at 118bps). Large banks would be less impacted, in our view, thanks to a smaller proportion of inter-bank assets to total assets. c) Risk weighting of corporate loans over five years would be raised by 15% to 115%. We estimate that H-share banks tier 1 ratios would decline between 3 and 28bps. Minsheng, Citic and CMB would be less affected, we believe, in view of light exposure. d) Risk weighting of retail loans (excluding personal housing loans) would drop to 75% from 100%, which looks favourable for H-share banks tier 1 ratios by an increase of 948bps. CRCB and CMB would be the largest two beneficiaries, we find. e) Risk weighting of small enterprise loans below CNY5m would also be revised down to 75% from 100%, given they would be reclassified as retail loans under the CBRC's earlier notice, in order to encourage financing to small enterprises. Therefore, tier 1 ratios for H-share banks would rise by 11 to 23bps, per Nomura estimate. Total impact on tier 1 ratio We estimate 80-234bps negative impact on tier 1 ratio for H-share banks. Joint stock banks Citic, CMB and Minsheng would likely be less affected thanks to their higher exposure to retail and small enterprise loans and lower exposure to long-term loans and property loans. Definition of Tier 2 capital The consultation paper also ties tier 2 capital with loan provisioning. Excess provisioning would be included in the calculation of tier 2 capital and the inadequate amount would be deducted. Moreover, tier 2 capital items such as convertible bond, hybrid bond and longterm sub-debt would be discounted based on remaining maturities. When their maturities are less than five years, a 20% discount on the total outstanding would be applied each year towards the maturity of the bonds. Financial Institutions under Supervision Apart from Chinese and foreign commercial banks, the proposed new rule would also apply to county banks, auto finance companies, financing lease companies and consumer finance companies. On balance, we believe if the consultation paper is confirmed and implemented, there could be significant impact on Chinese banks' capital as well as asset allocation decisions. At the forefront of capital concerns, joint-stock banks like CMB and Minsheng seem less unfavourably affected to us thanks to better positioning on loan exposure. In terms of business directions, Nomura will pay close attention to whether there will be a squeeze on loans to the property sector and rush into small enterprises and retail loans. While we think it is strategically important to have this loan mix migration, any excess lending is not deemed to be healthy. Last but not least, we do think the consultation paper would leave sufficient flexibility for regulators to dynamically fine-tune the new CAR rule contingent on macro conditions. Considering the high likelihood of a soft landing for the macro economy, we advise the direction of the adjustment would be more likely to head toward a more stringent supervision in view of the CBRC's stance to be "counter-cyclical".
19
Fig. 26: Draft of the New Version of the Administration on Capital Adequacy Ratio of Commercial Banks
Credit Risk Weighting Changes for On Balance Sheet Items
Loans to: Infrastructure Property development LGFVs Claims on Public-sector Entities Claims on PRC public-sector entities invested by the PRC central government Claims on PRC Commerical Banks Claims on PRC incorporated commercial banks with: - an original maturity of 3m or less
(0% for certain claims on PRC incorporated commercial banks as specified by CBRC)
Current RW
100% 100% 100%
New RW
110% 150% 100-300%
50%
100%
0% 0% 20% 20%
- an original maturity of 3m to 4m - an original maturity of more than 4m Hybrid bonds and subordinated bonds of PRC incorporated commercial banks Claims on non-PRC Commercial Banks or Securities Companies Claims on non-PRC commercial banks and securities companies incorporated in other countries or regions where the sovereign or region is rated at AA - or above Claims on non-PRC commercial banks and securities companies incorporated in other countries or regions where the sovereign or region is rated below B Claims on Foreign Sovereign Debt Claims on foreign sovereign debt with credit rating of below BClaims on Retail Loans Claims on individuals other than personal residential mortgages Claims on Corporate Loans Claims on corporate where the credit rating is below BBClaims on term loans with maturity over 5 years Equity Investments Non-deducted equity investment in financial institutions Equity investment in businesses other than financial institutions Property not self-occupied
20% 100%
50% 150%
100%
150%
100%
75%
100% 100%
Credit Risk Weighting Changes for Off Balance Sheet Items Loan equivalent credit business (including issuance of acceptance draft, financing guarantees, etc) Irrevocable credit commitment (credit card commitment, bond underwriting amount, etc) with original maturity less than 1 year Irrevocable credit commitment (credit card commitment, bond underwriting amount, etc) for with original matuirty more than 1 year Recocable credit commitment Trade related contingent liability Transaction related contigent liability Repurchase agreement with credit risk rested on the bank
Source: 21st Century Business Herald
20
5.0% (47) 2.8% (27) -1.9% 19 8.5% (76) -1.2% 11 1.8% (17) (136)
3.6% (35) 1.6% (15) -1.9% 19 8.8% (81) -1.2% 12 2.9% (28) (127)
3.3% (34) 1.1% (11) -1.2% 12 9.0% (86) -1.2% 12 2.4% (25) (131)
3.7% (36) 3.6% (35) -1.4% 14 7.8% (73) -1.2% 12 1.8% (18) (135)
3.0% (27) 2.0% (18) -1.6% 15 6.9% (61) -1.2% 11 1.6% (15) (95)
3.9% (30) 4.0% (31) -3.4% 28 7.7% (58) -1.9% 15 0.6% (5) (80)
2.6% (22) 4.2% (34) -1.0% 9 6.2% (49) -1.7% 15 0.7% (6) (88)
5.1% (39) 4.6% (36) -0.4% 4 6.4% (49) -4.7% 39 0.4% (3) (84)
4.1% (58) 8.7% (118) -3.1% 48 7.9% (108) -1.5% 23 1.4% (21) (234)
Fig. 28: Estimated impact on 2011F earnings of LGFV loan write-off and provisioning
RMB'mn ABC ICBC CCB BOC BCOM CMB CiticMinsheng CRCB Ave.
Base case: w e assume Chinese banks w rite off 20% of LGFV loans (RMB2.5trn) sold to government in the bail-out plan as a haircut total LGFV as of Dec 2010 total LGFV as % of total loan 30% of LGFV loan spin off 20% w rite-off on the spin off w rite off as % of 2011F PBT 395,300 8.0% 108,718 21,744 13.0% 649,600 9.6% 178,658 35,732 13.6% 540,000 9.5% 148,515 29,703 13.8% 380,000 6.7% 104,510 20,902 12.8% 177,400 7.9% 48,790 9,758 16.3% 135,100 9.4% 37,156 7,431 16.4% 118,400 9.4% 32,563 6,513 18.9% 197,200 18.6% 54,235 10,847 38.1% 18,500 15.1% 5,088 1,018 19.2% 18.0% 10.5%
Worse case: in addition to the w rite-off, Chinese banks take 50% loss provisioning on low er grade of LGFV loans not taken up by government total low er grade LGFV loans remaining low er grade LGFV loans not spin off 50% provision on remaining low er grade LGFV to 2011F PBT Total impact on 2011F PBT
Source: Company data, Nomura research
162,073 53,355
162,400 0
234,681 86,166
190,000 85,490
75,395 26,605
14,402 0
710 0
59,160 4,925
37 0
16% 29%
0% 14%
20% 34%
26% 39%
22% 39%
0% 16%
0% 19%
9% 47%
0% 19%
10.3% 28.4%
Regulation: Local government vehicle loans bail-out not necessary Reuters (China May Shift Local Government Debt, 31 May 2011) reported that China regulators were planning to take CNY2-3tn of debt load off local governments. The bailout plan, as per the Reuters report, involves the set-up of asset management companies to pay off LGFV loans from banks and to lift a ban on local governments issuing bonds. The market has reacted negatively to this news on the concern that banks may be required to dispose of their loans at a discount.
21
Our sensitivity analysis shows that in our worst case, Chinese banks profit before tax would be cut by an average of 28%. Minsheng bank would be most negatively affected of our universe (47% of 2011F pre-tax profit) considering its highest LGFV loan exposure to total loans. Additionally, the news report also stirred bearish views that there may have been hidden asset quality problems on LGFV loans that were not revealed by Chinese banks. In particular, the PBoCs financial report published on 1 June suggests total LGFV loans by end of 2010 may have reached as much as CNY14.4trn, much higher than the CBRCs statistics of CNY9trn as of Nov. 2011. We think this has compounded market concern on the creditability of LGFV loan information disclosure by Chinese banks. In our view, although the discussed bail-out plan proposed by MOF with the reference from the banking sector restructuring in 1998, is intended to remove the risk associated with LGFV loans written by Chinese banks, it is not necessary. First of all, we think banks overall asset quality is much more benign at this stage compared to the late 1990s. As a result of policy lending to state-owned companies under restructuring in 1990s, Chinese banks accumulated substantial NPLs. Before the establishment of asset management companies in 1999, the NPL ratio reached 39.3% in 1998 for state-owned banks, according to CEIC. This compares to 1.1% for commercial banks in 2010. Even we presume in our worst case that LGFV loan arrived at CNY14.4trn and 30% were NPL, the total adjusted NPL ratio for commercial banks in 2010 would have been 10%, lower than any year between 1998 and 2004, based on our calculations. Second, in late 1990s, banks internal capital could not cover its NPL. The NPL-to-equity ratio touched as high as 3.8x in 1998 and dropped below 2.5x in 2001 even with CNY270bn capital injection into the big 4 banks in 1998 and CNY1.4trn non-performing asset spin off in 1999. On the other hand, in our worst case, where 30% of existing LGFV loans (CNY14.4trn) are NPLs, the NP-to-equity ratio was 0.8x, and provisioning coverage stood at 21%. Some bearish views also consider the LGFV as a severe burden to Chinese financial system, but we think these are exaggerated. Even if we regard LGFV loans (CNY14.4trn, the highest estimate by institutes / academics) as government debt, the total government debt to GDP for China was still 52%, close to the average of other major economic entities. In addition, this aggregate amount of government debt represents 2.5x of total national fiscal revenue, still lower than the US, Japan and Germany. In this regard, we reckon the exposure of LGFV loans on the nations level is still manageable. We believe the worry of repayment risk of LGFV loans lies in it being closely tied to the property market, given the resource of land reserve of local governments can not only be used as collateral but also generate sales revenue. Take Chongqing municipality as an example, approximately 20% of LGFV loans are charged with land use rights. On the back of rising property price in the past few years, land sales revenue have outgrown the fiscal income of local governments and the ratio of land sales revenue to local governments disposable income has increased from 16% in 2008 to 27% in 2010. This concern could possibly be fueled by the decline of land sales revenue by 14% y-y in first five months in China.
22
Fig. 29: NPLs of state owned banks between 1998 and 2001
(RMB bn) Equity Loan Asset Provision NPL NPL ratio Provision to loan NPL / equity
Source: CEIC, Nomura research
1.2%
0.8%
0.6% 3.8
Fig. 30: Local Government Disposable Income (Land Sales Revenue +Budgetary Fiscal Income) (CNYmn)
12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2004 2005 2006 2007 2008 2009 2010
23
article went on to say that the CBRC intends to lay down stringent approval procedures and have strict examination before non-financial companies are allowed to hold a stake in financial companies. It was further disclosed in the article that non-financial companies need to obtain approval from the regulator if they would like to hold more than 5% capital of a financial company. For those non-financial companies which currently are holding companies of banks, the regulator would require them to lower the proportion they hold. We think this would restrict the sources of funding for banks especially when they are eager to raise capital in the coming areas in order to comply with the regulators tightened capital requirement. We think some enterprises might not care for the idea of injecting capital into a commercial bank if they cannot have a significant stake in it. As a result, expansion and growth of banks could be hindered, in our view. CBRC Chairman Liu Mingkang advocated that banks should expand into other business only when they have the capability to manage the new business effectively. As at the date of the news report (18 March, 2011), there are eight commercial banks that have set up fund management companies, four commercial banks with approval to hold stake in insurance companies, seven commercial banks have set up or invested in financial leasing companies and two commercial banks have invested in trust companies.
Fig. 32: Investment of commercial banks in other financial businesses
Type of other financial business Fund management companies Insurance companies Financial leasing companies Trust companies
Source: 21st Century Business Herald
An exit mechanism would also be introduced by the CBRC for banks that would like to invest in other financial business. The ROE and ROA of the investee need to stand at least at the same level of those of the investor as well as the industry average level after a certain period of time, otherwise, the investing banks would be required to exit from that business. The CBRC stressed that banks need to consider their capital level and the integration with the investee before expanding to other areas within the industry. In our view, it is a way for the regulator to restrict banks from aggressive expansion and hence prevent potential systemic risks. We think it is positive for banks in terms of risks management as they need to be more cautious in entering other financial businesses and need to ensure the adequate liquidity and capital of potential investee. The risk of the investee becoming a burden would be lowered, in our view.
24
Fig. 33: China new CNY loans and total social financing
(RMB bn) Total new RMB loans y-y growth Total social financing y-y growth % of new RMB loans to social financing
Source: CEIC, Nomura research
In our view, the current restrictive policy provides a leeway for shadow banking business to grow rapidly and if not controlled could inflate the asset prices through the undesired credit bubble. For example, the balance of shadow banking business in the US was estimated to reach USD6.5trn at the start of 2007 (Timothy Geithner quoted in a report in The 21st Century Business Herald in August 2009), compared with total outstanding loans of USD6.8trn and GDP of USD14.7trn at that time. Through financial derivatives, credit exposure is removed from banks balance sheet and transformed into securities with high leverage. Upon the defaults of large-scale mortgage loans (the underlying assets) in 2007, asset re-pricing is magnified through the deleveraging process. Commercial banks are not immune from the crisis due to their investments and guarantees on a portion of these asset back securities or their credit derivatives. The vast amount of provisioning and write off due to the asset de-leveraging and NPLs then wipe off the banks equity capital and trigger the capital shortfall and follow-on equity raising. Because the financial derivatives in China are still underdeveloped, the shadow banking system points to traditional loan business re-packaged to trust products and wealth management products or undertaken by non-banking institutions. Figure 36 displays a list of shadow banking businesses in China. The estimated total loan balance reached as much as CNY8.5trn in 2010, about 17% of total bank loan outstanding and 21% of GDP. We acknowledge that these non-bank institutions have played a very important role in debt financing, especially to small and medium-sized enterprises, evidenced by total loan size of individual financing firms. For example, the total outstanding guarantees by each credit guarantee company at the end of 2010 is CNY148mn and the same number for the micro-financing company is at CNY75mn. As the SMEs, which contribute to over 50% Chinas GDP, are under-banked (receiving less than 40% of total bank loans), we believe the development of shadow banking business (micro-financing) is likely to be favoured by the government. Nevertheless, we think the risks of shadow banks to the financial system lie in the loose regulations (under-provisioning and low capital requirement) and aggressiveness of the players pursuing abnormal returns without carefully assessing the counterparty risks, which can inject excess liquidity into the system albeit the strict control on bank lending. If the regulator tightens the oversight of shadow credit, which would help to monitor credit growth of total social financing in China more effectively, we believe borrowers in the shadow banking system, like SMEs and real estate companies, would be more vulnerable to a further drain on the credit supply.
25
Note: Shadow Banking Business in US in 2007 is by Geitner's estimate in 2009, including hedge fund, Structured Investment Vehicle, Conduits, Monoline Insurance Companies, Investment Banks Note: Shadow Banking Business in China in 2010 is by our summary, including outstanding loan balance in credit guarantee companies, private lending, small loan companies, trust companies, entrusted loans, financing lease and pawn loan companies
Source: CEIC, Nomura research
26
Nomura | AEJ
Business
Key Governing Rules Notice of Several Issues of Entrusted Loan Business by Commercial Banks (2000) Further Guidance on Bank Trust Cooperation (2011) Several Opinions on Private Lending Case Hearing by the High Court (1991) Provisioning Rules Governing Credit Guarantee Companies (2010), Guidelines on License Management of Credit Guarantee Companies (2010) Administrative Rules on Financial Leasing Companies (2007) Measures on the Administration of Foreign Investment in the Leasing Industry (2005) Administrative Rules on Trust Companies' Net Capital (2010), Notice of Standard for Net Capital Calculation of Trust Companies (2011)
China banks
Entrusted Loans
PBOC, CBRC
NA
3,660
7.3%
Our estimate
NA
NA
NA
Private Lending ()
NA
2,400
4.8%
self capital
NA
6030
893
1.8%
RMB5m
NA
CBRC, MOFCOM
181
700
1.4%
RMB100m
Trust Companies
CBRC
NA
636
1.3%
CBRC
Net capital no less than 100% of risk weighted assets, net capital no less than 40% of net assets Bank borrowings no more than 50% of total equity
From trustees
PBOC, CBRC
2614
198
0.4%
PBOC
RMB5-10m
Bank borrowing from no more than 2 banks, bank borrowings no more than 50% of equity capital
Pawn Loan
Administrative Rules on Pawn Loans (2005) Draft of New Administrative Rules on Pawn Loans (2011)
4433
32
0.1%
Ministry of Commerce
RMB5-10m
Total
8,519
17.0%
27
Below is our scenario analysis on capital shortage for banks if we bring the shadow banking loans on to banks balance sheet. Our base case assumes entrusted loans and trust loans, for which commercial banks play the intermediates role, to be brought onto the balance sheet of all banks. Accordingly, CNY303bn capital shall be raised to maintain the core capital ratio of Chinese banks at 10.1% as of 2010. In our worst case when all shadow banking loans be restructured as banks assets, there comes up with a capital shortfall of CNY599bn.
Fig. 37: Capital adequacy scenario analysis (sector)
(RMB bn) Capital Ratio Capital adequacy ratio Core capital adequacy ratio Capital Shortage (if capital ratios unchanged) Capital adequacy Core capital adequacy Assumptions Shadow Banking System Loans (RMB'bn) bear case (all shadow banking loans) base case (entrusted loans + trust loans) On-balance sheet risk-weighted assets Total loans On-balance sheet risk-weighted assets as % of total loans
Source: Nomura research, CBRC
2010
Bear Case
Base Case
12.2 10.1
10.7 8.8
11.4 9.4
0 0
724 599
366 303
8,500 4,300 35,537 50,923 70% 41,469 59,423 70% 38,538 55,223 70%
The following sections examine the credit-related trust products, wealth management products and entrusted loans, the surveillance of which have been underscored by the CBRC in the past year.
28
Industry Breakdown - Bank-trust product unit sales Infrastructure Non-credit Related Money Market Investme Commercial and Industrial Real Estate Others 16% 61% 20% 3% 0% 11% 59% 26% 3% 1% 11% 77% 12% 0% 0%
* The sales value of credit related bank trust products are not provided by Use Trust Studio. We estimate the value based on the percentage of credit related products to total trust proudcts in terms of volume, multplied by the size of trust products.
Source: Nomura Research, Use Trust Studio
Credit-related Bank-Trust Products slumped in 1Q11 Following the Notice by the CBRC in July 2010, monthly sales of credit related bank-trust products have fallen sharply from CNY200bn in June 2010 to about CNY40bn each month during 1Q11, according to Use Trust Studio, an independent research institute specializing in Chinas trust products. While the launch of total bank-trust products continued breaking new highs this year, most funds collected are channelled to money market financial products like interbank borrowings, bank acceptance draft and corporate bonds, etc. The expected annual yield of 3.2%-3.7% (compared with 1.7% to 2.6% of 3 month fixed deposit rates) offers investors a low-risk inflation protective investment channel. As a result, the percentage of credit related bank-trust products to total trust products has come down from almost 40% during 2Q10 to lower than 10% in recent months. Banks to reorganise outstanding trust loans on the balance sheet According to the CBRC, total outstanding trust loans stood at CNY636bn, accounting for 1.2% total outstanding loans in the banking industry, in 2010. These trust loans, according to most banks, are being gradually migrated to on-balance-sheet. Considering the continuing lacklustre sales of credit related bank trust products due to the regulatory control and the vast amount of products issued in 2Q and 3Q last year set to mature in 1H11, we reckon the outstanding balance of credit-related bank trust products could see a moderate decline in 1H11. This is broadly in line with some banks guidance, indicating the size of credit-related bank trust products as a percentage of total outstanding gross loans at less than 1% in current quarter.
29
Fig. 40: Monthly sales of bank-trust products vs 1 year real interest rate
(RMB bn) 1,000 800 600 400 200 0
5 3 1 -1 -3 -5
1yr real interest rate(LHS)LHS (%) number of new issuance (RHS) - RHS
Apr-09
Jan-08
Jan-09
Jan-10
Credit related bank trust product as % of total bank trust product - LHS (LHS) number of new credit related bank trust products(RHS) - RHS
Jan-11
Apr-11
Oct-08
Apr-08
Oct-09
Oct-10
Apr-10
Jul-08
Jul-09
Jul-10
Bringing back to the balance sheet will it cause liquidity-driven NPL problem? As the CBRC has required banks to bring the outstanding credit-related trust products back to the balance sheet, we believe approximately 1% of total existing loans will be squeezed out given the loan quota. Compounded by a series of reserve ratio hikes, it may accelerate the imbalanced loan supply and demand, and is likely to trigger some liquidity driven NPL problem. To further elaborate, SMEs are particularly vulnerable given their capital demand is organic and they do not have easy access to other financing channels. Admittedly, the fast-growing corporate debt market, particularly in 1Q11, has compensated for the declining credit-related trust products sales in the same period. Nevertheless, we believe the majority of corporate direct financing is associated with SOEs and large listed companies. The average size of financing of each deal, for example, was CNY1.2bn and CNY1.6bn for corporate debt and commercial paper in 1Q11. According to the definition by four ministries of the state council, SMEs are companies with annual sales and total assets lower than CNY300m and CNY400m respectively.
30
Issue date
Bank
Product
Client
Product Type
Size (RMB'm)
Term (days)
Yield
30/04/2010
CCB
Credit Related
200
179
3.18
0.39
0.05
0.44
100,000
18/5/2010
SPD
Credit Related
NA
365
4.4
NA
NA
NA
500,000
13/5/2010
BOC
3 month revolving wealth management product RMB wealth management product (90 days)
Financial products (i.e. interbank, PBOC bills, bank acceptance draft, corporate bond, etc)
Finance
5000
182
2.55
NA
NA
NA
50,000
18/6/2010
ICBC
Trust loan projects 0-70% trust loan projects, 0-50% bond market, 0-50% bank deposit Ministry of Railways, Large SOEs, liquid and high credit rated bonds and mid-term bills Financial products (i.e. interbank, PBOC bills, bank acceptance draft, corporate bond, etc) Trust loans of premium companies, money market, high credit rated corporate bonds Trust loans of premium companies, money market, high credit rated corporate bonds Guizhou Jinyuan Group
Credit Related
211
90
2.85
0.4
0.03
0.43
50,000
15/7/2010
ABC
Hybrid
3500
28
2.15
NA
0.05
NA
50,000
21/9/2010
CMB
Hybrid
200
169
2.8
NA
NA
NA
50,000
2/11/2010
ICBC
RMB wealth management product (30 days) 3 month revolving wealth management product
Finance
3000
30
2.5
0.4
0.02
0.42
100,000
18/11/2010
BOC
Hybrid
6000
95
2.5
0.2
0.08
0.28
50,000
22/2/2011
ABC
5000
182
3.2
NA
NA
NA
50,000
25/3/2011
CCB
500
364
4.41
NA
NA
NA
50,000
31
In our view, although banks only act as intermediaries and do not assume any guarantees, the underlying credit risk of entrusted loans should be watched and evaluated by the regulator more carefully, given the size and sector exposure of entrusted loans. Larger size to total bank loans The outstanding amount of entrusted loans ranged from 4 to14% for H-share listed banks in 2010, compared with 1.2% for total banking system loans by outstanding creditrelated trust products, on our estimates. In the PBoC's 1Q11 financial statistics review, new entrusted loans took up 7.6% of total social financing, in contrast to 0.2% for creditrelated trust products. High exposure to real estate industry Credit exposure to the real estate industry of entrusted loans could be much heavier than credit-related trust products (16% in 2010), in our view. Per the 21st Century Business Herald in May, of 17 entrusted loans (amounting to CNY1.4bn) offered by publicly listed companies year to date, more than half of the trustees are real estate-related companies. These trustors are rewarded with an average interest rate of 15.8% for the exposure to the high risk sector. The news report also highlights the repayment risk for the entrusted loans to property developers. Three listed companies have reported further loan provisioning, loan recall and maturity extension of the entrusted loans granted to counterparties. Scenario analysis: RWA with credit risk weighting of 50% In the following table, we assume entrusted loans are required to be included in the calculation of risk weighted assets and assigned a credit risk weighting of 50%. Our findings are that CCB has the highest percentage of entrusted loans to total gross loans and would encounter a 60bp reduction in Tier 1 ratio for 2010. On the other side, Minsheng has the smallest size of entrusted loan business in both absolute amount terms and proportion to total gross loans. The Tier 1 impact on Minsheng is about 20bps, the lowest among H-share banks we cover.
Fig. 45: Chinese banks adjusted capital adequacy ratio assuming 50% RWA of entrusted loans
(RMB bn) 10A entrusted loan 10A gross loan % of gross loan 10A RWA 10A adj. RWA 10A Tier 1 10A adj. Tier 1 10A CAR 10A adj. CAR Capital shortfall Market cap as % of market cap
Source: Company data, Nomura estimates
ICBC 395,216 6,790,506 5.8% 7,112,357 7,309,965 10.0 9.7 12.3 11.9 19,702 1,653,814 1.2%
CCB 778,349 5,669,128 13.7% 6,015,329 6,404,504 10.4 9.8 12.7 11.9 40,474 1,500,391 2.7%
CMB 104,013 1,431,451 7.3% 1,446,883 1,498,890 8.0 7.8 11.5 11.1 4,181 316,706 1.3%
Bocom 124,254 2,236,927 5.6% 2,370,648 2,432,775 9.4 9.1 12.4 12.0 5,821 351,349 1.7%
Citic 99,662 1,264,245 7.9% 1,385,262 1,435,093 8.5 8.2 11.3 10.9 4,211 202,637 2.1%
Minsheng 38,810 1,057,571 3.7% 1,280,847 1,300,252 8.1 7.9 10.4 10.3 1,566 162,049 1.0%
32
2007
2008
2009
2010
Note: ABC, BOC and CRCB no disclosure of the entrusted loans Source: Company data, Nomura research
RMB'bn Number of issuance (units) Value of issuance (RMB'bn) Net new bank loans (RMB'bn) Net new bank deposits (RMB'bn) credit related WM as % of net new loans credit related WM as % of net new deposits credit related WM as % of total WM
Source: Benefit, Nomura research
3% 1% 1%
33
(%)
6
Duration:Years
Source: Wind, Nomura research
Credit-related wealth management products growth curbed by regulatory oversight In contrast, sales of credit-related wealth management products hit CNY56.3bn in 1Q11, merely 1.4% of the total wealth management product issuing amount. The total issuance declined by 47.5% y-y, in our view, due to tightened oversight of sales of credit-related bank-trust products. Some commercial banks stated that a significant proportion of wealth management funds are investing in products issued by trust companies. Low duration and high yields More than 90% of wealth management products have a maturity less than six months, taking advantage of rising short-term yields. Fig 49 shows the expected annual yield compared with the benchmark savings rate with matching duration. High growth expected to continue Like trust products, we believe the super-nominal growth experienced in 1Q11 may continue at least for the next one-two quarters given the lack of market mechanism for deposit rates. In this sense, wealth management products are a stepping stone for deposit liberalization. Coupled with continuing restrictive monetary policy, short-term rates may still climb, in our view.
SME business has drawn more attention from banks over the past year...
Under tightened credit, we believe Chinese banks have been developing SME business more aggressively since last year, given higher yields from SME loans. This is also true for large-cap banks that used to focus on large corporate but now have been setting up
34
SME lending centres one after another. The table below shows that SME loans of major Chinese banks grew by 46% y-y by end-2010, on average, accounting to 4.2%-52.4% of total loans for H-share banks. Among the H-share banks listed below, BOC, Citic and Minsheng used different measurements for SME loans as defined by themselves, while all the other six banks applied the same definition, i.e. loans extended to small and medium-sized enterprises as defined by National Bureau of Statistics (NBS). That is why the SME loan sizes of BOC and Citic were far smaller than those of peers as the data did not include loans to medium-sized enterprises over the same period. However, for Minsheng, although it adopted a different definition set by itself, we included Shang Dai Tong (SDT) loans in its SME loans, although these were classified as retail loans in its 2010 annual report.
Fig. 50: SME loans of H-share banks
SME loans by end-2010
2010 ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng CRCB Balance (RMBmn) 1,947,000 3,429,206 1,585,220 239,365 754,700 388,418 68,070 238,518 64,000 y-y growth (%) 22 19 29 35 46 26 73 133 31 Total loans (RMBmn) 4,956,741 6,790,506 5,669,128 5,660,621 2,236,927 1,431,451 1,264,245 1,057,571 122,145 % to total loans (%) 39.3 50.5 28.0 4.2 33.7 27.1 5.4 22.6 52.4
Industrial Construction Retail Wholesale Transportation Postal services Hotel and restaurant
* Satisfaction of one of the three conditions enables the qualification. Source: NBS, Nomura research
Specifically, in the case of ICBC, as of end-2010, according to company data, the number of small-sized corporate customers with lending balance at ICBC increased by 18,838, to 63,081, compared with a year ago, three times the growth in 2009. By end2010, ICBCs SME loans made up over half (50.5%) of its total loans with the trend continuing at the beginning of this year. In 1Q11, loan balance of small-sized enterprises increased by CNY53.5bn from the end of last year, which accounted for 35.7% of the total new corporate loans in the first quarter. ICBCs outstanding corporate loans for small-sized enterprises grew by 11.6% ytd in 1Q11, 8.2% higher than the overall loan growth rate. According to management, annual new loan quota for small-sized corporate should exceed CNY100bn in the coming five years and ICBC Zhejiang Branch has become the first provincial branch that has reached such a loan quota.
35
According to the PBoCs latest monetary report, total SME loans increased by CNY911.4bn in 1Q11, accounting for 40.7% of total new loans in the quarter. As of endMarch 2011, SME loans grew by 24.8% y-y, 21.6% higher than that of large-sized corporate loans over the same period. In particular, loans for small-sized corporate grew by CNY497.9bn (or 54.6% of total new SME loans) in 1Q11, increasing by 48.7% y-y as of March 2011.
Type of borrower State-owned enterprises Larger listed companies Smaller listed companies SMEs Personal business loans
Lending rate 10% above benchmark 20% above benchmark 30% above benchmark 40-50% above benchmark, 60-70% under some circumstances 40-50% above benchmark, 60-70% under some circumstances
36
However, even though SMEs are willing to pay such high interest rates in order to get funds for the continuity of business operations, they are still facing severe difficulties in obtaining loans from banks, especially under a tightening monetary environment such as status quo, on our analysis. As their financing needs remain strong yet bank loans cannot meet demand for credit due to tightened liquidity and credit, many SMEs need to borrow from sources that charge even higher interest rates, on our analysis. According to data released by the CBRC Wenzhou Branch, the interest rate in Wenzhous black market reached 17.29% pa in January, 18.09% in February and 18.46% in March 2011.
37
38
the requirements could not have an operating license. As required by the CBRC, banks would have to evaluate the corporate governance, risk management and capital level of guarantee companies before doing business with them. In our view, the new regulation is positive for the banks in terms of risk management as the capital level and capability of guarantee of credit guarantee companies are typically doubted, given insufficient monitoring over the industry and banks cannot control guarantee companies from over-leveraging. Besides, the ways that credit guarantee companies replenish capital (such as using high interest rates to attract deposits) may disrupt the normal financial order. After implementation of the new requirement, banks will restrict exposure to credit guarantee companies at not more than 10x of net assets in order to limit the risks exposed to the industry. The market expects that a number of credit guarantee companies will be eliminated after the cleaning-up is completed. Hike in rate of credit guarantee fee Tightened credit and liquidity not only led to a rise in lending rate, the rate of guarantee was also pushed up according to an article in the 21st Century Business Herald on 17 March, 2011. The rate of guarantee generally rose 1pp from 2.5% to 3.5%, representing 40% growth. Under some circumstances, borrowers are required to pay 15-20% as a deposit. In our view, the higher credit guarantee fee, together with rising lending rate, make it difficult for SMEs to borrow. The funding cost could reach higher than 11% for a one-year loan assuming the lending rate is 30% above benchmark and the rate of guarantee is 3.5%. The repayment burden for borrowers would be heavy, given interest rates might rise further. We think the resulting higher default risks would be an overhang for lending banks. As part of efforts to improve the guarantee for credit business to small enterprises, the CBRC issued the Provisional Rules Governing Credit Guarantee Companies in 2010, which provided regulatory requirements on the market entry and risk control of credit guarantee industry. Impact on banking industry We think such tighter monitoring measures and more standardized regulations for the credit guarantee industry can help to ensure the strength and repayment ability of credit guarantee companies. Potential losses for banks in case of default of borrowers could as a result be reduced (provided that those loans are guaranteed by credit guarantee companies). As of 31 December, 2010, major China banks generally had around onefifth of guaranteed loans to total loans (except BOCOM as information is not available), where ICBC had the lowest proportion at 15.8% and Minsheng had the highest at 25.9%. Given such a significant proportion, we think the implementation of tighter and more standardized regulations for the credit guarantee industry is necessary and beneficial to China banks in terms of asset quality and risk management.
39
Cities Beijing Shanghai Guangzhou Shenzhen Tianjin Dalian Nanjing Suzhou Hangzhou Xaimen Wuhan Chengdu Chongqing Xi'an
Cities
1,000 Wuxi 1,000 Hefei - Zhengzhou 240 Jinan 400 Fuzhou - Nanning 290 Guiyang 50 Nanchang - Urumqi 17 Harbin - Shijiazhuang - Yinchuan - Sanya 316
40
period. Also in Chongqing, as of 1Q11, the outstanding amount of public housing loans exceeded CNY30bn for the first time, standing at CNY30.7bn. And in the first quarter of this year, loans lent to public housing projects amounted to CNY2.4bn, accounting for 7.8% of the total outstanding amount. It was also reported by 21st Century Business Herald that Shanghai will build 40,000 public rental housing units in 2011, accounting for 14.4% of the total public housing projects for the year, with floor space of 40-50 sqm for each house. Assuming a construction cost of CNY10,000 per sqm, 40,000 public rental housing units require CNY20bn.
Local governments, RMB100bn NDB, RMB100bn Others - including banks, insurers, SSF, trusts and PE, RMB900bn
41
implies that the project could not repay the principle by itself an obstacle in encouraging banks to lend to these projects. We think banks will be cautious in making loans to public housing projects.
42
Under scenario 2 where non-banking financials provides 20% of CNY900bn and banks finance the remaining CNY720bn, banks loan growth would be boosted by 0.6-1.6pp with NPAT growth increasing by 0-3.5pp in 2011F. Meanwhile, FY11F CAR and Tier 1 CAR would be reduced by 0.05-1.70pp and 0.04-1.20pp , respectively.
43
Under scenario 3 where non-banking financials offer 30% of CNY900bn and banks provide CNY630bn, we estimate that banks loan growth would be boosted by 0.51.41pp while NPAT growth increases by 0.3-3.0pp in 2011F. In the mean time, FY11F CAR and Tier 1 CAR would be lowered by 0.04-1.50pp and 0-1.00pp, respectively.
Fig. 60: Sensitivity analysis under scenario 3
Scenario 3
Base line forecast Loan growth in FY11F NPAT 2011F (y-y) growth (y-y) ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng CRCB 14.2 14.5 13.0 11.8 16.3 18.1 16.8 18.6 16.4 34.7 21.3 19.2 15.5 18.4 34.1 20.7 21.3 30.9 FY11F CAR 12.5 12.2 12.1 12.2 12.2 11.5 12.5 12.5 14.6 FY11F T1 CAR 10.1 9.9 10.0 9.6 8.5 8.6 10.3 8.7 13.4 Loan growth in 2011F (y-y) 15.6 15.8 14.2 12.5 17.7 19.4 18.0 19.9 16.9 Scenario 3 FY11F NPAT growth (y-y) 35.1 21.6 19.2 16.0 18.6 37.1 21.9 21.6 31.2 FY11F FY11F T1 CAR CAR 12.4 11.9 12.0 12.2 10.7 11.4 12.2 12.4 14.5 10.0 9.7 9.9 9.6 7.5 8.5 10.1 8.7 13.4
In scenario 4 where non-banking financials meet 50% of the CNY900bn capital needs for the public housing program and banks provide the other half of CNY450bn, we calculate that banks FY11F loan growth should be lifted by 0.4-1.00pp and FY11F NPAT growth by 0.1-2.2pp. And we see an even milder impact of 0-1.10pp and 0-0.80pp, respectively, on banks FY11F CAR and Tier-1 CAR.
Fig. 61: Sensitivity analysis under scenario 4
Scenario 4
Base line forecast Loan growth in FY11F NPAT 2011F (y-y) growth (y-y) ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng CRCB 14.2 14.5 13.0 11.8 16.3 18.1 16.8 18.6 16.4 34.7 21.3 19.2 15.5 18.4 34.1 20.7 21.3 30.9 FY11F T1 FY11F CAR CAR 12.5 12.2 12.1 12.2 12.2 11.5 12.5 12.5 14.6 10.1 9.9 10.0 9.6 8.5 8.6 10.3 8.7 13.4 Scenario 4 Loan growth in FY11F NPAT 2011F (y-y) growth (y-y) 15.2 15.4 13.9 12.2 17.3 19.0 17.7 19.5 16.8 35.0 21.6 19.2 15.8 18.5 36.3 21.5 21.8 31.1 FY11F CAR 12.4 12.0 12.0 12.2 11.1 11.4 12.2 12.5 14.5 FY11F T1 CAR 10.0 9.7 10.0 9.6 7.7 8.5 10.1 8.7 13.4
We detected that, among all H-share banks, ICBCs CAR might be under pressure as it declined by 50bps in 1Q11 after taking into account the adjustment of LGFV risk weighting. However, our sensitivity analysis indicates that BCOM is the one that will likely be affected most by economic housing loan growth in 2011F. Apart from BCOM, we do not see another round of capital raising plans for China banks arising from growing economic housing project loans.
44
Rural financing
Improvement of rural financing
In 2010, the policy framework for the promotion of rural and agricultural finance was largely in place. Specifically, the CBRC expanded the geographic coverage of preferential policies and increased the number of provinces where the local banking entities would be rewarded for distinctive performance in growing agricultural and rural services. The CBRC also gave favourable treatments for banking institutions to set up a presence in underdeveloped regions. In addition, the CBRC promoted the introduction of preferential income tax policies and offered exemption of supervisory fees for all smalland medium-sized rural financial institutions. By the end of 2010, the outstanding balance of agriculture-related loans reached CNY11.8tn, increasing by CNY2.63tn or 28.8% from the beginning of the year. Such growth was 5.7pp higher than the average growth of all loans. The proportion of agriculture-related loans to the total loans witnessed a 1.6% year-on-year growth, which signified a powerful financial support to agricultural and rural development, per the CBRC. As of 31 December, 2010, there were 2,646 rural credit cooperatives, 85 rural commercial banks, 223 rural cooperative banks, and 395 new-type rural financial institutions. By the end of 2013, it is estimated that 1,300 more new-type rural financial institutions will be established in China to serve county areas with low banking coverage.
Fig. 62: Major players in China's county area banking (as at end-2010)
Type of institution Large Commercial Bank Policy Bank Postal Savings Bank Small and Medium-sized Financial Institutions Nam e of institution or sub-type Agricultural Bank of China Agricultural Development Bank of China Postal Savings Bank of China Rural Rural credit cooperative institutions: - rural credit cooperatives - rural commercial banks - rural cooperative banks New -type rural financial institutions: - village and tow nship banks - lending companies - rural mutual credit cooperatives
Source: CBRC, Nomura research
45
46
Institutions/Year Banking institutions Policy banks & the CDB Large commercial banks Joint-stock commercial banks City commercial banks Rural commercial banks Rural cooperative banks Urban credit cooperatives Rural credit cooperatives Non-bank financial institutions Foreign banks New-type rural financial institutions & Postal savings bank
2007 53,116 4,278 28,500 7,274 3,341 610 646 131 4,343 972 1,253 1,769
2009 79,515 6,946 40,800 11,818 5,680 1,866 1,279 27 5,495 1,550 1,349 2,705
2010 95,305 7,652 46,894 14,904 7,853 2,767 1,500 2 6,391 2,090 1,742 3,510
2007 8.05 53.66 13.69 6.29 1.15 1.22 0.25 8.18 1.83 2.36 3.33
2010 8.03 49.20 15.64 8.24 2.90 1.57 0.00 6.71 2.19 1.83 3.68
Institutions/Year Banking institutions Policy banks & the CDB Large commercial banks Joint-stock commercial banks City commercial banks Rural commercial banks Rural cooperative banks Urban credit cooperatives Rural credit cooperatives Non-bank financial institutions Foreign banks New-type rural financial institutions & Postal savings bank
2009 4,444 406 2,196 564 359 112 85 2 234 286 167 33
2010 5,832 436 2,861 817 482 203 112 0 279 383 185 74
2007 11.77 52.06 11.16 6.19 1.09 1.35 0.21 6.14 5.78 3.86 0.39
2010 7.48 49.06 14.00 8.27 3.47 1.91 0.00 4.79 6.57 3.18 1.26
Institutions/Year Banking institutions Policy banks & the CDB Large commercial banks Joint-stock commercial banks City commercial banks Rural commercial banks Rural cooperative banks Urban credit cooperatives Rural credit cooperatives Non-bank financial institutions Foreign banks New-type rural financial institutions & Postal savings bank
Source: CBRC, Nomura research
2007 447 48.9 246.6 56.4 24.8 4.3 5.5 0.8 19.3 33.4 6.1 0.7
2009 668 35.3 400.1 92.5 49.7 14.9 13.5 0.2 22.8 29.9 6.5 3.2
2010 899 41.5 515.1 135.8 77.0 28.0 17.9 0.0 23.3 40.8 7.8 11.9
2007 10.95 55.20 12.63 5.55 0.96 1.22 0.17 4.33 7.47 1.36 0.15
2010 4.62 57.29 15.10 8.56 3.11 1.99 0.00 2.59 4.54 0.87 1.32
47
1288.HK 1288 HK
EQUITY RESEARCH
June 24, 2011 Rating Remains Target price Remains Closing price June 21, 2011 Potential upside
Buy
HKD 5.20 HKD 3.94 +32%
Anchor themes The operating environment remains favourable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continues to weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a rerating in the near term. Nomura vs consensus Our FY12 net profit forecast is 4% above consensus estimates due to our higher NIM and lower credit cost assumptions.
Research analysts
China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
Source: Nomura estimates
164,146 203,316 203,316 246,260 246,260 297,268 297,268 94,873 127,766 127,766 158,091 158,091 194,278 194,278 94,873 127,766 127,766 158,091 158,091 194,278 194,278 0.32 29.8 10.4 2.0 2.0 1.6 21.4 1.0 0.39 21.2 N/A N/A N/A N/A 21.5 1.1 0.39 21.2 8.2 1.6 1.6 5.5 21.5 1.1 0.49 23.7 N/A N/A N/A N/A 22.6 1.2 0.49 23.7 6.3 1.3 1.3 7.2 22.6 1.2 0.60 22.9 N/A N/A N/A N/A 24.0 1.3 0.60 22.9 5.0 1.1 1.1 9.0 24.0 1.3
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomuras rating system.
FY09 296,147 -114,508 181,639 35,640 271 6,087 41,998 223,637 -10,775 0 -98,792 114,070 -44,289 4,147 73,928 0 0 73,928 -8,926 65,002 -10 0 0 64,992 0 64,992 -20,000 44,992 FY10 357,660 -115,508 242,152 46,128 -998 4,971 50,101 292,253 -11,296 0 -116,811 164,146 -43,536 124 120,734 0 0 120,734 -25,827 94,907 -34 0 0 94,873 0 94,873 -17,539 77,334 FY11F 434,079 -145,777 288,302 56,211 -909 -677 54,625 342,927 -11,861 0 -127,751 203,316 -36,252 0 167,064 0 0 167,064 -39,260 127,804 -37 0 0 127,766 0 127,766 -57,512 70,255 FY12F 517,904 -182,037 335,866 69,136 -1,244 937 68,829 404,696 -12,454 0 -145,982 246,260 -39,551 0 206,709 0 0 206,709 -48,577 158,132 -41 0 0 158,091 0 158,091 -71,159 86,931 FY13F 612,549 -222,391 390,158 85,044 -1,694 1,179 84,528 474,686 -13,077 0 -164,342 297,268 -43,251 0 254,017 0 0 254,017 -59,694 194,323 -45 0 0 194,278 0 194,278 -87,446 106,833 Notes
13.8 18.6 13.8 2.2 2.6 2.6 2.28 3.71 1.51 2.20 18.8 49.0 12.1 30.8 20.5 0.82 23.3 0.93
10.4 14.1 10.4 1.6 2.0 2.0 2.57 3.80 1.30 2.50 17.1 43.8 21.4 18.5 21.4 0.99 27.3 1.26
8.2 11.1 8.2 5.5 1.6 1.6 2.68 4.04 1.42 2.62 15.9 40.7 23.5 45.0 21.5 1.15 28.1 1.50
6.3 8.5 6.3 7.2 1.3 1.3 2.74 4.23 1.54 2.69 17.0 39.1 23.5 45.0 22.6 1.23 29.6 1.61
5.0 6.7 5.0 9.0 1.1 1.1 2.80 4.39 1.64 2.75 17.8 37.4 23.5 45.0 24.0 1.31 31.3 1.72
Priceandpricerelativechart(oneyear)
(HKD) 5 4.5 4 3.5 3 M ar 1 1 M ay 11 O c t 10 Dec 10 N ov 1 0 A ug 10 S ep 10 Feb 11 J an 11 J un 11 A pr 1 1 Price Rel MSCI China 130 125 120 115 110 105 100 95
(%) Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn)
12M
Estimated free float (%) 52-week range (HKD) 3-mth avg daily turnover (USDmn) Major shareholders (%) MOF Huijin
39.2 40.0
49
BalanceSheet(CNYmn)
As at 31 Dec Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (CNY) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) DPS (CNY) PPOP PS (CNY) BVPS (CNY) ABVPS (CNY) NTAPS (CNY)
Source: Nomura estimates
FY09 FY10 FY11F FY12F FY13F 1,517,806 2,082,332 2,728,437 3,302,118 4,042,436 111,128 173,268 194,060 217,347 243,429 0 0 0 0 0 2,504,496 2,477,174 2,758,995 3,073,090 3,423,178 421,093 525,331 577,864 635,651 699,216 4,138,187 4,956,741 5,662,892 6,521,574 7,462,156 -126,692 -168,733 -200,140 -235,951 -275,229 4,011,495 4,788,008 5,462,752 6,285,623 7,186,927 141 141 141 141 141 111,973 121,391 123,819 126,295 128,821 0 0 0 0 0 19,659 31,470 28,323 25,491 22,942 184,797 138,291 79,650 80,446 81,251 8,882,588 10,337,406 11,954,041 13,746,202 15,828,340 7,497,618 8,887,905 10,276,556 11,886,157 13,752,013 714,218 617,995 680,950 753,700 836,972 163,681 112,189 165,936 170,057 174,591 8,375,517 9,618,089 11,123,441 12,809,914 14,763,576 164,146 177,081 181,942 187,033 192,370 8,539,663 9,795,170 11,305,383 12,996,946 14,955,946 106 165 167 168 170 260,000 324,794 324,794 324,794 324,794 39,817 27,945 70,844 129,059 200,972 20,000 17,539 57,512 71,159 87,446 23,002 171,793 195,341 224,075 259,012 342,819 542,071 648,491 749,087 872,224 8,882,588 10,337,406 11,954,041 13,746,202 15,828,340 120,241 100,405 89,618 89,002 88,315 Notes
55.2 3.9
55.8 5.2
55.1 5.4
54.9 5.4
54.3 5.5
50
51
ICBC
CCB
BOC
BCOM
CMB
Citic
Minsheng
52
53
ICBC
BANKS
1398.HK 1398 HK
EQUITY RESEARCH
June 24, 2011 Rating Remains Target price Reduced from 7.60 Closing price June 21, 2011 Potential upside
Buy
HKD 7.50 HKD 5.84 +28.4%
Anchor themes The operating environment remains favourable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continues to weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a rerating in the near term. Nomura vs consensus Our FY12F NPAT forecast is 1% above consensus estimates due to our higher NIM and lower credit cost assumptions.
Research analysts
China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
Source: Nomura estimates
241,268 295,821 291,497 353,486 344,800 409,639 402,621 165,156 200,409 197,101 245,789 239,144 279,722 274,317 165,156 200,409 197,101 245,789 239,144 279,722 274,317 0.48 25.6 10.3 2.1 2.1 3.7 22.1 1.3 0.57 18.7 N/A N/A N/A N/A 22.5 1.4 0.56 16.8 8.5 1.7 1.7 5.3 22.1 1.3 0.70 22.6 N/A N/A N/A N/A 23.6 1.4 0.69 21.3 6.6 1.4 1.4 6.9 23.1 1.4 0.80 13.8 N/A N/A N/A N/A 23.2 1.4 0.79 14.7 5.6 1.2 1.2 8.1 23.0 1.4
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomuras rating system.
FY09 405,878 -160,057 245,821 55,147 7,135 1,308 63,590 309,411 0 -120,819 188,592 -21,682 -1,603 165,307 0 1,987 167,294 -37,898 129,396 -751 0 0 128,645 0 128,645 -56,783 71,862 FY10 462,762 -159,013 303,749 72,840 316 3,843 76,999 380,748 0 -139,480 241,268 -27,888 -100 213,280 0 2,146 215,426 -49,401 166,025 -869 0 0 165,156 0 165,156 -64,219 100,937 FY11F 594,112 -233,212 360,900 87,623 146 3,920 91,688 452,588 0 -161,092 291,497 -34,959 0 256,537 0 2,361 258,898 -60,841 198,057 -956 0 0 197,101 0 197,101 -89,126 107,975 FY12F 710,577 -286,249 424,328 105,796 24 3,998 109,818 534,146 0 -189,346 344,800 -33,416 0 311,384 0 2,597 313,981 -73,785 240,195 -1,051 0 0 239,144 0 239,144 -108,088 131,056 FY13F 838,302 -345,832 492,471 130,369 -103 4,078 134,345 626,815 0 -224,195 402,621 -38,178 0 364,442 0 2,856 367,299 -91,825 275,474 -1,157 0 0 274,317 0 274,317 -123,963 150,354 Notes
13.2 17.3 13.2 3.3 2.5 2.5 2.26 3.74 1.58 2.16 20.6 39.0 22.7 44.1 20.2 1.19 25.9 1.53
10.3 13.5 10.3 3.7 2.1 2.1 2.44 3.72 1.37 2.35 20.2 36.6 22.9 38.9 22.1 1.31 28.5 1.69
8.5 11.1 8.5 5.3 1.7 1.7 2.55 4.19 1.75 2.44 20.3 35.6 23.5 45.2 22.1 1.35 28.8 1.75
6.6 8.6 6.6 6.9 1.4 1.4 2.63 4.40 1.87 2.53 20.6 35.4 23.5 45.2 23.1 1.39 30.1 1.80
5.6 7.3 5.6 8.1 1.2 1.2 2.67 4.55 1.96 2.59 21.4 35.8 25.0 45.2 23.0 1.38 30.5 1.84
Priceandpricerelativechart(oneyear)
(HKD) 6.8 6.6 6.4 6.2 6 5.8 5.6 5.4 N ov 10 D ec 10 A ug 10 S ep 10 O c t 10 J an 11 F eb 11 M ar 11 A pr 11 J ul 10 M ay 11 J un 11 Price Rel MSCI China 104 102 100 98 96 94 92 90
(%) Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn)
Estimated free float (%) 52-week range (HKD) 3-mth avg daily turnover (USDmn) Major shareholders (%) Huijin MOF
35.4 35.3
55
BalanceSheet(CNYmn)
As at 31 Dec Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (CNY) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) DPS (CNY) PPOP PS (CNY) BVPS (CNY) ABVPS (CNY) NTAPS (CNY)
Source: Nomura estimates
FY09 0 235,301 1,693,048 3,579,026 408,826 5,728,626 -145,452 5,583,174 36,278 95,684 0 18,696 135,020 11,785,053 9,771,277 1,003,106 111,060 10,885,443 220,676 11,106,119 5,041 334,019 FY10 0 248,860 2,282,999 3,719,282 262,227 6,790,506 -167,134 6,623,372 40,325 103,412 0 21,712 156,433 13,458,622 11,145,557 1,059,170 185,298 12,390,025 246,889 12,636,914 1,227 349,019 FY11F 0 278,723 3,218,770 4,155,562 288,450 7,775,769 -197,061 7,578,708 40,325 105,480 0 19,541 157,997 15,843,556 13,251,509 1,182,697 193,787 14,627,993 254,553 14,882,546 1,239 349,019 FY12F 0 312,170 4,360,014 4,643,192 317,295 8,932,091 -224,725 8,707,367 40,325 107,590 0 17,587 159,577 18,665,116 15,765,490 1,321,761 203,124 17,290,375 262,643 17,553,018 1,252 349,019 FY13F 0 349,630 4,908,318 5,188,233 349,024 10,157,074 -256,361 9,900,712 40,325 109,742 0 15,828 161,173 21,022,986 17,955,961 1,321,761 203,124 19,480,846 262,643 19,743,489 1,264 349,019 Notes
61,977 137,767 246,360 378,468 529,979 56,783 64,219 89,126 108,088 123,963 221,114 269,476 275,266 275,272 275,272 673,893 820,481 959,771 1,110,847 1,278,233 11,785,053 13,458,622 15,843,556 18,665,117 21,022,986 88,467 73,241 72,629 76,146 85,151
58.6 5.7
60.9 6.1
58.7 6.1
56.7 6.0
56.6 6.1
56
Most resilient player to outperform amid tightened policy and slowing economy
We have fine-tuned our FY11F earnings to CNY196bn from CNY200bn with NPAT growth of 18.7% y-y. However, we continue to view ICBC as the most resilient H-share Chinese bank given its adequate liquidity, diversified business growth model and stable capital adequacy ratio.
Base case: we assume Chinese banks write off 20% of LGFV loans (RMB2.5trn) sold to government in the bail-out plan as a haircut total LGFV as of Dec 2010 total LGFV as % of total loan 30% of LGFV loan spin off 20% write-off on the spin off haircut as % of LGFV haircut as % of total loans 2011F pre tax profit write off as % of 2011F PBT 395,300 8.0% 108,718 21,744 6% 0.44% 167,064 13.0% 649,600 9.6% 178,658 35,732 6% 0.53% 263,222 13.6% 540,000 9.5% 148,515 29,703 6% 0.52% 214,915 13.8% 380,000 6.7% 104,510 20,902 6% 0.37% 163,658 12.8% 177,400 7.9% 48,790 9,758 6% 0.44% 59,829 16.3% 135,100 9.4% 37,156 7,431 6% 0.52% 45,178 16.4% 118,400 9.4% 32,563 6,513 6% 0.52% 34,383 18.9% 197,200 18.6% 54,235 10,847 6% 1.03% 28,445 38.1% 18,500 15.1% 5,088 1,018 6% 0.83% 5,291 19.2%
Worse case: in addition to the write-off, Chinese banks take 50% loss provisioning on lower grade of LGFV loans not taken up by government total lower grade LGFV loans remaining lower grade LGFV loans not spin off 50% provision on remaining lower grade LGFV to 2011F PBT Total impact on 2011F PBT
Source: Reuters, Company data, Nomura estimates
162,400 0 0% 14%
14,402 0 0% 16%
710 0 0% 19%
37 0 0% 19%
57
2010 (RMB'mn) Total exposure Incremental RWA % to RWA Tier 1 impact (bps)
SME
Total
58
Minsheng
Bocom
Our target price of HKD7.50 (previously HKD7.60) is based on 2.2x P/BV multiplier and FY11F BVPS of CNY2.75. Our sustainable ROE assumption is 15.8%. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term growth)/(cost of equity - long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 11.5% and a terminal growth rate of 7.9%. We derive our terminal growth figure by applying a 50% payout ratio to our long-term sustainable ROE. Our valuation methodology remains unchanged. Downside risks: As the largest bank in China, ICBC and its performance remain closely tied to the Chinese economy. Hence, we believe that a more severe-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth, in our view. The concept of market and operation-related risks has only been introduced to the bank over the past few years. Moreover, fewer rate hikes than expected in 2011F is likely to pose a downward risk to our NIM assumption.
CRCB
CCB
ICBC
CMB
BOC
ABC
Citic
59
0939.HK 939 HK
EQUITY RESEARCH
June 24, 2011 Rating Down from Buy Target price Reduced from 8.60 Closing price June 21, 2011 Potential upside
Neutral
HKD 7.02 HKD 6.44 +9%
Anchor themes The operating environment remains favourable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continues to weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a rerating in the near term. Nomura vs consensus Our net profit forecast is 2.6% below consensus estimates due to our higher NIM and higher credit cost assumptions.
Research analysts
China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
Source: Nomura estimates
204,414 248,087 243,225 297,497 288,424 352,315 336,694 134,844 165,279 160,141 199,743 189,052 233,387 216,049 134,844 165,279 160,141 199,743 189,052 233,387 216,049 0.56 22.0 10.2 2.0 2.0 3.7 21.5 1.3 0.66 18.6 N/A N/A N/A N/A 21.9 1.4 0.64 14.9 8.5 1.6 1.6 5.3 21.3 1.4 0.80 20.9 N/A N/A N/A N/A 22.9 1.5 0.76 18.1 6.8 1.4 1.4 6.6 21.9 1.4 0.93 16.8 N/A N/A N/A N/A 23.2 1.5 0.86 14.3 5.8 1.2 1.2 7.7 21.9 1.4
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomuras rating system.
FY09 339,463 -127,578 211,885 48,059 6,704 2,666 57,429 269,314 0 0 -105,146 0 164,168 -24,256 -1,204 138,708 0 17 138,725 -31,889 106,836 -80 0 0 106,756 0 106,756 -47,205 59,551 FY10 377,783 -126,283 251,500 66,132 5,412 2,736 74,280 325,780 0 0 -121,366 0 204,414 -25,641 -3,651 175,122 0 34 175,156 -40,125 135,031 -187 0 0 134,844 0 134,844 -53,052 81,792 FY11F 470,321 -171,096 299,225 81,787 4,330 2,886 89,003 388,228 0 0 -145,003 0 243,225 -35,021 0 208,204 0 37 208,242 -47,896 160,346 -206 0 0 160,141 0 160,141 -72,063 88,077 FY12F 558,696 -208,357 350,338 104,688 3,464 3,043 111,194 461,533 0 0 -173,109 0 288,424 -42,620 0 245,804 0 41 245,845 -56,544 189,301 -249 0 0 189,052 0 189,052 -85,084 103,968 FY13F 649,464 -242,919 406,545 130,860 2,771 3,209 136,839 543,384 0 0 -206,690 0 336,694 -53,997 0 282,697 0 45 282,742 -66,444 216,298 -249 0 0 216,049 0 216,049 -97,222 118,827 Notes
12.7 17.6 12.7 3.5 2.4 2.4 2.41 3.85 1.55 2.30 21.3 39.0 23.0 44.2 20.9 1.24 27.2 1.61
10.2 14.2 10.2 3.7 2.0 2.0 2.49 3.74 1.34 2.40 22.8 37.3 22.9 39.3 21.5 1.32 28.0 1.71
8.5 11.8 8.5 5.3 1.6 1.6 2.60 4.09 1.60 2.49 22.9 37.3 23.0 45.0 21.3 1.36 27.7 1.77
6.8 9.5 6.8 6.6 1.4 1.4 2.67 4.25 1.73 2.52 24.1 37.5 23.0 45.0 21.9 1.38 28.5 1.79
5.8 8.1 5.8 7.7 1.2 1.2 2.72 4.34 1.81 2.53 25.2 38.0 23.5 45.0 21.9 1.35 28.6 1.77
Priceandpricerelativechart(oneyear)
(HKD) 8.5 8 7.5 7 6.5 6 5.5 N ov 10 M ar 11 A pr 11 M ay 11 A ug 10 S ep 10 J an 11 F eb 11 D ec 10 J un 11 O c t 10 J ul 10 Price Rel MSCI China 108 106 104 102 100 98 96 94
(%) Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn)
Estimated free float (%) 52-week range (HKD) 3-mth avg daily turnover (USDmn) Major shareholders (%) Huijin Bank of America
57.1 10.2
61
BalanceSheet(CNYmn)
As at 31 Dec Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (CNY) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) DPS (CNY) PPOP PS (CNY) BVPS (CNY) ABVPS (CNY) NTAPS (CNY)
Source: Nomura estimates
FY09 FY10 FY11F FY12F FY13F 29,173 36,961 50,257 63,022 80,965 123,380 142,280 170,736 204,883 245,860 1,429,475 1,811,068 2,462,600 3,088,084 3,967,298 2,578,799 2,904,994 3,340,743 3,841,855 4,418,133 0 0 0 0 0 4,819,773 5,669,128 6,407,031 7,341,372 8,310,064 -126,826 -143,102 -162,752 -199,499 -248,814 4,692,947 5,526,026 6,244,279 7,141,873 8,061,249 1,791 1,777 1,955 2,150 2,365 74,693 83,434 87,606 91,986 96,585 1,590 1,534 1,381 1,243 1,118 10,790 17,825 16,043 14,438 12,994 680,717 284,418 298,639 313,571 329,249 9,623,355 10,810,317 12,674,238 14,763,105 17,215,818 8,001,323 9,075,369 10,708,935 12,636,544 14,911,122 812,911 751,590 774,262 797,627 821,707 98,644 93,315 173,315 173,315 173,315 8,912,878 9,920,274 11,656,513 13,607,486 15,906,144 151,457 189,138 208,052 228,857 251,743 9,064,335 10,109,412 11,864,565 13,836,343 16,157,886 3,545 4,113 4,524 4,977 5,474 233,689 250,011 250,011 250,011 250,011 0 0 0 0 0 88,907 142,898 212,497 294,258 388,632 47,205 53,052 72,063 85,084 97,222 185,640 250,831 270,577 292,432 316,593 555,441 696,792 805,149 921,785 1,052,458 9,623,355 10,810,317 12,674,238 14,763,105 17,215,818 72,156 64,712 66,217 73,653 87,621 Notes
60.2 5.8
62.5 6.4
59.8 6.4
58.1 6.2
55.7 6.1
62
Asset mix restructuring required to reduce hidden risk on capital, cut to NEUTRAL
The shadow banking system is at risk of regulatory tightening given its credit supply to the system may discount the effectiveness of liquidity control by loan quota. Entrusted loans take up 43% of shadow loans. CCB's entrusted loan exposure is around 14% of its total loans, the highest proportion among all H-share listed banks.
6% 5% 4% 3% 2% 1% 0%
10% 0%
Minsheng
CMB
BOC
BCOM
BCOM
Minsheng
CRCB
New CAR rule penalised by its bias towards long-term and corporate loans
We estimate CCBs Tier-1 ratio in 2010 will be mostly negatively impacted by the requirement to include operating risk in risk weighted assets (86bps), followed by the upward revision of risk weighting for property loans (34bps) and corporate loans over five years (25bps). On the other hand, CCBs Tier-1 ratio can increase by 24bps with the reduced risk weighting on retail loans (excluding personal mortgages) and small enterprise loans. In all, we forecast a 131bps drop in the Tier-1 ratio if the new CAR rule is implemented. The unfavourable change for CCB is the highest among H-share listed banks.
CRCB
63
ICBC
CCB
ICBC
CMB
BOC
ABC
Citic
CCB
Citic
ABC
CCB has been traditionally positioned to finance infrastructure projects in China. As at end-2010, property and infrastructure loans reached 30.3% of its total loans. Since most loans have a long maturity period, we believe it will take longer for CCB to improve its asset mix to reduce the negative impact from the new CAR rule.
Fig. 78: Impact on 2010 RWA and Tier-1 ratio by new CAR rule
Retail claims excluding Operating mortgage risk 277,695 -69,424 -1.2% 12
2010 (RMB mn) Total exposure Incremental RWA % to RWA Tier 1 impact (bps)
Property Interbank 402,922 201,461 3.3% -34 323,355 67,206 1.1% -11
Total
16% 14% 12% 10% 8% 6% 4% 2% 0% ICBC CCB CMB Bocom Citic Minsheng
ICBC
CCB
CMB
Bocom
Citic
Minsheng
64
65
3988.HK 3988 HK
EQUITY RESEARCH
June 24, 2011 Rating Remains Target price Remains Closing price June 21, 2011 Potential upside
Buy
HKD 5.20 HKD 3.77 +37.9%
Action: Mild NIM rebound in 2Q11F; reiterate BUY with TP at HKD5.20 For 1Q11, BOC reported 3bp q-q NIM contraction. Per management, NIM continued to narrow in April by 1bp on a 10bp increase in demand deposits, but started to rebound in May. For 2Q11F, management guided for 1-2bp q-q NIM expansion. We, therefore, lower our FY11F NIM expansion forecast by 1bp to 7bps y-y, bringing our earnings forecast down by 2%. Currently trading at 1.2x FY11F P/BV, the lowest among the Big 4, BOC offers an undemanding valuation, in our view. Reiterate BUY. Catalysts Further rounds of rate hikes (if symmetric) to boost NIM in FY11F. Potentially slower growth in offshore RMB business Total RMB deposits in Hong Kong reached RMB511bn as at end-April 2011, accounting for 8.0% of total deposits in Hong Kong (up from 5.2% as at end-2010). However, we note the slower monthly growth pace of 1017% m-m this year, versus 13-45% m-m in 2H10, which may signal slower offshore RMB business in Hong Kong. However, given the PBOC is planning to expand the cross-border RMB settlement plan, we think the overall impact will be neutral. RMB32bn subordinated bonds issuance completed As of 31 March, 2011, BOCs CAR stood at 12.4%. In May, the bank completed the issuance of RMB32bn in subordinated bonds to strengthen its supplementary capital. According to our estimates, BOCs CAR will climb by 0.5pp and reach 12.8% by end-FY11.
Anchor themes The operating environment remains favourable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continues to weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a rerating in the near term. Nomura vs consensus Our net profit forecast is 2% above consensus estimates due to our higher NIM and lower credit cost assumptions.
Research analysts
China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
FY13F New
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
Source: Nomura estimates
154,109 191,008 190,502 230,625 228,777 266,215 264,240 104,418 120,625 117,945 144,005 142,600 164,753 163,252 104,418 120,625 117,945 144,005 142,600 164,753 163,252 0.39 23.1 8.3 1.4 1.4 4.5 18.0 1.1 0.43 10.3 N/A N/A N/A N/A 17.8 1.1 0.42 7.8 7.3 1.2 1.2 6.1 17.4 1.1 0.52 19.4 N/A N/A N/A N/A 19.2 1.1 0.51 20.9 5.7 1.0 1.0 7.8 19.1 1.1 0.59 14.4 N/A N/A N/A N/A 19.7 1.1 0.58 14.5 4.9 0.9 0.9 9.2 19.6 1.1
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomuras rating system.
FY09 261,424 -102,543 158,881 46,013 5,849 21,827 73,689 232,570 FY10 313,533 -119,571 193,962 54,483 3,491 24,582 82,556 276,518 FY11F 409,293 -182,259 227,033 78,440 4,740 16,217 99,397 326,430 FY12F 495,549 -228,682 266,867 98,498 6,760 17,565 122,823 389,690 FY13F 572,611 -265,518 307,093 122,533 8,893 19,028 150,454 457,547 Notes
Enhancing ROE
10.4 17.6 10.4 4.2 1.6 1.6 2.04 3.36 1.41 1.94 31.7 46.1 23.2 44.0 16.5 1.03 22.5 1.40
8.3 14.1 8.3 4.5 1.4 1.4 2.07 3.34 1.37 1.97 29.9 44.3 22.8 39.0 18.0 1.09 24.3 1.47
7.3 12.4 7.3 6.1 1.2 1.2 2.14 3.87 1.81 2.06 30.4 41.6 22.7 45.0 17.4 1.05 23.5 1.42
5.7 9.7 5.7 7.8 1.0 1.0 2.23 4.14 1.98 2.16 31.5 41.3 22.9 45.0 19.1 1.11 25.7 1.49
4.9 8.3 4.9 9.2 0.9 0.9 2.27 4.23 2.01 2.22 32.9 42.2 23.1 45.0 19.6 1.09 26.4 1.48
Priceandpricerelativechart(oneyear)
(HKD) 5.2 5 4.8 4.6 4.4 4.2 4 3.8 3.6 N ov 10 M ar 11 A pr 11 M ay 11 A ug 10 S ep 10 J an 11 F eb 11 D ec 10 J un 11 O c t 10 J ul 10 Price Rel MSCI China 108 106 104 102 100 98 96 94 92 90
(%) Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn)
Estimated free float (%) 52-week range (HKD) 3-mth avg daily turnover (USDmn) Major shareholders (%) Huijin HKSCC Nominees
67.5 21.8
67
BalanceSheet(CNYmn)
As at 31 Dec Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (CNY) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) DPS (CNY) PPOP PS (CNY) BVPS (CNY) ABVPS (CNY) NTAPS (CNY)
Source: Nomura estimates
FY09 434,351 223,444 1,111,351 1,816,679 36,099 4,910,358 -112,950 4,797,408 10,668 109,954 FY10 636,126 213,716 1,573,922 2,055,324 42,469 5,668,478 -130,713 5,537,765 12,631 123,568 FY11F 1,147,608 213,716 1,762,793 2,160,527 42,469 6,326,213 -147,408 6,178,805 14,147 129,746 FY12F 1,842,813 213,716 1,974,328 2,271,186 42,469 7,217,779 -170,776 7,047,003 15,844 136,234 FY13F 2,643,804 213,716 2,211,247 2,387,588 42,469 8,136,415 -183,633 7,952,782 17,746 143,045 Notes
211,989 264,344 291,018 320,488 8,751,943 10,459,865 11,940,829 13,864,081 6,620,552 7,483,254 8,582,500 10,103,239 1,126,963 1,549,126 1,780,220 2,045,824 175,599 247,922 304,605 332,225 7,923,114 9,280,302 10,667,324 12,481,288 283,435 503,413 530,304 558,763 8,206,549 9,783,715 11,197,628 13,040,051 30,402 31,985 34,166 36,565 253,839 279,147 279,147 279,147
353,059 15,965,456 11,745,637 2,351,098 363,368 14,460,104 588,895 15,048,998 39,204 279,147
65,221 107,600 160,150 227,485 307,980 35,537 40,755 53,075 64,170 73,464 160,395 216,663 216,663 216,663 216,663 514,992 644,165 709,035 787,465 877,254 8,751,943 10,459,865 11,940,829 13,864,081 15,965,456 76,006 63,965 62,319 69,707 73,926
74.2 5.9
75.7 6.2
73.7 5.9
71.4 5.7
69.3 5.5
68
Profit & Loss (RMBmn, except %) Net interest income Fee income Non-interest income Operating Income Operating Expenses PPOP Provisions Associated Companies Operating pre-tax Profit tax Minority Interest Profits attributable to equity holders
Source: Company data, Nomura estimates
2011F 227,033 78,440 99,397 326,430 (135,928) 190,502 (31,502) 1,132 160,133 (36,387) (5,800) 117,945
2013F 307,093 122,533 150,454 457,547 (193,308) 264,240 (44,197) 1,307 221,350 (51,079) (7,018) 163,252
2011F 227,567 78,440 99,397 326,964 (135,955) 191,008 (28,482) 1,132 163,658 (37,233) (5,800) 120,625
2013F 309,176 122,533 150,454 459,631 (193,416) 266,215 (44,197) 1,307 223,325 (51,553) (7,018) 164,753
2011F (0.2) 0.0 0.0 (0.2) (0.0) (0.3) 10.6 0.0 (2.2) (2.3) 0.0 (2.2)
2013F (0.7) 0.0 0.0 (0.5) (0.1) (0.7) 0.0 0.0 (0.9) (0.9) 0.0 (0.9)
69
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
70
Bank of Communications
BANKS
3328.HK 3328 HK
EQUITY RESEARCH
June 24, 2011 Rating Remains Target price Reduced from 9.00 Closing price June 21, 2011 Potential upside
Neutral
HKD 8.30 HKD 7.24 +14.6%
Anchor themes The operating environment remains favourable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continues to weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a rerating in the near term. Nomura vs consensus Our FY12F NPAT forecast is 10% lower than consensus due to lower NIM and higher credit cost assumptions.
Research analysts
China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
Source: Nomura estimates
62,200 39,042 39,042 0.74 20.7 8.4 1.5 1.5 3.0 20.2 1.1
75,552 46,225 46,225 0.78 5.5 N/A N/A N/A N/A 19.4 1.1
73,768 43,931 43,931 0.74 0.2 8.0 1.4 1.4 4.8 18.5 1.0
89,326 54,413 54,413 0.88 12.4 N/A N/A N/A N/A 20.4 1.1
85,334 104,117 50,523 50,523 0.82 9.8 6.9 1.2 1.2 5.8 19.1 1.0 62,647 62,647 1.01 15.1 N/A N/A N/A N/A 20.9 1.0
97,462 57,098 57,098 0.92 13.0 5.9 1.1 1.1 6.8 19.4 0.9
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomuras rating system.
FY09 116,743 -50,075 66,668 11,399 2,126 1,385 14,910 81,578 0 -32,022 0 49,556 -11,255 0 38,301 0 0 38,301 -8,047 30,254 -136 0 0 30,118 0 30,118 -9,799 20,319 FY10 141,905 -56,910 84,995 14,479 1,245 3,425 19,149 104,144 0 -41,944 0 62,200 -12,246 0 49,954 0 0 49,954 -10,782 39,172 -130 0 0 39,042 0 39,042 -10,525 28,517 FY11F 174,584 -74,159 100,425 18,488 1,121 3,599 23,208 123,633 0 -49,865 0 73,768 -16,898 0 56,870 0 0 56,870 -12,796 44,074 -143 0 0 43,931 0 43,931 -17,630 26,301 FY12F 207,241 -90,359 116,883 23,539 1,008 3,783 28,330 145,212 0 -59,878 0 85,334 -19,940 0 65,394 0 0 65,394 -14,714 50,680 -157 0 0 50,523 0 50,523 -20,272 30,251 FY13F 239,903 -105,813 134,091 29,895 908 3,975 34,778 168,868 0 -71,407 97,462 -23,564 0 73,898 0 0 73,898 -16,627 57,271 -173 0 0 57,098 0 57,098 -22,908 34,189 Notes
10.3 12.7 10.3 3.2 1.9 1.9 2.26 3.96 1.78 2.18 18.3 39.3 21.0 32.5 19.2 1.01 24.4 1.28
8.4 10.3 8.4 3.0 1.5 1.5 2.46 4.11 1.72 2.38 18.4 40.3 21.6 27.0 20.2 1.08 25.8 1.38
8.0 9.8 8.0 4.8 1.4 1.4 2.51 4.37 1.97 2.40 18.8 40.3 22.5 40.1 18.5 1.02 24.0 1.32
6.9 8.5 6.9 5.8 1.2 1.2 2.57 4.55 2.13 2.42 19.5 41.2 22.5 40.1 19.1 0.99 24.7 1.29
5.9 7.3 5.9 6.8 1.1 1.1 2.60 4.65 2.20 2.45 20.6 42.3 22.5 40.1 19.4 0.95 25.1 1.23
Priceandpricerelativechart(oneyear)
(HKD) 9.5 9 8.5 8 7.5 7 N ov 10 M ar 11 A pr 11 M ay 11 A ug 10 S ep 10 J an 11 F eb 11 D ec 10 J un 11 O c t 10 J ul 10 Price Rel MSCI China 105 100 95 90 85 80 75
(%) Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (HKD) 3-mth avg daily turnover (USDmn) Major shareholders (%) MOF HSBC
26.5 18.6
72
BalanceSheet(CNYmn)
As at 31 Dec Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (CNY) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) DPS (CNY) PPOP PS (CNY) BVPS (CNY) ABVPS (CNY) NTAPS (CNY)
Source: Nomura estimates
FY09 13,050 222,671 421,946 778,131 0 1,839,314 -37,776 1,801,538 0 29,878 0 5,821 36,102 3,309,137 2,372,055 715,547 0 3,087,602 57,110 3,144,712 577 48,994 0 16,247 9,799 88,808 163,848 3,309,137 25,009 FY10 17,597 262,976 568,957 814,551 0 2,236,927 -46,437 2,190,490 0 33,911 0 7,341 55,770 3,951,593 2,867,847 783,411 0 3,651,258 76,678 3,727,936 884 56,260 0 19,416 10,525 136,572 222,773 3,951,593 24,988 FY11F 24,828 302,422 802,780 898,308 0 2,591,009 -59,522 2,531,487 0 35,607 0 6,607 58,559 4,660,598 3,498,773 840,701 0 4,339,474 69,874 4,409,348 0 61,886 0 38,613 17,630 133,122 251,251 4,660,598 26,195 FY12F 33,455 347,786 1,081,711 990,787 0 3,025,925 -73,846 2,952,079 0 37,387 0 5,946 61,486 5,510,638 4,268,503 899,926 0 5,168,430 63,902 5,232,332 0 61,886 0 66,221 20,272 129,927 278,306 5,510,638 29,003 FY13F 44,535 399,954 1,439,965 1,092,910 0 3,519,603 -89,227 3,430,375 0 39,256 0 5,352 64,561 6,516,907 5,207,574 941,193 0 6,148,767 58,628 6,207,395 0 61,886 0 97,775 22,908 126,943 309,512 6,516,907 33,913 Notes
77.5 5.0
78.0 5.6
74.1 5.4
70.9 5.1
67.6 4.7
73
2011F 100,425 18,488 23,208 123,633 (49,865) 73,768 (16,898) 56,870 (12,796) (143) 43,931
Revised 2012F 116,883 23,539 28,330 145,212 (59,878) 85,334 (19,940) 65,394 (14,714) (157) 50,523
2013F 134,091 29,895 34,778 168,868 (71,407) 97,462 (23,564) 73,898 (16,627) (173) 57,098
2011F 101,745 18,488 23,208 124,953 (49,400) 75,552 (15,723) 59,829 (13,462) (143) 46,225
Previous 2012F 119,746 23,539 28,330 148,075 (58,749) 89,326 (18,913) 70,413 (15,843) (157) 54,413
2013F 138,611 29,895 34,778 173,388 (69,272) 104,117 (23,059) 81,057 (18,238) (173) 62,647
2011F (1.3) 0.0 0.0 (1.1) 0.9 (2.4) 7.5 (4.9) (4.9) 0.0 (5.0)
Change (%) 2012F (2.4) 0.0 0.0 (1.9) 1.9 (4.5) 5.4 (7.1) (7.1) 0.0 (7.1)
2013F (3.3) 0.0 0.0 (2.6) 3.1 (6.4) 2.2 (8.8) (8.8) 0.0 (8.9)
Pricing level of new loans We understand that in 2Q11 there are 7% new domestic RMB loans priced below benchmark, 38% at benchmark and 55% above benchmark. The figures show an obvious improvement in pricing power, as the proportion in 1Q11 was 20%, 34% and 46%, respectively. The percentage of new loans priced at and above benchmark further increased to 93%, up from 80% in 1Q11.
74
Fig. 86: BOCOM: % of new RMB loans at benchmark interest rates and above benchmark interest rates
Improving pricing power
(%) 2.52 2.50 2.48 2.46 2.44 2.42 2.40 2.38 2.36 1Q10 2Q10 3Q10 4Q10 1Q11
1Q11
2Q11
75
given the amount of these products is not substantial. Besides, one-off adjustment by year-end could avoid potential pressure on quarterly results, in our view. Assuming the amount of credit-related bank-trust corporation products remain the same until the end of the year (which is a conservative assumption), we estimate the impact would be 0.7% on FY11F NPAT (assuming 2% provision), 0.6% on FY11F RWA (assuming 100% risk weight) and 4.8% on net new loans in FY11F.
76
3968.HK 3968 HK
EQUITY RESEARCH
June 24, 2011 Rating Remains Target price Reduced from 26.86 Closing price June 21, 2011 Potential upside
Buy
HKD 24.82 HKD 18.08 +37.3%
Anchor themes The operating environment remains favorable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continues to weigh on valuations. Better visibility on capital raising plan could trigger a re-rating in the near term. Nomura vs consensus Our FY12F net profit forecast is 3% above consensus estimates due to our higher NIM and lower credit cost assumptions.
Research analysts
China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
Source: Nomura estimates
38,780 25,769 25,769 1.19 33.3 13.0 2.5 2.5 1.9 22.7 1.2
52,125 34,561 34,561 1.60 34.1 N/A N/A N/A N/A 23.4 1.3
49,908 33,007 33,007 1.53 28.1 9.7 1.9 1.9 3.1 22.5 1.2
65,559 43,127 43,127 2.00 24.8 N/A N/A N/A N/A 24.2 1.3
63,763 4 ,089 42,089 1.95 27.5 7.2 1.5 1.5 4.2 23.9 1.3
81,176 52,905 52,905 2.45 22.7 N/A N/A N/A N/A 24.6 1.4
78,961 51,281 51,281 2.38 21.8 5.8 1.3 1.3 5.2 24.1 1.3
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomuras rating system.
FY09 65,838 -25,474 40,364 7,993 1,318 2,173 11,484 51,848 0 -26,562 25,286 -3,073 102 22,315 0 69 22,384 -4,149 18,235 0 0 0 18,235 0 18,235 -4,015 14,220 FY10 84,513 -27,437 57,076 11,330 1,947 1,339 14,616 71,692 0 -32,912 38,780 -5,570 69 33,279 0 64 33,343 -7,574 25,769 0 0 0 25,769 0 25,769 -6,257 19,512 FY11F 109,289 -39,440 69,848 14,291 2,171 1,540 18,002 87,851 0 -37,943 49,908 -6,838 0 43,070 0 77 43,147 -10,139 33,007 0 0 0 33,007 0 33,007 -9,902 23,105 FY12F 137,328 -51,305 86,023 18,040 2,422 1,771 22,234 108,256 0 -44,493 63,763 -8,837 0 54,927 0 92 55,019 -12,929 42,089 0 0 0 42,089 0 42,089 -12,627 29,463 FY13F 165,996 -62,074 103,922 22,831 2,704 2,036 27,571 131,493 0 -52,532 78,961 -12,037 0 66,924 0 111 67,035 -15,753 51,281 0 0 0 51,281 0 51,281 -15,384 35,897 Notes
18.7 27.0 17.7 1.3 3.3 3.3 2.23 3.65 1.50 2.14 22.1 51.2 18.5 22.0 21.2 1.00 25.9 1.23
13.0 18.8 13.0 1.9 2.5 2.5 2.65 3.93 1.37 2.56 20.4 45.9 22.7 24.3 22.7 1.15 29.3 1.49
9.7 14.0 9.7 3.1 1.9 1.9 2.77 4.34 1.71 2.63 20.5 43.2 23.5 30.0 22.5 1.24 29.3 1.62
7.2 10.4 7.2 4.2 1.5 1.5 2.86 4.56 1.83 2.72 20.5 41.1 23.5 30.0 23.9 1.31 31.2 1.71
5.8 8.3 5.8 5.2 1.3 1.3 2.92 4.66 1.85 2.81 21.0 40.0 23.5 30.0 24.1 1.33 31.5 1.74
Priceandpricerelativechart(oneyear)
(HKD) 24 22 20 95 18 16 N ov 10 M ar 11 A pr 11 M ay 11 A ug 10 S ep 10 J an 11 F eb 11 D ec 10 J un 11 O c t 10 J ul 10 90 85 Price Rel MSCI China 110 105 100
(%) Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn)
Estimated free float 100.0 (%) 52-week range (HKD) 23.9/17.62 3-mth avg daily turnover (USDmn) Major shareholders (%) China Merchants Steam Navigation China Ocean Shipping 57.21
12.4 6.4
78
BalanceSheet(CNYmn)
As at 31 Dec Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (CNY) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) DPS (CNY) PPOP PS (CNY) BVPS (CNY) ABVPS (CNY) NTAPS (CNY)
Source: Nomura estimates
FY09 8,342 277,738 200,212 377,072 0 1,185,859 -24,042 1,161,817 466 16,008 0 2,786 23,500 2,067,941 1,608,146 307,023 0 1,915,169 59,989 1,975,158 0 19,119 0 27,592 6,296 39,776 92,783 2,067,941 9,732 FY10 11,428 273,675 274,277 394,176 0 1,431,495 -29,335 1,402,160 443 18,397 0 3,706 24,245 2,402,507 1,897,178 319,473 0 2,216,651 51,850 2,268,501 0 21,577 0 42,806 8,719 60,904 134,006 2,402,507 9,686 FY11F 14,970 324,589 359,276 498,810 0 1,676,881 -34,805 1,642,076 532 22,076 0 4,818 36,368 2,903,514 2,314,557 361,893 0 2,676,450 67,405 2,743,855 0 21,577 0 62,911 9,902 65,269 159,659 2,903,514 11,240 FY12F 17,880 385,303 429,127 631,430 0 2,005,105 -41,961 1,963,144 638 26,492 0 6,263 54,551 3,514,828 2,823,760 410,670 0 3,234,430 87,627 3,322,056 0 21,577 0 89,374 12,627 69,195 192,772 3,514,828 13,633 FY13F 20,282 457,741 486,762 799,580 0 2,371,917 -51,916 2,320,001 766 31,790 0 8,142 68,189 4,193,253 3,388,512 466,757 0 3,855,269 105,538 3,960,807 0 21,577 0 122,271 15,384 73,213 232,445 4,193,253 16,916 Notes
73.7 4.5
75.5 5.6
72.4 5.5
71.0 5.5
70.0 5.5
79
80
81
Note: (1) assuming new shares are issued at a 85% discount to CMB's average closing price over the last 90 trading days (equivalent to HKD19.75 for H shares and CNY13.83 for A shares); (2) assuming the proportion of the A-share rights issue and the H-share rights issue equals the proportion of existing A shares & H shares to total number of shares. Source: Bloomberg, Nomura estimates
82
0998.HK 998 HK
EQUITY RESEARCH
June 24, 2011 Rating Remains Target price Remains Closing price June 21, 2011 Potential upside
Buy
HKD 6.50 HKD 4.97 +30.8%
Anchor themes The operating environment remains favourable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continues to weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a rerating in the near term. Nomura vs consensus Our net profit forecast is 2% above consensus estimates due to our higher NIM and lower credit cost assumptions.
Research analysts
China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
Source: Nomura estimates
33,718 21,509 21,509 0.55 50.2 7.8 1.4 1.4 na 19.3 1.1
43,974 25,959 25,959 0.60 8.7 N/A N/A N/A N/A 18.3 1.1
43,813 25,837 25,837 0.60 8.2 6.8 1.2 1.2 4.6 18.3 1.1
53,140 31,029 31,029 0.65 8.8 N/A N/A N/A N/A 17.9 1.1
52,951 30,887 30,887 0.65 8.8 6.0 1.0 1.0 5.9 17.9 1.1
62,863 36,092 36,092 0.76 16.3 N/A N/A N/A N/A 18.5 1.1
62,642 35,925 35,925 0.75 16.3 5.0 0.9 0.9 7.0 18.4 1.1
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomuras rating system.
FY09 56,131 -20,147 35,984 4,220 383 396 4,999 40,983 0 -19,132 21,851 -2,446 -173 19,232 32 0 19,264 -4,705 14,559 -240 0 0 14,319 0 14,319 -3,435 10,884 FY10 72,460 -24,325 48,135 5,696 1,431 1,094 8,221 56,356 0 -22,638 33,718 -4,238 -1,011 28,469 226 0 28,695 -6,916 21,779 -270 0 0 21,509 0 21,509 0 21,509 FY11F 95,990 -36,423 59,567 7,990 1,416 1,313 10,720 70,286 0 -26,474 43,813 -9,591 0 34,221 0 0 34,221 -8,384 25,837 0 0 0 25,837 0 25,837 -9,043 16,794 FY12F 118,014 -46,699 71,315 10,521 1,084 1,510 13,115 84,430 0 -31,479 52,951 -12,042 0 40,909 0 0 40,909 -10,023 30,887 0 0 0 30,887 0 30,887 -10,810 20,076 FY13F 140,556 -56,025 84,531 13,261 878 1,736 15,876 100,406 0 -37,765 62,642 -15,059 0 47,582 0 0 47,582 -11,658 35,925 0 0 0 35,925 0 35,925 -12,574 23,351 Notes
11.9 21.2 11.9 2.0 1.7 1.7 2.39 3.73 1.53 2.20 12.2 46.7 24.4 24.0 14.4 0.98 19.4 1.30
7.8 13.9 7.8 na 1.4 1.4 2.63 3.96 1.42 2.54 14.6 40.2 24.1 0.0 19.3 1.13 25.5 1.48
6.8 12.3 6.8 4.6 1.2 1.2 2.71 4.37 1.77 2.60 15.3 37.7 24.5 35.0 18.3 1.12 24.2 1.49
6.0 10.7 6.0 5.9 1.0 1.0 2.76 4.58 1.94 2.64 15.5 37.3 24.5 35.0 17.9 1.12 23.6 1.48
5.0 8.9 5.0 7.0 0.9 0.9 2.81 4.68 1.99 2.68 15.8 37.6 24.5 35.0 18.4 1.11 24.4 1.47
Priceandpricerelativechart(oneyear)
(HKD) 6.4 6.2 6 5.8 5.6 5.4 5.2 5 4.8 4.6 N ov 10 M ar 11 A pr 11 M ay 11 A ug 10 S ep 10 J an 11 F eb 11 D ec 10 J un 11 O c t 10 J ul 10 Price Rel MSCI HK 105 100 95 90 85 80 75
(%) Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (HKD) 3-mth avg daily turnover (USDmn) Major shareholders (%) Citic Group BBVA 1M -8.5 -8.7 -1.5 24,907.1 51.1 6.26/4.7 25.57 3M -4.1 -3.9 -1.0 12M -5.2 -5.3 -19.2
62.3 15.0
84
BalanceSheet(CNYmn)
As at 31 Dec Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (CNY) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) DPS (CNY) PPOP PS (CNY) BVPS (CNY) ABVPS (CNY) NTAPS (CNY)
Source: Nomura estimates
FY09 4,480 81,808 219,523 206,260 0 1,065,649 -15,170 1,050,479 0 10,482 0 2,095 199,904 1,775,031 1,341,927 298,024 0 1,639,951 28,072 1,668,023 4,210 39,033 0 14,286 3,435 46,044 102,798 1,775,031 10,157 FY10 5,126 130,588 251,197 269,005 0 1,264,245 -18,219 1,246,026 0 10,222 0 2,565 166,585 2,081,314 1,730,816 183,650 0 1,914,466 42,310 1,956,776 4,363 39,033 0 30,576 0 50,566 120,175 2,081,314 8,533 FY11F 8,857 146,259 434,006 301,229 0 1,476,113 -20,826 1,455,287 0 10,426 0 0 168,251 2,524,315 2,111,596 202,774 0 2,314,369 42,570 2,356,939 4,407 47,620 0 38,327 9,043 67,979 162,969 2,524,315 9,218 FY12F 11,914 163,810 583,780 337,313 0 1,734,973 -24,707 1,710,266 0 10,635 0 0 169,933 2,987,651 2,533,915 223,384 0 2,757,299 42,856 2,800,155 4,451 47,620 0 56,636 10,810 67,979 183,046 2,987,651 10,824 FY13F 14,928 183,467 731,452 377,722 0 2,029,886 -30,222 1,999,664 0 10,848 0 0 171,633 3,489,712 2,990,019 245,631 0 3,235,651 43,170 3,278,820 4,495 47,620 0 78,224 12,574 67,979 206,397 3,489,712 13,647 Notes
Lowering LDR.
79.4 5.8
73.0 5.8
69.9 6.5
68.5 6.1
67.9 5.9
85
Lower FY11F NIM forecast by 1bp; marginal earnings reduction; reiterate BUY
In view of the 10bp interest rate hike in demand deposits in April and three more potential RRR hikes in 2Q11, we believe funding costs should continue to rise. Although supported by stronger pricing power, we expect more moderate NIM expansion in 2Q11F and a potential asymmetric rate hike will likely place downside pressure on the banks NIM in FY11F. We lower our forecast FY11F NIM expansion by 1bp to 8bp y-y. The stock is trading at 1.2x FY11F P/B. the lowest among H-share banks. With a marginal reduction (0.5%) in our earnings forecasts, we reiterate our BUY rating with a PT of HKD6.50.
Fig. 92: Citic Bank: earnings revisions
Marginal earnings reduction
Profit & Loss (RMBmn, except %) Net interest income Fee income Non-interest income Operating Income Operating Expenses PPOP Provisions Operating pre-tax Profit tax Profits attributable to equity holders
Source: Company data, Nomura estimates
2011F 59,567 7,990 10,720 70,286 (26,474) 43,813 (9,591) 34,221 (8,384) 25,837
Revised 2012F 71,315 10,521 13,115 84,430 (31,479) 52,951 (12,042) 40,909 (10,023) 30,887
2013F 84,531 13,261 15,876 100,406 (37,765) 62,642 (15,059) 47,582 (11,658) 35,925
2011F 59,738 7,990 10,720 70,457 (26,484) 43,974 (9,591) 34,383 (8,424) 25,959
Previous 2012F 71,516 10,521 13,115 84,631 (31,491) 53,140 (12,042) 41,098 (10,069) 31,029
2013F 84,766 13,261 15,876 100,642 (37,778) 62,863 (15,059) 47,804 (11,712) 36,092
2011F (0.3) 0.0 0.0 (0.2) (0.0) (0.4) 0.0 (0.5) (0.5) (0.5)
Change (%) 2012F (0.3) 0.0 0.0 (0.2) (0.0) (0.4) 0.0 (0.5) (0.5) (0.5)
2013F (0.3) 0.0 0.0 (0.2) (0.0) (0.4) 0.0 (0.5) (0.5) (0.5)
86
CAR & T1 CAR to be boosted by 1.5pp After the CNY26bn A+H shares rights issues, we estimate Citics CAR and T1 CAR will be boosted by 1.5pp each. We expect both ratios to reach 12.45% and 10.32% at the end of FY11F, respectively.
Fig. 93: Citic: quarterly T1 CAR
(%) 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
Valuation methodology and investment risk Our target price of HKD6.50 is based on 1.5x P/BV applied to our FY11F BVPS forecast of CNY3.42, assuming sustainable ROE of 14.5% in order to reflect our positive view on Citics improvement in LDR. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term growth)/(cost of equity - long-term growth)] to derive our fair P/BV, assuming a cost of equity of 12% and a terminal growth rate of 7.2%. We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE. Downside risks: more severe-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth.
1Q11
87
1988.HK 1988 HK
EQUITY RESEARCH
June 24, 2011 Rating Remains Target price Remains Closing price June 21, 2011 Potential upside
Asset quality could worsen as economic growth slows sharply; remain NEUTRAL
Action: Reaffirm NEUTRAL and TP of HK$7.40 We continue to expect FY11F NPAT to grow 21.3% y-y, underpinned by 5bp NIM expansion and 18.6% y-y gross loan growth. Nevertheless, with the rapid growth of the shadow banking business and a stretched loan yield, we see higher risks of worsening asset quality, especially if the overall economy slows sharply. Although a higher loan yield has boosted margin expansion and profitability in past quarters, we see very limited upside for further margin expansion, given that new SDT loan yield reached over 10% p.a. in 1Q11 vs 6.31% p.a. for the benchmark one-year lending rate, while funding costs should continue to rise significantly due to tight liquidity, severe competition for deposits (due to daily monitoring of LDR) and higher interest and interbank market rates. The stock has outperformed peers recently with the share price up 9.5% YTD vs. -4.1% for the sector; however, we believe the macro outlook could be crucial for the bank as a potential significant slowdown in economic growth could erode its asset quality substantially given that SME borrowers are usually very sensitive to economic conditions. We maintain our NEUTRAL rating. Catalysts Better-than-expected 2Q11 results could trigger a re-rating in the near term. Valuation The stock is trading at 7.7x FY11F P/E and 1.4x FY11F P/B. We believe ongoing capital-raising will continue to exert pressure on ROE and EPS; hence, we maintain our NEUTRAL rating and TP of HK$7.40.
31 Dec Currency (CNY) FY10 Actual Old FY11F New Old FY12F New Old FY13F New
Neutral
HKD 7.40 HKD 7.29 +1.5%
Anchor themes The operating environment remains favourable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continues to weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a rerating in the near term. Nomura vs consensus Our forecasts are 6.0% lower than consensus because of our lower loan yields and higher funding costs assumption.
Research analysts
China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
Source: Nomura estimates
28,480 17,581 17,581 0.72 21.8 8.7 1.6 1.6 1.6 18.3 1.1
35,190 21,334 21,334 0.77 7.9 N/A N/A N/A N/A 18.9 1.1
35,190 21,334 21,334 0.77 7.9 7.7 1.4 1.4 2.6 18.9 1.1
43,165 25,729 25,729 0.88 13.2 N/A N/A N/A N/A 19.5 1.0
43,165 25,729 25,729 0.88 13.2 6.5 1.2 1.2 3.1 19.5 1.0
52,931 31,037 31,037 1.02 16.7 N/A N/A N/A N/A 20.2 1.0
52,931 31,037 31,037 1.02 16.7 5.5 1.0 1.0 3.7 20.2 1.0
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomuras rating system.
FY09 53,441 -21,201 32,240 4,664 5,133 0 9,797 42,037 FY10 70,776 -24,903 45,873 8,289 505 0 8,794 54,667 FY11F 83,169 -30,411 52,759 10,822 600 0 11,422 64,181 FY12F 98,865 -36,767 62,098 14,124 714 0 14,838 76,936 FY13F 116,098 -43,128 72,970 18,429 849 0 19,277 92,247 Notes
10.8 11.0 10.8 0.8 1.6 1.6 2.59 4.29 1.80 2.49 23.3 50.1 22.7 9.2 17.1 0.98 22.1 1.26
8.7 8.9 8.7 1.6 1.6 1.6 2.94 4.54 1.72 2.82 16.1 47.9 23.0 15.2 18.3 1.08 23.9 1.41
7.7 7.9 7.7 2.6 1.4 1.4 2.99 4.72 1.83 2.89 17.8 45.2 25.0 20.6 18.9 1.05 25.2 1.40
6.5 6.6 6.5 3.1 1.2 1.2 3.06 4.86 1.94 2.93 19.3 43.9 25.0 20.7 19.5 1.04 26.0 1.39
5.5 5.6 5.4 3.7 1.0 1.0 3.12 4.97 2.00 2.97 20.9 42.6 25.0 20.3 20.2 1.03 26.9 1.37
Priceandpricerelativechart(oneyear)
(HKD) 7.8 7.6 7.4 7.2 7 6.8 6.6 6.4 6.2 N ov 10 M ar 11 A pr 11 M ay 11 A ug 10 S ep 10 J an 11 F eb 11 D ec 10 J un 11 O c t 10 J ul 10 Price Rel MSCI HK 105 100 95 90 85 80 75 70
(%) Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn)
Estimated free float (%) 52-week range (HKD) 3-mth avg daily turnover (USDmn) Major shareholders (%) New Hope China Life
5.0 4.0
89
BalanceSheet(CNYmn)
As at 31 Dec Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (CNY) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) DPS (CNY) PPOP PS (CNY) BVPS (CNY) ABVPS (CNY) NTAPS (CNY)
Source: Nomura estimates
FY09 66,312 73,015 221,590 156,491 0 882,979 -15,241 867,738 0 8,068 FY10 130,059 149,385 262,238 180,943 0 1,057,571 -19,848 1,037,723 0 8,809 FY11F 281,514 156,854 288,462 207,241 0 1,254,020 -27,928 1,226,092 0 10,130 FY12F 453,330 164,697 317,308 237,475 0 1,496,787 -32,868 1,463,919 0 11,650 FY13F 687,776 172,932 349,039 272,236 0 1,777,032 -38,932 1,738,100 0 13,397 Notes
33,178 1,426,392 1,127,938 166,188 23,060 1,317,186 20,312 1,337,498 860 22,262 11,390 1,113 53,269 88,034 1,426,392 7,397
54,580 1,823,737 1,416,939 250,355 21,496 1,688,790 29,690 1,718,480 1,149 26,715 17,209 2,672 57,512 104,108 1,823,737 7,339
62,767 2,233,061 1,742,835 300,426 31,496 2,074,757 34,972 2,109,729 1,264 28,366 25,690 4,395 63,618 122,068 2,233,061 8,495
72,182 2,720,561 2,143,687 360,511 31,496 2,535,694 41,203 2,576,898 1,390 30,330 35,098 5,318 71,527 142,274 2,720,561 10,558
83,009 3,316,490 2,636,735 432,613 31,496 3,100,844 48,556 3,149,401 1,529 31,313 47,536 6,306 80,406 165,560 3,316,490 13,013
78.3 6.2
74.6 5.7
72.0 5.5
69.8 5.2
67.4 5.0
90
91
92
EQUITY RESEARCH
June 24, 2011 Rating Remains Target price Reduced from 6.68 Closing price June 21, 2011 Potential upside
Target 30% earnings growth in FY11F with potential upside; reaffirm BUY
Action and Valuation: targets 30% earnings growth in FY11 with potential upside; reaffirm BUY with TP slightly lowered to HKD6.52 According to management guidance, FY11F NPAT would be at least above CNY40bn, driven mainly by asset growth, further NIM expansion and strong fee income growth, as well as proactive cost control (target CIR of <40% in FY11F). We maintain our forecast that CRCBs NPAT will double in three years, but we slightly lower our TP by 2% to reflect our higher provision assumptions under tighter regulations. Trading at 1.3x FY11F P/B, we would recommend investors to accumulate the stock. Catalyst: 2Q11 results Stronger-than-expected results could trigger a share price re-rating. FY11F NIM will likely reach 3.30-3.50% According to management, CRCBs 1Q11 NIM was 3.17% (compared with 3.07% in FY10). Management has guided for a full-year FY11F NIM of 3.30-3.50%, to be driven mainly by higher investment yields, improving pricing power and availability of low-cost IPO funds. We expect this to bring 8-20% potential upside to our FY11F earnings estimate. 1Q11 operating data loan and deposit growth on track Total loans in 1Q11 grew 5.7% q-q to CNY129.1bn, with net new loans of CNY6,956mn equivalent to 34.8% of managements minimum loan growth target of CNY20bn for FY11F guided by management in an analyst briefing in late-March. Total deposits increased 4.3% q-q to CNY214.3bn. Given its relatively low LDR at 60%, we think the impact of monitoring the daily average LDR starting in June would not be significant to CRCB.
31 Dec Currency (CNY) FY10 Actual Old FY11F New Old FY12F New Old FY13F New
Buy
HKD 6.52 HKD 4.71 +38.4%
Anchor themes The operating environment remains favourable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continues to weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a rerating in the near term. Nomura vs consensus Our net profit forecast is above consensus estimates by 9% due to our higher NIM and lower credit cost assumptions.
Research analysts
China Banks Lucy Feng - NIHK lucy.feng@nomura.com +852 2252 2165 Donger Wang - NIHK donger.wang@nomura.com +852 2252 1590
PPOP (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) Price/adj. book (x) Price/book (x) Dividend yield (%) ROE (%) ROA (%)
Source: Nomura estimates
3,835 3,064 3,064 0.41 29.8 9.9 1.6 1.6 1.1 19.3 1.3
5,591 4,011 4,011 0.44 7.3 N/A N/A N/A N/A 16.6 1.2
5,591 3,973 3,973 0.43 6.3 8.9 1.3 1.3 3.3 16.4 1.2
7,303 5,126 5,126 0.55 25.7 N/A N/A N/A N/A 18.2 1.3
7,303 5,126 5,126 0.55 26.9 6.6 1.1 1.1 5.3 18.3 1.3
9,036 6,302 6,302 0.68 22.9 N/A N/A N/A N/A 19.3 1.3
9,036 6,302 6,302 0.68 22.9 5.3 0.9 0.9 6.7 19.3 1.3
See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.
Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomuras rating system.
FY09 8,703 -3,228 5,474 137 8 57 202 5,677 -331 0 -2,860 2,486 -118 -5 2,363 121 0 2,485 -596 1,888 0 0 0 1,888 0 1,888 -360 1,528 FY10 11,473 -3,972 7,502 286 -46 3 243 7,745 -331 0 -3,579 3,835 -5 50 3,880 106 0 3,986 -925 3,061 3 0 0 3,064 0 3,064 -404 2,661 FY11F 15,053 -5,012 10,042 384 23 4 410 10,452 -348 0 -4,513 5,591 -350 0 5,241 0 0 5,241 -1,271 3,970 3 0 0 3,973 0 3,973 -1,192 2,781 FY12F 18,983 -6,232 12,750 486 24 3 513 13,264 -365 0 -5,595 7,303 -540 0 6,763 0 0 6,763 -1,640 5,123 3 0 0 5,126 0 5,126 -1,793 3,333 FY13F 23,144 -7,427 15,717 618 25 4 648 16,365 -383 0 -6,945 9,036 -721 0 8,315 0 0 8,315 -2,016 6,299 3 0 0 6,302 0 6,302 -2,205 4,097 Notes
13.1 18.6 13.1 1.5 2.6 2.6 3.06 4.87 1.93 2.93 3.6 56.2 24.0 19.1 21.7 1.02 27.2 1.28
9.9 14.1 9.9 1.1 1.6 1.6 3.07 4.70 1.73 2.97 3.1 50.5 23.2 13.2 19.3 1.26 24.4 1.59
8.9 12.6 8.9 3.3 1.3 1.3 3.16 4.74 1.75 2.99 3.9 46.5 24.3 30.0 16.4 1.24 21.7 1.63
6.6 9.4 6.6 5.3 1.1 1.1 3.21 4.79 1.81 2.97 3.9 44.9 24.3 35.0 18.3 1.29 24.1 1.70
5.3 7.5 5.3 6.7 0.9 0.9 3.25 4.78 1.80 2.98 4.0 44.8 24.3 35.0 19.3 1.31 25.5 1.72
Priceandpricerelativechart(oneyear)
(HKD) 6.5 6 5.5 5 4.5 4 M ar 11 A pr 11 M ay 11 J an 11 F eb 11 J un 11 Price Rel MSCI China 120 115 110 105 100 95 90 85
(%) Absolute (HKD) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (HKD) 3-mth avg daily turnover (USDmn) Major shareholders (%) Chongqing Yufu Chongqing City Construction
12M
6.9 6.6
94
BalanceSheet(CNYmn)
As at 31 Dec Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (CNY) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) DPS (CNY) PPOP PS (CNY) BVPS (CNY) ABVPS (CNY) NTAPS (CNY)
Source: Nomura estimates
FY09 27,416 10,154 0 40,882 13,374 101,821 -5,005 96,816 0 2,117 0 1,264 9,338 201,361 153,776 4,136 28,806 186,718 5,166 191,883 0 6,000 1,710 360 1,408 9,477 201,361 3,946 FY10 37,322 19,220 0 59,373 37,158 122,145 -5,031 117,114 0 2,341 0 1,308 11,710 285,546 205,563 12,157 38,063 255,782 7,333 263,115 85 9,000 2,243 404 10,699 22,345 285,546 2,912 FY11F 75,555 21,527 0 66,074 40,874 142,210 -5,232 136,978 0 2,388 0 1,177 12,594 357,166 263,042 15,225 45,215 323,482 7,559 331,042 94 9,300 4,236 1,192 11,303 26,031 357,166 2,481 FY12F 118,787 24,110 0 73,536 44,961 166,425 -5,548 160,878 0 2,436 0 1,059 13,565 439,331 327,725 19,793 53,798 401,316 7,806 409,123 103 9,300 6,967 1,793 12,046 30,105 439,331 2,191 FY13F 161,074 27,003 0 81,846 49,457 194,072 -5,989 188,082 0 2,485 0 953 14,629 525,529 392,422 25,731 64,098 482,250 8,077 490,328 113 9,300 10,651 2,205 12,932 35,088 525,529 1,929 Notes
66.2 4.7
59.4 7.8
54.1 7.3
50.8 6.9
49.5 6.7
95
2011F 10,042 384 410 10,452 (4,861) 5,591 (350) 5,241 (1,271) 3 3,973
Revised 2012F 12,750 486 513 13,264 (5,960) 7,303 (540) 6,763 (1,640) 3 5,126
2013F 15,717 618 648 16,365 (7,329) 9,036 (721) 8,315 (2,016) 3 6,302
2011F 10,042 384 410 10,452 (4,861) 5,591 (300) 5,291 (1,283) 3 4,011
Previous 2012F 12,750 486 513 13,264 (5,960) 7,303 (540) 6,763 (1,640) 3 5,126
2013F 15,717 618 648 16,365 (7,329) 9,036 (721) 8,315 (2,016) 3 6,302
2011F 0.0 0.0 0.0 0.0 0.0 0.0 16.7 (0.9) (0.9) 0.0 (0.9)
Change (%) 2012F 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
2013F 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
96
97
As at the end of 1Q11, total outstanding amount of LGFV loans was CNY18.0bn, accounting for 15% of total loans. According to management, 99.98% of the loans can be classified as general corporate loans based on the regulators principles. As for the CNY30mn loans that are regarded as real LGFV loans, the bank has a detailed plan of recovering and clearing. So far, it has recovered several millions in renminbi and its NPL ratio on LGFV loans remains at 0%, according to management. Valuation methodology and risk Our revised target price of HKD6.52 (from HKD6.68) is based on 1.9x P/BV applied to our FY11F BVPS forecast of CNY2.80 as well as a sustainable ROE of 15.6%. We lower our TP in order to reflect our higher provision forecasts due to tighter regulations. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term growth)/(cost of equity - long-term growth)] to derive our fair P/BV, assuming a cost of equity of 12.0% and a terminal growth rate of 7.8%. We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE. Downside risks: A more severe-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth.
98
Appendix A-1
Analyst Certification
I, Lucy Feng, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
8,47,48,55,61
4,58
48
50
12
99
58
Nomura financial interest/business relationships disclosures: Nomura International (Hong Kong) Limited or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities / related derivatives of the issuer. Nomura financial interest/business relationships disclosures: Nomura International (Hong Kong) Limited and/or its group company which carries on a business in Hong Kong in proprietary trading or market making, in aggregate own/(s) 1% or more of the securities of the issuer as of the previous month-end.
61
Previous Rating
Issuer name Agricultural Bank of China ICBC China Construction Bank-H Bank of Communications China Merchants Bank Chongqing Rural Commercial Bank China Minsheng Bank - H China CITIC Bank Bank of China (H-share) Previous Rating Not Rated Strong Buy Buy Buy Neutral Not Rated Not Rated Reduce Neutral Date of change 26-Aug-2010 10-Dec-2008 23-Jun-2011 14-Jan-2011 03-Feb-2010 26-Jan-2011 03-Feb-2010 26-Jun-2009 12-Feb-2009
ICBC China Construction Bank-H Bank of Communications China Merchants Bank Chongqing Rural Commercial Bank
HKD 7.60 HKD 8.60 HKD 9.00 HKD 26.86 HKD 6.68
HKD 7.50 HKD 7.02 HKD 8.30 HKD 24.82 HKD 6.52
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of HKD5.20 is based on 2.1x P/BV applied to FY11F BVPS of CNY2.00. Our sustainable ROE assumption is 16.2% to reflect our positive view on ABCs LT ROE development given: 1) strong deposit franchise to be benefit from RRR hikes; 2) normalised credit costs to support future earnings. We use a Gordon Growth model (target P/BV= (sustainable ROE long-term growth) / (cost of equity long-term growth)) to derive our fair P/BV range, assuming a cost of equity of 12% and terminal growth rate of 8.1%. We derive our terminal growth rate assumption by applying a 50% payout ratio to our long-term sustainable ROE assumption. Risks that may impede the achievement of the target price Downside risks: Being one of the largest banks in China, ABC remains closely tied to the Chinese economy. We believe that a more severe-than-expected macro tightening could result in a sharp rise in bad debt costs. The government may implement certain policies specifically for ABC in county areas which might or might not be of benefit to ABC. A slowing economy would likely have negative implications for loan growth and asset quality. The concept of market and operations-related risks has only been introduced into Chinas banking system in recent years, and
100
the system itself has yet to go through a full credit cycle. Therefore, there is no historical data showing how Chinese banks may perform under a more testing credit environment.
ICBC (1398 HK)
Rating and target price chart (three year history) Date 14-Jan-2011 22-Oct-2010 30-Jul-2010 13-May-2010 03-Feb-2010 18-Dec-2009 31-Aug-2009 26-Jun-2009 26-Mar-2009 10-Dec-2008 10-Dec-2008 Rating Target price 7.60 7.30 7.00 7.70 7.36 7.50 6.70 6.25 4.94 4.97 Buy Closing price 6.08 6.14 5.82 5.62 5.72 6.08 5.19 5.35 4.03 4.38 4.38
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of HKD7.50 is based on 2.2x P/BV multiplier and FY11F BVPS of CNY2.75. Our sustainable ROE assumption is 15.8%. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term growth)/(cost of equity - long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 11.5% and a terminal growth rate of 7.9%. We derive our terminal growth figure by applying a 50% payout ratio to our long-term sustainable ROE. Risks that may impede the achievement of the target price Downside risks: As the largest bank in China, ICBC and its performance remain closely tied to the Chinese economy. Hence, we believe that a more severe-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth, in our view. The concept of market and operation-related risks has only been introduced to the bank over the past few years. Moreover, fewer rate hikes than expected in 2011F is likely to pose a downward risk to our NIM assumption.
China Construction Bank-H (939 HK)
Rating and target price chart (three year history) Date 14-Jan-2011 22-Oct-2010 30-Jul-2010 13-May-2010 03-Feb-2010 18-Dec-2009 04-Sep-2009 18-Jun-2009 25-May-2009 30-Mar-2009 12-Feb-2009 12-Feb-2009 10-Dec-2008 10-Dec-2008 Rating Target price 8.60 8.50 7.60 7.90 7.48 8.50 7.80 7.30 5.65 4.95 4.99 Buy 5.05 Neutral Closing price 7.32 7.20 6.39 6.17 5.92 6.17 5.86 5.37 4.65 4.12 3.84 3.84 4.73 4.73
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of HKD7.02 is based on 1.75x P/BV multiplier and FY11F BVPS of CNY3.22. Our sustainable ROE assumption is 15.5%. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term growth)/(cost of equity - long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 12.7% and a terminal growth rate of 7.8%. We derive our terminal growth figure by applying a 50% payout ratio to our long-term sustainable ROE.
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Risks that may impede the achievement of the target price Downside risks: We believe that more severe-than-expected macro tightening could result in a sharp increase in bad debt costs. In addition, a slowing economy would have negative implications for loan growth and could lead to a significant rise in NPLs, in our view. Upside risks: a peak and reversing CPI is likely to reduce the possibility of asymmetric interest rate hike.
Bank of Communications (3328 HK)
Rating and target price chart (three year history) Date 14-Jan-2011 14-Jan-2011 22-Oct-2010 07-Jun-2010 13-May-2010 09-Mar-2010 09-Mar-2010 23-Feb-2010 03-Feb-2010 18-Dec-2009 04-Sep-2009 26-Jun-2009 26-Jun-2009 19-Mar-2009 10-Dec-2008 10-Dec-2008 Rating Target price 9.00 Neutral 11.00 10.00 10.20 10.00 Buy 9.09 8.81 10.00 9.80 8.65 Neutral 4.10 4.40 Reduce Closing price 8.00 8.00 9.28 7.71 7.92 8.19 8.19 7.58 7.63 8.28 9.00 7.99 7.99 4.91 5.50 5.50
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of HKD8.30 is based on a P/BV multiple of 1.6x, which we apply to our FY11F BVPS forecast of CNY4.07. In deriving our target multiple, we assume a sustainable ROE of 15.7%. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term growth)/(cost of equity - long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 12.5% and a terminal growth rate of 7.9%. We derive our terminal growth by applying a 50% payout ratio to our long-term sustainable ROE. Risks that may impede the achievement of the target price Downside risks: We believe that severer-than-expected macro tightening could result in a sharp rise in bad debt costs. A sharper-than-expected fall in exports could hurt BCOM more than peers, given its exposure to Chinas coastal regions. Finally, a slowing economy would have negative implications for loan growth. Upside risks: A strong NIM rebound amid the interest rate hike cycle.
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of HKD24.82 is based on 2.69x P/BV applied to our FY11F BVPS forecast of CNY7.4. Our sustainable ROE is 16.8%. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term growth) / (cost
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of equity - long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 11.5% and a terminal growth rate of 8.4%. We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE. Risks that may impede the achievement of the target price Downside risks: We believe that severer-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth.
Chongqing Rural Commercial Bank (3618 HK)
Rating and target price chart (three year history) Date 30-Mar-2011 26-Jan-2011 26-Jan-2011 Rating Target price 6.68 6.90 Buy Closing price 5.23 5.41 5.41
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of HKD6.52 is based on 1.9x P/BV applied to our FY11F BVPS forecast of CNY2.80 as well as a sustainable ROE of 15.6%. We lower our TP in order to reflect our higher provision forecast due to tighter regulations. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term growth)/(cost of equity - long-term growth)] to derive our fair P/BV, assuming a cost of equity of 12.0% and a terminal growth rate of 7.8%. We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE. Risks that may impede the achievement of the target price Downside risks: A more severe-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth.
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of HKD7.40 is based on 1.35x P/BV applied to our FY11F BVPS forecast of CNY4.39 as well as a sustainable ROE of 13.8%. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term
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growth)/(cost of equity - long-term growth)] to derive our fair P/BV, assuming a cost of equity of 12.0% and a terminal growth rate of 6.9%. We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE. Risks that may impede the achievement of the target price Downside risks: severer-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth. Upside risks: A strong NIM rebound amid the interest rate hike cycle.
China CITIC Bank (998 HK)
Rating and target price chart (three year history) Date 05-May-2011 14-Jan-2011 22-Oct-2010 13-May-2010 03-Feb-2010 18-Dec-2009 04-Sep-2009 26-Jun-2009 26-Jun-2009 10-Dec-2008 10-Dec-2008 Rating Target price 6.50 6.30 6.60 5.80 6.57 8.25 6.10 5.85 Buy 2.40 Reduce Closing price 5.47 5.35 5.73 4.64 5.55 6.18 4.79 4.94 4.94 3.03 3.03
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of HKD6.50 is based on 1.5x P/BV applied to our FY11F BVPS forecast of CNY3.42, assuming sustainable ROE of 14.5% in order to reflect our positive view on Citics improvement in LDR. We use the Gordon Growth Model [target P/BV = (sustainable ROE - long-term growth)/(cost of equity - long-term growth)] to derive our fair P/BV, assuming a cost of equity of 12% and a terminal growth rate of 7.2%. We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE. Risks that may impede the achievement of the target price Downside risks: more severe-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth.
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We derive our target price of HKD5.20 by applying a target P/BV of 1.64x to our FY11F BVPS forecast of CNY2.54. Our sustainable ROE assumption is 14.9%. We use the Gordon Growth Model [target P/BV= (sustainable ROE long-term growth)/(cost of equity - long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 12.0% and a
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terminal growth rate of 7.4%. We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE. Risks that may impede the achievement of the target price Downside risks: We believe that more-severe-than-expected macro tightening could result in a sharp rise in bad debt costs. Any downturn in the global economy, and especially Hong Kongs economy, could also weigh on the banks earnings performance given its bigger foreign exposure relative to that of peers.
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Conflict-of-interest disclosures
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Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (exAsia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009
STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008)
STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.
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Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008
STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Target Price
A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
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