Dissecting China’s Banking Sector
Deutsche Bank (DB) recently hosted its Access China 2018 conference which the management of the top five banks in China attended. The management of each bank shared the outlook of the bank on key metrics like net interest margin (NIM), loan growth and asset quality. Here are some of the highlights of DB’s Access China 2018 conference.
Investors Takeaway: Dissecting China’s Banking Sector With DB
1. China Construction Bank
According to the management, China Construction Bank has one of the lowest NIM among its peers. This is a result of strict discipline in containing funding cost by the bank. Moving forward, with loan yield expanding, China Construction Bank’s NIM should further expand.
As economic growth in China slows, new loan issuance will also slow. China Construction Bank will be shifting its focus towards consumption loans and credit card installment loans with a decent yield and asset quality. China Construction Bank has also recently entered into residential rental financing, which focuses on construction financing and financing provided to tenants. DB believes that the new segment will strengthen China Construction Bank’s ability to acquire new customers.
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2. Bank of China (BoC)
DB has picked BoC as its top banking pick for its improving corporate financial health, faster NIM recovery and “Belt and Road” strategy.
BoC is set to extend US$100 billion credit to “Belt and Road” projects. Apart from financing projects, BoC is also looking to provide financial advisory services. With the projects funded by large corporations and governments, the associated project risk is low. Furthermore, BoC is likely to be at the bottom of the asset quality cycle. Asset quality pressure should be relieved over the medium to long-term.
Adding another tailwind, management foresees NIM going up in 2018 from several factors. This includes higher new bond yield, higher loan demand and lower loan supply, higher asset yield from overseas business and funding costs rising slower than increasing asset yields.
BoC currently trades at the lowest valuation among all four big banks at around 0.6 times its book value.
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3. China Minsheng Bank
China Minsheng Bank has started shifting its focus towards micro and small enterprise (MSE) lending. China Minsheng Bank believes that this segment has higher loan yield, good loan demand and better asset quality. It has already grown its MSE loans by about 10 percent since the beginning of 2018.
Given its focus on MSE lending, a targeted reserve requirement ratio (RRR) cut will benefit China Minsheng Bank. To reduce the risk of non-performing loans of the MSE segment, China Minsheng Bank will be collecting collaterals from MSEs. So far, 73 percent of loans are collateralised.
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4. Ping An Bank
Ping An Bank has set out to take on the retail business with its digital transformation. Having established an online presence, Ping An Bank is looking to transform 1000 of its banking outlets into retail-focused outlets. The management wants to strengthen its foothold with its technological ability.
In 2018, Ping An Bank expects to experience pressure in relation to asset quality. This will continue to lift provision expenses in 2018. The management has set its sight on exiting overcapacity sectors once the loans mature. While DB views its retail banking franchise as a sweet spot, it is still concerned by the asset quality of Ping An Bank.
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5. China Merchants Bank
According to DB, China Merchants Bank’s focus in 2018 will be on retail banking. The bank has the largest private banking asset under management (AUM), the largest credit card transaction volume and the second largest wealth management AUM. DB highlights that China Merchants Bank has been investing one percent of its profit before tax in FinTech. Moving forward, FinTech will be a key driver for its retail business.
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