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1、Deutsche Bank Markets Research Asia China Banking / Finance Banks Industry Chinese banks Date 1 May 2017 Industry Update Financial deleveraging impact Series 3 Mounting capital pressure Capital raising wave on tighter regulations; staying cautious on smaller banks _ Deutsche Bank AG/Hong Kong Deutsc
2、he Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investme
3、nt decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Hans Fan, CFA Research Analyst (+852 ) 2203 6353 Jacky Zuo Research Associate (+852 ) 2203 6255 Stephen Andrews, CFA Research Analyst (+852 ) - 2203 6191 stephen- Top picks ICBC (1398.HK),HKD5.08 Buy
4、China Merchants Bank (3968.HK),HKD20.20 Buy Source: Deutsche Bank Companies Featured ICBC (1398.HK),HKD5.08 Buy China Construction Bank (0939.HK),HKD6.32 Buy Agri. Bank of China (1288.HK),HKD3.59 Hold Bank of China (3988.HK),HKD3.77 Buy Bank of Communications (3328.HK),HKD5.99 Hold China Merchants B
5、ank (3968.HK),HKD20.20 Buy China CITIC Bank (0998.HK),HKD4.93 Sell China Minsheng Bank (1988.HK),HKD7.66 Sell CEB (6818.HK),HKD3.65 Sell Chongqing Rural Bank (3618.HK),HKD5.35 Hold Huishang Bank (3698.HK),HKD3.68 Sell Bank of Chongqing (1963.HK),HKD6.49 Sell Shanghai Pudong Bank (600000.SS),CNY15.21
6、 Sell Industrial Bank (601166.SS),CNY15.46 Sell Ping An Bank (000001.SZ),CNY8.99 Hold Bank of Beijing (601169.SS),CNY9.00 Buy Bank of Nanjing (601009.SS),CNY10.56 Sell Bank of Ningbo (002142.SZ),CNY17.61 Sell Source: Deutsche Bank We value Chinese banks using a three- stage Gordon Growth Model (PV=
7、(ROE- g)/(COE-g), with target prices based on 2017E book values. Downside risks include property price protection and tighter liquidity. Upside risks include removal or softening of GDP targeting and more SOE defaults. Facing tighter regulation of shadow banking, we expect rising capital pressure on
8、 smaller banks. Indeed, we have noted that 20 listed banks have announced capital raising plans worth Rmb517bn (Figure 15), among which Rmb66bn will be issued via private placements. In a bear case, we estimate that listed banks would have to raise CET-1 capital of Rmb343bn, or 18% of their market c
9、ap. As trading below book, listed smaller banks would probably have to slow asset growth, shift to lower-return assets and cut dividends in the near term. We remain cautious on smaller banks and prefer the Big Four and CMB, with much stronger capital bases. With fast growing shadow banking, smaller
10、banks capital may be inflated All the smaller banks in China, including joint-stock and city/rural banks, recorded a CET-1 ratio of 9.8% as at the end of 2016. While this is higher than the regulatory requirement, we believe it may be inflated. This is because smaller banks have grown shadow banking
11、 credit aggressively (a 77% CAGR in the past three years), for which they have not set aside sufficient capital risk weighting. In many cases the risk weightings are as low as 20-25% against 100% for general loans. Highly differentiated impact on banks when facing tighter regulations As we highlight
12、ed in Series 1 and 2, Chinas financial regulators have been tightening regulation of shadow banking and pledged to ensure sufficient capital protection. If these regulations are strictly implemented, we believe the banks with higher shadow banking exposure and relatively weaker capital positions are
13、 likely to face rising capital pressure. The implementation of regulations has accelerated lately. In contrast, Big Four banks recorded a CET- 1 ratio of 12.0% at the end of 2016, with limited shadow banking exposure. Stress test how much capital is needed? We note that 20 listed banks have announce
14、d capital raising plans worth Rmb517bn as of now via private placements, preferred shares and tier-2 instruments. Specifically, INDB, SPDB and BOBJ plan to issue Rmb66bn via private placements, which makes up c.9% of their market cap. However it is probably not enough. In a stress test with fully-lo
15、aded regulations and a 1% buffer above the regulatory floor, we estimate that listed banks would need to raise Rmb343bn CET-1 capital, or 18% of their market cap (Figure 13). What are the options if banks cannot raise capital below book? With most listed banks currently trading below book, we believe that in the near term, smaller banks would have to slow down asset expansion notably, shift asset mix towards lower-return assets (hence a lower risk weighting) and cut dividends, which should translate into earnings risks and headwinds for share prices. Over the longer term, they would have
