Asia Pacific Equity Research
02 September 2018
China banks
1H18 results review: glimpsing 2H18, big banks
outperformance to end
Banks & Financial Services
Katherine Lei
AC
(852) 2800-8552
@
Bloomberg JPMA LEI <GO>
George Cai
(852) 2800-8557
@
. Morgan Securities (Asia Pacific) Limited
See page 57 for analyst certification and important disclosures, including non-US analyst disclosures.
. Morgan does and seeks to do business with companies covered in its research reports. As a result, 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 investment decision.
China banks 1H18 bottom line growth beat our expectation on fee, NIM and
lower effective tax rate. Financial deleveraging continues to see progress on
contraction of shadow assets by small banks. Asset quality was stable; key
negative surprise is on PSBC (link). But concern lingers as newly overdue loan
and gross NPL formation ratios rose. Management teams of banks are guiding
policy support to stabilize macro growth, thus they are still confident about asset
quality. On stocks, large banks’ (big 4 & PSBC) outperformance may end as their
NIM could see some downside sequentially, and these banks are more responsive
to policy calls. Our sector top pick is CMB which shows the highest ROA, strong
capital, improving deposits franchise and Fintech capacity.
1H18 net profits growth of 7% slightly beat JPM estimates of 6% y/y. We
noted acceleration in both PPoP and net profit growth in 2Q vs 1Q. (Figure 13-
14), mainly driven by asset growth, stable NIM, recovery in fee income and flat
credit cost. However, 2H18 growth trend is likely to moderate for large banks.
Asset quality still stable but some worrying signs: We note a decline in NPL
and SML ratios. Banks adopted tighter NPL recognition policy and provision
level roses. However, some worrying signs on rising gross NPL formation ratios
(excluding impact of reclassification) and overdue loans (less than 90 days).
Progress on financial deleveraging: a) reduction on off-balance sheet WMPs
by most banks (-6% h/h); b) declining reliance on wholesale funding; c)
contraction on non-standardized assets (NSA) on balance sheet (-17% h/h).
Management guidance in 2H18: a) large banks (. ICBC & CCB) revise up
loan growth targets; b) banks to increase asset allocation in provincial bonds; c)
Banks believe 2H18 macro growth to be stable with policy supports to offset -ve
impact from trade conflicts. Thus asset quality likely to be stable; d) banks
giving different view on NIM (. BOC/CCB optimistic, ABC/PSBC less so).
Outperformance of large banks (big 4 + PSBC) may not sustain: a) small
banks’ profit growth beat large banks in 2Q18, driven by NIM improvement
(Figures 37-38); likely to persist into 2H18; b) small banks’ NPL ratios rose in
1H18 partly on tightening on bad debt recognition policy; largely done except
for Minsheng and Huishang (Figure 22); c) small banks showing good progress
on financial deleveraging, latest regulatory relaxation ease risk partially. Our
sector top pick is CMB on solid fundamentals.
Table 1: 1H18 results for the banks – Beat / Miss / In line
Banks 1H18 results Notes
CMB Beat Net profit grew +14% y/y, improving asset quality and liquidity; balance sheet de-risk with significant NSA contraction
BoCom Beat NM expansion and improving asset quality & provision; PPoP and fee growth recovered in 2Q18
Citic Inline NIM rebounded in 2Q18; on-BS shadow loans and off-BS WMP contracted; rising NPL ratio is within expectation
CCB Inline Stable asset quality and strong capital ratios; sequential trend of NIM was weaker than peers
ICBC Inline Balanced results with stable deposit growth, fee income rebound and stable asset quality. Capital ratio drop is the disappointment
BOC Inline NIM expansion is higher than expected; asset quality stable with strong provision; overseas business continue to thrive
ABC Inline Positive asset quality trends; fee growth rebounded; disappointments are on flat deposits growth
CRCB Inline Asset quality deteriorates and fee income continued to contract; positives are declining shadow banking exposure and NIM expansion
Minsheng Inline NIM expanded q/q, fee income started to rebound and deposit growth is better than peers. But NPL growth likely to have upside.
PSBC Miss Asset quality is a key disappointment (NPL % +27bps q/q); NIM expansion is higher than expected, but likely to see downside in 2H18.
Source: Company reports, . Morgan estimates
2
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Table of Contents
Data talk: 1H18 in a glance ......................................................3
Improving profitability amid de-risking ..................................5
Profitability beat at the upside .................................................................................5
Asset quality still stable, but some worrying signs....................................................5
Financial deleveraging continue to see progress .....................................................10
Performance differentiation between large banks and peers likely to narrow...........15
Key takeaway from analyst briefing......................................18
On macro and banks’ response to policies such as loan growth, local government
bonds ....................................................................................................................18
On asset quality.....................................................................................................20
On banks’ net interest margin trend .......................................................................21
On banks' WMP business ......................................................................................21
1H18 Review: Stable recovery...............................................23
P&L review ..........................................................................................................23
Balance sheet review.............................................................................................24
Asset quality review..............................................................................................27
2Q18 Review: Small banks start to catch up on profitability
.................................................................................................32
Reviews on P&L lines...........................................................................................32
Reviews on balance sheet lines..............................................................................34
Asset quality review..............................................................................................35
2Q18 Review by bank.............................................................38
ABC: Asset quality surprises at the upside.............................................................38
BOC: NIM expansion ahead of big bank peers.......................................................39
ICBC: A balance set of result beat other big 4 peers...............................................40
CCB: Stable set of result largely inline with expectation ........................................41
BoCom: Asset quality, NIM and profitability beat expectation ...............................42
PSBC: sharp rise in NPL ratio, a key downside surprise.........................................43
Citic: Profitability remains weak, rise in NPL is within expectation........................44
CMB: Beating expectations on profitability and risk management..........................45
Minsheng: downside on asset quality in 2H18........................................................46
CRCB: Remain UW on elevated credit risk and diminishing NIM outlook .............49
Huishang: High NSA exposure leads to rising risks................................................50
Industrial Bank: asset quality saw deterioration......................................................51
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Katherine Lei
(852) 2800-8552
@
Data talk: 1H18 in a glance
Figure 1: YoY growth of semi-annual profits growth was 7% in1H18
Source: Company reports. * YoY growth of sum of the banks' net profit
Figure 2: PPoP & Operating income growth (YoY) grew ~9% in 1H18
Source: Company reports.
Figure 3: Fee income semi-annual growth was 2%in 1H18
Source: Company reports. * YoY growth of sum of the banks' net fee income
Figure 4: YoY growth of OPEX was 6% in 1H18
Source: Company reports. * YoY growth of sum of the banks' opex.
Figure 5: NIM improved 2bps HoH 1H18
Source: Company reports. * Simple average of the banks' NIM
Figure 6: Credit cost increased by 8bps YoY in 1H18
Source: Company reports. Note: simple average of our coverage banks.
31%
35%34%
22%
16%16%
13%12%
10%
3% 1% 0%
2% 1%
5% 6%
7%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Net profit yoy growth
%
%
%
%
%
%
%
%
%
%
%
1H11 1H12 1H13 1H14 1H15 1H16 2H16 1H17 2H17 1H18
YoY growth of operating inocme YoY growth of PPoP
35%
29%
46%
30%
6%
15%
27%
13%14%
10%12%
14%
9%
3%
-3%
2% 2%
-10%
0%
10%
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30%
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50%
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H
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8
Fee income yoy growth
24%
14%
22%21%
19%
14%
11% 9% 8% 9%
4% 3%
-5%
-10%
-3%
6% 6%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1H
10
2H
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1H
11
2H
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1H
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2H
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1H
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2H
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1H
14
2H
14
1H
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2H
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1H
16
2H
16
1H
17
2H
17
1H
18
Opex yoy growth
%
%
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% %
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%
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1
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1
6
2
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1
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1
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1
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2
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1
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1
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1
8
NIM
%
%%%
%%
%
%
%
%%
%
%
%
%
%
%
%
%
%
%
%
%
%
1H
11
2H
11
1H
12
2H
12
1H
13
2H
13
1H
14
2H
14
1H
15
2H
15
1H
16
2H
16
1H
17
2H
17
1H
18
Annualized credit cost - industry average
4
Asia Pacific Equity Research
02 September 2018
Katherine Lei
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@
Figure 7: Overdue less than 90 days ratio went up by 7bps HoH,
whereas overdue over 90 days ratio went down by 7bps HoH
Source: Company reports. * Simple average of the banks' overdue loans less than 90 days
ratio
Figure 8: NPL / loans overdue over 90 days (big 4 vs other banks)
Source: Company reports. * Simple average of the banks' overdue loans ratio
Figure 9: SML+NPLs continued to trend down in 1H18
Source: Company reports.
Figure 10: Loan loss reserve / (NPLs + Special mention) improvevd in
1H18
Source: Company reports. * Sum of the banks' provision / (Sum of NPLs & special mention
loans)
Figure 11: Growth of NPL balance picked up by 5ppt HoH in 1H18
Source: Company reports. * HoH growth of sum of the banks' NPL balance.
Figure 12: Estimated NPL formation ratio-Industry average picked up
in 1H18
Source: Company reports, (Note: NPL formation= Net increase in NPL(excl. write off)/
beginning normal and SML loans)
%
%
%
%
%
1H
12
2H
12
1H
13
2H
13
1H
14
2H
14
1H
15
2H
15
1H
16
2H
16
1H
17
2H
17
1H
18
Overdue loans ratio (within 90 days)
Overdue loans ratio (over 90 days)
0%
60%
120%
180%
240%
Big 4 banks Other banks
%%
%%%
%
%
%
%
%
%%
%
%
%
%
%
%
%
%
%
%
1H122H121H132H131H142H141H152H151H162H161H172H171H18
NPL+SML ratio
%
%
%
%
%
%%
%
%
%%%
%
%
%
%
%
%
%
%
%
%
Loan loss reserve / NPL+SML
-9%
-5%-5%
3% 1%
6%
10% 9%
15%
20%
27%
17%
10%
5%
3%
0%
5%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1H
10
2H
10
1H
11
2H
11
1H
12
2H
12
1H
13
2H
13
1H
14
2H
14
1H
15
2H
15
1H
16
2H
16
1H
17
2H
17
1H
18
NPL balance growth rate (HoH)
%
%
%
%
%
%
%
%%
%%
%
%
%
%
%
%
%
2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18
NPL formation - Sector average
Adjusted NPL formation ratio (excluding classification of overdue 90+)
5
Asia Pacific Equity Research
02 September 2018
Katherine Lei
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@
Improving profitability amid de-risking
Profitability beat at the upside
Pre-provisional profits and profits growth accelerated in 2Q18: PPoP and
net profit growth were 12% and 8% y/y, accelerating from 1Q18 (Figures
13-14). This was mainly driven by asset growth, stable NIM, recovery in fee
income and stable credit cost.
NIM was likely higher if it were not for accounting change due to IFRS9:
note that banks start to implement IFRS9 in January 2018. One of the
impacts is that investment securities income is reclassified to trading
income. As such, we noted that net trading income went up by 113% y/y or
265% h/h in 1H18. This was negative to net interest margin. For example,
for CCB, according to our calculation, NIM is % in 1H18, but if we add
back related trading gain due to the reclassification, NIM is %.
Fee growth rebounded in 2Q18 to 6% y/y, from -1% in 1Q18. WMP
related fees continue to show weakness, but this was partly offset by bank
card fee, electronic transaction fee and settlement and clearing fee.
Lower effective tax rate is a profits growth driver, particularly on the big 4
banks and Postal: effective tax rate was 17% in 1H18, lower than 19% in
1H17. For big 4 banks and Postal, the effective tax rate was 16%, -266bps
y/y. This was likely a result of rising holding in government bonds as
treasury and provincial bonds tax rate is zero. Our data show that bonds
issued by government account for 46% of total investment at 1H18, higher
than 44% in 2017.
Figure 13: Quarterly PPoP growth picked up in 2Q18
Source: Company reports.
Figure 14: Quarterly net profit growth remain stable in 2Q18
Source: Company reports.
Asset quality still stable, but some worrying signs
NPL ratio slightly up on tighter reclassification: NPL ratio was %, +3bps
q/q and -3bps y/y. This was partly due to tightening on NPL reclassification to
include all loans overdue more than 90 days into NPLs. This mainly affects mid-
cap and small banks (except for CMB). Note that for non-SOE banks, NPL to
loans overdue 90 days ratio was 121% 1H18, up from 112% end 2017. In
general, the deterioration is more notable in corporate loans (NPL ratio %,
%
%
%
%
%
%
%
%
1
Q
1
1
3
Q
1
1
1
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3
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1
6
3
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1
6
1
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1
7
3
Q
1
7
1
Q
1
8
Big 4 banks Sector
%
%
%
%
%
%
%
1
Q
1
1
3
Q
1
1
1
Q
1
2
3
Q
1
2
1
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1
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3
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1
3
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1
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1
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1
7
1
Q
1
8
Big 4 banks Sector
6
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Katherine Lei
(852) 2800-8552
@
+10bps h/h). On retail loans, broad NPL ratio was stable (%, -7bps h/h),
even if we exclude mortgage, then NPL on other retail loans (consumption loans,
credit card and small business loans) was largely flat at % (-1bp h/h) for
banks with relevant disclosure. (Table 4)
Special mention loans and overdue loan ratio remains stable: SML ratio was
%, -13bps h/h, this be that some loans overdue 90 days but not in NPLs were
in SML category in 2017, and such loans were reclassified into NPLs.
Banks continue to write off or dispose NPLs: the amount of NPLs being written
off or disposed or recover, based on write-back of related provision is
RMB266bn in 1H18, higher than 1H17 by 44%.
Rising provision level: NPL coverage ratio was 218%. Coverage ratio on both
NPL and SML loan increased to 70% from 62% at end 2017. This was partly due
to IFRS 9 adoption leading to rise in coverage ratio at beginning of the year. In
addition, reported loan loss reserve (balance of loan impairment / gross loss) is
% at 1H18 (-1bps qoq), but if we calculate fully-caliber LLR to include
shadow loans in investment book and related provision, then LLR could be
%, despite lower than reported one but higher than required level of %.
But there are some worrying trends: loans overdue less than 90 days was %,
up 7bps. Gross NPL formation ratio ((new NPL + loans written off/disposed) /
beginning Normal & SML loans) went up to 51bps in 1H18 from 37bps of 1H17.
Even if we exclude the impact of tightening NPL recognition, gross NPL
formation could be 46bps, 6bps higher than 2H17 level (Figure 12). And we
noted NPL rise in Manufacturing (%, +39bps h/h), some banks (. ABC,
BOC domestic, Citic, Minsheng, Industrial) saw deterioration on property
developer loans).
PSBC and BOC showed negative surprise: PSBC NPL ratio went up by 22bps
h/h and 15bps y/y to %. Reclassification of loans overdue one month into
NPLs (vs peers of three months) account for about 38% of total new NPLs in
1H18, so there is a broad base deterioration in asset quality (link). BOC’s NPL
ratio was stable, but loans overdue less than 90 days went up from % to
% of total loans (+60bps h/h).
Asset quality likely to deteriorate in 2H18: However, unlike 2015-2016 cycle,
this is unlikely to be broad base, assume macro growth stabilize due to policy
supports (link), which is our base case. We expect deterioration will focus on
sectors which are more related to trade, such as Manufacturing and W&R
(trading). Property sectors may also see pressure due to ongoing deleveraging of
the shadow banking system. On retail side, we expect deterioration on business
operating loans. By banks, CMB and CCB may be in better position than others,
both banks saw decline in gross NPL formation in 1H18.
7
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@
Table 2: China banks’ NPL ratio adjusted for disposal (including write-off and recovery)
2013 2014 2015 2016 2017 1H18 1H18
Rmb bn
NPL
dispos
ed
LLR
written
off/tra
nsfer
out
NPL
dispos
ed
LLR
written
off/tra
nsfer
out
NPL
dispos
ed
LLR
written
off/tra
nsfer
out
NPL
dispos
ed
LLR
written
off/tra
nsfer
out
NPL
dispos
ed
LLR
written
off/tra
nsfer
out
NPL
dispos
ed
LLR
written
off/tra
nsfer
out
NPL
disposed
(2013-
1H18)
Gross
loan
NPL
disposed /
Gross
loan
NPL ratio
(reported,
wtd avg)
NPL ratio
(adj for
written
disposed)
a b c d e f g h i j k l
m=a+c+e+
g+i+k*
n o=m/n p q=o+p
ABC NA 496 11,463 % % %
BOC 553 11,403 % % %
CCB NA NA 536 13,452 % % %
ICBC NA NA 848 14,934 % % %
PSBC NA NA NA 36 4,016 % % %
BoCom 181 4,794 % % %
Citic 251 3,379 % % %
CMB NA 189 3,878 % % %
Minsheng NA NA NA NA NA 121 3,053 % % %
Industrial NA NA NA NA NA NA 101 2,675 % % %
CRCB NA NA NA NA NA NA 6 362 % % %
Huishang NA NA NA NA NA NA 9 348 % % %
Sector 3,326 73,758 % % %
Source: Company reports, JPM estimates (Note: we used LLR written back if NPL disposed/written-off are not available).
Figure 15: NPL ratio of manufacturing loans
Source: Company reports.
Figure 16: NPL ratio of wholesale & retail sector loans
Source: Company reports.
Figure 17: NPL ratio of property loans
Source: Company reports.
Figure 18: Non-mortgage retail loan NPL ratios by bank
Source: Company reports. Note: this only includes banks with relevant disclosure.
% % %
% %
% % %
% % %
%
%
%
%
%
%
%
%
%
2017 1H18
%
%
%
% %
%
% %
%
%
%
%
%
%
%
%
%
%
%
2017 1H18
%
%
%
%
%
%
%
2017 1H18
%
%
%
%
%
%
%
CMB CCB PSBC Industrial ABC BOC
domestic
2017 1H18
8
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Figure 19: NPL ratios by banks
Source: Company reports.
Figure 20: SML ratios by banks
Source: Company reports.
Figure 21: Newly overdue loan (less than 90 days) ratio by banks
Source: Company reports.
Figure 22: Minsheng and Huishang likely have under recognized
NPLs
Source: Company reports.
Table 3: NPL coverage ratio comparison
NPL coverage ratios (%) 2H16 1H17 2H17 1H18 HoH YoY
ABC % % % % 40 ppt 67 ppt
BOC % % % % 6 ppt 12 ppt
CCB % % % % 22 ppt 33 ppt
ICBC % % % % 19 ppt 27 ppt
PSBC % % % % -55 ppt -19 ppt
BoCom % % % % 18 ppt 20 ppt
Citic % % % % -18 ppt -2 ppt
CMB % % % % 54 ppt 91 ppt
Minsheng % % % % 7 ppt 9 ppt
Industrial % % % % -2 ppt -13 ppt
CRCB % % % % -92 ppt -86 ppt
Huishang % % % % 1 ppt 15 ppt
Big 4 % % % % 22 ppt 35 ppt
JSB + Bocom % % % % 12 ppt 21 ppt
Sector % % % % 0 ppt 13 ppt
Source: Company reports
%
%
%
%
%
%
%
%
2H17 1H18
%
%
%
%
%
%
%
%
%
%
2H17 1H18
%%
%
%%
%%%
%
%
%
%
%
%
%
%
%
%
%
2017 1H18
77%
92%
106% 110%
124% 124% 124% 127%
138%
152%157%
20%
50%
80%
110%
140%
170%
2017 1H18
NPL/Overdue loans (over 90 days)
9
Asia Pacific Equity Research
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Figure 23: (Loans in construction + transportation + utilities sector +
mortgage) as % of total loans, CCB may see less risk than others
Source: Company reports
Figure 24: Non-mortgage retail loans as % of total loans
Source: Company reports
Figure 25: Manufacturing and wholesale & retail loans as % of total
loans
Source: Company reports
Figure 26: Real estate loans as % of total loans
Source: Company reports
Table 4: Loan and NPL ratio by segment (for JPM coverage banks)
NPL ratio (%)
2H16 1H17 2H17 1H18 HoH
Manufacturing % % % % 46 bps
Wholesale and retail % % % % -1 bps
Property % % % % 4 bps
Mining % % % % -54 bps
Total corporate loans % % % % 10 bps
Mortgage loans* % % % % -3 bps
Non-mortgage loans* % % % % -1 bps
Total consumer loans % % % % -7 bps
Total loan % % % % 1 bps
Source: Company reports, JP Morgan estimates. Note: BoCom loans are excluded due to lack of disclosure of sector NPL. For BOC, BOC domestic loans are used. * Industrial, CMB, CCB, PSBC,
BOC domestic, and ABC have disclosed their mortgage and non-mortgage NPLs. Simple average of NPL ratio is applied.
15%
25%
35%
45%
55%
Mortgage, construction, utilities & transportation loan as % of
total
2H17 1H18 1H18 - Average
0%
5%
10%
15%
20%
25%
30%
2H17 1H18 Average - 1H18
0%
5%
10%
15%
20%
25%
30%
35%
2H17 1H18 Average - 1H18
0%
2%
4%
6%
8%
10%
12%
2H17 1H18 Average - 1H18
10
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Table 5: Banks are decreasing corporate exposure
Manufacturing Trading (Wholesale and retail) Corporate loans
As % of total loans 2017 1H18 HoH 2017 1H18 HoH 2017 1H18 HoH
ABC 12% 11% -48 bps 3% 3% -23 bps 57% 57% -19 bps
BOC domestic 16% 15% -92 bps 13% 13% -17 bps 52% 51% -108 bps
BoCom 13% 12% -97 bps 6% 5% -78 bps 66% 64% -172 bps
PSBC 6% 6% 30 bps 2% 2% 25 bps 38% 39% 71 bps
CCB 9% 9% -45 bps 3% 3% -35 bps 50% 49% -55 bps
Citic 9% 9% -83 bps 6% 5% -82 bps 52% 50% -202 bps
CMB 7% 7% -25 bps 6% 4% -132 bps 40% 40% -80 bps
ICBC 10% 10% -16 bps 4% 4% -20 bps 53% 52% -77 bps
MSB 12% 11% -88 bps 8% 7% -107 bps 58% 58% 80 bps
Industrial 14% 14% -22 bps 9% 8% -95 bps 61% 59% -164 bps
CRCB 20% 18% -119 bps 8% 7% -37 bps 63% 62% -143 bps
Huishang 14% 13% -28 bps 16% 15% -67 bps 59% 60% 83 bps
Source: Company data
Table 6: Overcapacity sectors NPL ratios by banks
Manufacturing Wholesale and retail Corporate loans
NPL ratios 2017 1H18 HoH 2017 1H18 HoH 2017 1H18 HoH
ABC % % -12 bps % % -176 bps % % -20 bps
BOC domestic % % 65 bps % % -8 bps % % 1 bps
BoCom N/A N/A NA N/A N/A NA % % -4 bps
PSBC % % 5 bps % % 56 bps % % 40 bps
CCB % % 22 bps % % -32 bps % % -5 bps
Citic % % 142 bps % % 142 bps % % 40 bps
CMB % % 36 bps % % 36 bps % % -19 bps
ICBC % % 55 bps % % -73 bps % % 2 bps
MSB % % 40 bps % % 17 bps % % -1 bps
Industrial % % 62 bps % % -12 bps % % 10 bps
CRCB % % 127 bps % % 83 bps % % 54 bps
Huishang % % -33 bps % % -49 bps % % -8 bps
Source: Company data
Financial deleveraging continue to see progress
Financial deleveraging has some achievements
Reducing reliance on wholesale funding: Wholesale funding (interbank plus
NCDs, excluding borrowing from PBOC) accounted for % of big 4 banks’
liabilities at 1H18, down from % end 2017. Outside of the big 4 banks, this
ratio was % 1H18, down from % at end 2017.
Reduction in off-bal WMPs off-bal sheet WMPs decreased by 6 % HoH in 1H18
(vs -1% YoY in 2017), big 4 banks reduced off-bal WMPs by 7% HoH, vs other
banks of -6% HoH (Table 8).
Reduction in shadow banking assets: this is what we refer to as non-
standardized assets (NSA). This accounts for only % of assets for big 4 banks,
but 11% of assets for other banks. NSA of banks within our coverage contracted
by 17% h/h. This is positive development. Asset quality of NSA worsens (.
CMB related NPL ratio was %, +30bps h/h). (Table 10)
Banks’s liquidity improves: LDR ratio of banks on reported basis was %, but
if we include NSA into loans, then this will increase to 88%. For non-big 4 banks,
adjusted LDR will reach 95% at end 1H18, down 4ppt h/h. Also, Liquidity
coverage ratio + 11ppt HoH for banks we cover, only Minsheng’s LCR is still
below regulatory minimum of 100% (Figure 32).
11
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Figure 27: Interbank liabilities (incl. NCD) as % of total liabilities
Source: Company reports
Figure 28: interbank liabilities (including NCD and excluding NCD) as
% of total liabilities as of 1H18
Source: Company data
Figure 29: Interbank liabilities as % of interest bearing liabilities
(daily average)
Source: Company reports
Figure 30: Interbank funding costs by banks
Source: Company reports.
Figure 31: LDR by banks as of 1H18
Source: Company reports. Note: adjusted LDR = (gross loans + NSA) / total deposits
Figure 32: Liquidity coverage ratios by banks
Source: Company reports
0%
5%
10%
15%
20%
25%
30%
2014 2015 2016 2017 1H18
Big 4 average Banks excluding big 4
3%
7% 7% 8%
10% 11%
13%
15% 17%
21%
26%
%
%
%
%
%
%
%
%
Incl. NCD excl NCD 1/3 of total liabilities
3%
7%
11% 12% 13%
17%
21% 23%
25% 27%
36%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2017 1H18 Avg - 1H18
%
%
%
%
%
%
%
%
%
%
1H17 2H17 1H18
52%
68% 72% 74%
80% 80%
88% 88%
100%106%
117%120%
129%
-10%
10%
30%
50%
70%
90%
110%
130%
150%
reported LDR Adj. LDR (gross loan+NSA) / total deopsits
99% 105%106%
111%111%118%118%
127%138%
142%
176%
238%
0%
50%
100%
150%
200%
250%
2017 1H18 Minimum
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Figure 33: Total NSA of JPM coverage banks
Source: Company reports. Note: 1H18 y/y growth is compared to 1H17.
Figure 34: LLR vs (LLR + impairment on amortized cost investment) /
(loans + NSA)
Source: Company reports
Figure 35: Non-standardized assets (interbank + investment book) as
% of total assets
Source: Company reports, . Morgan (This includes investments on both investment book
and as reverse repo in interbank book)
Figure 36: Off-balance sheet WMP as % of total assets
Source: Company reports.
-40%
-20%
0%
20%
40%
60%
80%
0
1,000
2,000
3,000
4,000
5,000
6,000
2014 2015 2016 2017 1H18
Total NSA amount YoY growth
RMB bn YoY change
%
%
%
%
%
%
%
%
%
%
%
LLR/GL (LLR+Impairment)/(GL+NSA)
0% 0% 0% 1%
3% 4%
6%
7%
10% 10%
20%
31%
0%
5%
10%
15%
20%
25%
30%
35%
2017 1H18 Average - 1H18
Total non-standardized assets (TBR, AMP and WMP issued by
other financial institutions) as % of total assets
5% 5% 7%
7% 8%
9% 10% 10%
14%
16% 18%
30%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2017 1H18 1H18 Average
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Table 7: Summary of non-standardized assets
NSA (Rmb bn) 1H16 2H16 1H17 2H17 1H18 HoH YoY
ICBC 250 262 337 292 372 28% 10%
CCB 144 147 56 52 59 15% 7%
BOC 120 23 10 14 15 4% 49%
ABC 179 34 38 45 47 5% 24%
PSBC 891 1,133 754 614 353 -43% -53%
BoCom 253 287 300 273 254 -7% -15%
CMB 539 509 566 557 361 -35% -36%
Citic 1,175 1,038 844 534 428 -20% -49%
Minsheng 730 1,054 918 752 629 -16% -31%
Industrial 2,020 1,932 1,728 1,470 1,339 -9% -23%
CRCB 140 164 185 199 91 -54% -51%
Huishang 218 235 273 288 294 2% 7%
Big 4 sum 693 467 441 403 494 23% 12%
Others 5,967 6,352 5,568 4,688 3,750 -20% -33%
As % of total assets
ICBC % % % % % 25 bps 4 bps
CCB % % % % % 3 bps 0 bps
BOC % % % % % 0 bps 2 bps
ABC % % % % % 0 bps 3 bps
PSBC % % % % % -303 bps -504 bps
BoCom % % % % % -30 bps -63 bps
CMB % % % % % -332 bps -360 bps
Citic % % % % % -203 bps -756 bps
Minsheng % % % % % -236 bps -554 bps
Industrial % % % % % -250 bps -666 bps
CRCB % % % % % -1199 bps -1164 bps
Huishang % % % % % -98 bps -288 bps
Big 4 average % % % % % 7 bps 2 bps
Others % % % % % -331 bps -544 bps
Source: Company reports
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Table 8: Summary of off-balance sheet wealth management product
Off BS WMP (Rmb bn) 1H16 2H16 1H17 2H17 1H18 HoH YoY
ABC 1,215 1,299 1,186 1,369 1,185 -13% 0%
BOC N/A 1,177 1,100 1,158 1,061 -8% -4%
CCB 1,645 1,795 1,627 1,731 1,599 -8% -2%
ICBC 2,309 2,424 2,363 2,666 2,580 -3% 9%
PSBC 572 809 727 732 785 7% 8%
Bocom 655 689 647 661 627 -5% -3%
CMB 2,045 2,376 2,130 2,178 1,990 -9% -7%
Citic 690 957 993 1,133 1,033 -9% 4%
Minsheng 1,018 1,177 913 814 819 1% -10%
CRCB 89 116 104 107 88 -18% -15%
Huishang 47 71 78 86 92 7% 17%
Industrial 1,257 1,057 1,065 1,152 1,050 -9% -1%
Big 4 sum 5,169 6,695 6,277 6,923 6,425 -7% 2%
Others 6,372 7,252 6,657 6,863 6,484 -6% -3%
Off BS WMP as % of assets
ABC 7% 7% 6% 7% 5% -1 ppt 0 ppt
BOC N/A 6% 6% 6% 5% -1 ppt 0 ppt
CCB 8% 9% 8% 8% 7% -1 ppt 0 ppt
ICBC 10% 10% 9% 10% 9% -1 ppt 0 ppt
PSBC 7% 10% 9% 8% 8% 0 ppt 0 ppt
Bocom 8% 8% 7% 7% 7% -1 ppt -1 ppt
CMB 37% 40% 34% 35% 30% -4 ppt -4 ppt
Citic 12% 16% 18% 20% 18% -2 ppt 0 ppt
Minsheng 19% 20% 16% 14% 14% 0 ppt -2 ppt
CRCB 12% 14% 12% 12% 10% -2 ppt -2 ppt
Huishang 7% 9% 10% 10% 10% 0 ppt 0 ppt
Industrial 22% 17% 17% 18% 16% -2 ppt -1 ppt
Big 4 average 8% 8% 7% 8% 7% -1 ppt 0 ppt
Others 16% 17% 15% 15% 14% -1 ppt -1 ppt
Source: Company reports
Table 9: WMP by bank: Big 4 SOE banks and PSBC have lower WMP exposure as % of total assets
In Rmb bn 2017 1H18
unless otherwise
stated
Total O/S
WMP G'teed Non-g'teed
Total WMP as
% of Assets
Total O/S
WMP G'teed Non-g'teed
Total WMP as
% of Assets
BOC 1,520 24% 76% 8% 1,599 34% 66% 8%
ABC 1,761 22% 78% 8% 1,600 26% 74% 7%
PSBC 774 5% 95% 9% 800 2% 98% 9%
CCB 2,085 17% 83% 9% 1,949 18% 82% 9%
ICBC 3,012 11% 89% 12% 3,371 23% 77% 12%
Huishang 110 22% 78% 12% 109 16% 84% 11%
CRCB 144 26% 74% 16% 120 27% 73% 13%
Bocom 1,600 59% 41% 18% 1,285 51% 49% 14%
Citic 1,192 5% 95% 21% 1,292 20% 80% 22%
Minsheng 1,153 29% 71% 20% 1,385 41% 59% 23%
Industrial 1,650 30% 70% 26% 1,617 35% 65% 25%
CMB 2,228 2% 98% 35% 2,040 2% 98% 31%
Sector 17,229 20% 80% 13% 17,167 25% 75% 12%
Source: Company reports. *Note: total WMP as % of total assets is the weighted average.
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Table 10: CMB: Investment of proprietary funds in non-standardized credit assets
Balance (Rmb bn) NPL ratio
1H17 2H17 1H18 HoH (%) YoY(%) 2H17 1H18 HoH (%)
Proprietary funds invested in non-standard creditor’s assets
Assets under the credit category -35% -34% % % 30 bps
Corporate creditors' beneficiary rights -11% -18%
Individual creditors' beneficiary rights -7% -15%
beneficiary rights to discounted bills and commercial bills -58% -53%
Assets under the non-credit category 0% -87%
Total -35% -36%
Balance of provision under credit category N/A N/A N/A
Provision ratio % % N/A NA N/A
Full-calibre credit assets*
Allowance ratio for full-calibre credit assets % % % 43 bps 76 bps
NPL coverage ratio for full-calibre credit assets % % % 56 ppt 93 ppt
Source: Company data. * Full-calibre credit assets include proprietary loans and proprietary funds invested in non-standard creditor’s assets under the credit category. Note that 1H18 is estimated
by JPMorgan by including allowance of NSCA and gross loans.
Performance differentiation between large banks and peers
likely to narrow
Big 4 banks may not lead the race on PPoP growth
Non-big 4 banks’ PPoP growth accelerate: big 4 banks saw PPoP went up by
8% yoy in 1H18, Postal saw 43% y/y, and the remaining banks was 11% yoy.
This is mainly driven by improving NIM and non-interest income; note that fee
income of big 4 grew 2% vs. Postal 9% vs. others of 4% y/y.
Big 4 banks’ NIM improvement may come to a halt: Note that 44% of big 4
banks’ interest earning assets are sensitive market rates (interbank assets and
investments, excluding NSA), vs Postal of 52% and other banks of 40%. And
10% of big 4’s interest bearing liabilities is interbank liabilities (including NCD),
vs Postal of 3% and other banks of 24%. As such declining market rats will hurt
NIM of big 4 and Postal but accretive to NIM of small banks with tight balance
sheet liquidity.
Big 4 banks may see more pressure on performing "national services": This
may include increasing loan growth regardless of macro trend, Debt-to-equity
swaps, supporting measures likely evergreen loans in some segment, etc. For
details, please refer to our note (link).
But big 4 are still in better position on asset quality and regulatory risk
Big 4 banks have higher exposure in infrastructure loans, SOE loans and
mortgage: Infrastructure related sector (utilities + construction + transportation)
and mortgage to total loans account for 51% of total loans for big 4, but only 32%
for other banks. Also, big 4 banks should have higher SOE loans, and despite
higher underlying risks, government implicit guarantee provides support to SOE
loan quality. As such, at least at near term, big 4 banks see lower risk on asset
quality as other banks.
Big 4 banks are subject to lower regulatory risks: NSA only account for % of
total assets for big 4 banks but 11% for other banks. Off-bal WMPs were only
equivalent to 7% of big 4 banks assets but 14% of other banks.
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Figure 37: PPoP yoy growth of big 4 banks slowed down
Source: Company reports.
Figure 38: NIM of other banks picked up in 2Q18
Source: Company reports.
Figure 39: Deposits costs of big 4 banks are lower than other banks
Source: Company reports
Figure 40: The lending yield of big 4 banks stabilized in 1H18
Source: Company reports.
Figure 41: Interbank liabilities as % of interest bearing liabilities
Source: Company reports
Figure 42: Interbank assets + investments, excluding NSA, as % of
Interest-earning assets
Source: Company reports.
%
%
%
%
%
%
%
%
2Q
11
4Q
11
2Q
12
4Q
12
2Q
13
4Q
13
2Q
14
4Q
14
2Q
15
4Q
15
2Q
16
4Q
16
2Q
17
4Q
17
2Q
18
Big 4 banks Sector
%
%
%
%
%
%
%
%
%
Big 4 banks Other banks
%
%
%
%
%
%
%
%
1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18
Big 4 Other banks (excl. big 4)
%
%
%
%
%
%
%
%
%
1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18
Big 4 Other banks (excl. big 4)
3%
7%
11% 12% 13%
17%
21% 23%
25% 27%
36%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2017 1H18 Avg - 1H18
30%
33% 34% 34%
38% 39% 41%
42% 44% 44%
52%
66%
0%
10%
20%
30%
40%
50%
60%
70%
2017 1H18 Avg - 1H18
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Figure 43: NPL ratios of big 4 banks declined 6bps HoH in 1H18,
greater than the average of other banks
Source: Company reports
Figure 44: SML ratios of big4 banks declined 25bps HoH in 1H18
Source: Company reports.
%
%
%
%
%
%
%
1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18
Big 4 Other banks (excl. big 4)
%
%
%
%
%
%
%
1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18
Big 4 banks Other banks
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Key takeaway from analyst briefing
On macro and banks’ response to policies such as loan
growth, local government bonds
In our view, large banks (. CCB and ICBC), are responding to policy makers’ call
to speed up loan growth and investment in provincial government bonds. This in the
long run raises concern on banks doing “national services”, but in the short term, this
limits downside risk to macro growth, in our view.
Macro growth downside manageable: Banks in general cited trade conflict a key
source of macro uncertainties, but ICBC and Industrial Bank thinks the downside
is manageable. CCB commented that the stabilization policy started June 2018
will take effect to support macro growth.
Banks to increase asset allocation to provincial bonds: Banks are uncertain if
the news (link) on reduction of risk weighting of provincial bonds will
materialize or not. But they think this is sensible, ICBC believes that the chances
for provincial bonds to default are low. All banks commented on this issue said
they will increase asset allocation to provincial bonds issuances. As provincial
governments need to finish 80% of this year's issuance target () by
end of September, yield may be resilient despite easing market rates.
Loan growth to accelerate: ICBC’s and CCB's management indicated that they
are going to revise up the loan growth target (vs beginning of the year) to support
macro growth. Base on ICBC's disclosure, we calculated that growth would be up
by ~80bps (% domestic loan growth target beginning of 2018 to now about
%). Small banks, such as CMB and Citic, sound more cautious on loan growth
and indicate no change to loan growth target.
No relaxation to specific sectors: All banks indicate that they are NOT going to
relax loans to overcapacity sectors or property developers. Banks continue to
prefer mortgage and loans supporting industrial upgrades.
Table 11: Summary of analyst briefing on macro outlook
Banks Details
ICBC
Macro uncertainties due to trade conflicts and worsening globally trade environment. This may induce the exposure of China’s structural problem
Management thinks the regulatory goal is to clean up of deviant practices
On trade conflicts, ICBC did stress test on affected borrowers and related loans, but since the policy is still being rolled out, so it is not easy to be precise; these
are challenges for ICBC, but risk is manageable
Industrial
Management thinks the fiscal policies will be more active and local government bond issuance will speed up
Management expects sufficient liquidity and long term market rates are likely to go down.
Policy makers want to eliminate the zombie companies and continue economic reforms.
Source: Company data, . Morgan
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Table 12: Summary of analyst briefing on loan growth
Banks Details
ABC
Loan growth in 1H18 is mainly in retail loan (mortgage, long-term leasing), retail financing, new manufacturing (+Rmb128bn), green credit (+Rmb144bn), new
services. Sannong and inclusive financing
ABC will reduce high risk industry exposure, such as over-capacity sectors (growth rate is lower than corporate loan, mix -42bps), high risk sectors such
as low-end manufacturing and W&R sectors.
BOC
BOC's loan growth includes inclusive finance, MSE, growth rate is more than 10% y/y.
Management commented that lending rates went down in 2Q18 q/q
BOC will increase in bond investment, provincial bond and corporate bond
BOC will increase loan growth in infrastructure, IT, new economy, Yangtze River Delta, XiongAn, greater Bay Area.
BOC will continue to be differentiated on property related loans; they will support primary residential loans.
CCB
Loan growth from big banks is going up, and CCB will increase loan growth in 2H18
Loan growth direction: inclusive financing, mortgage, consumer loans, MSEs.
On monthly basis, loan growth may not be as strong as in July alone, but will accelerate from 1H18.
ICBC
Shadow loan contracted thus bank loan going up is normal, but TSF growth will likely remain low
New domestic Rmb loan target to be RMB900bn beginning of the year, now expect Rmb1trn for FY18 (implying ~80bps on loan growth).
Citic
Loan growth will avoid manufacturing and wholesale & retail industry. Citic will support industries including high-tech, internet, high-end manufacturing, new
energy, etc.
Loans to real estate sector are shrinking (less than 10% of total loan book) and will continue to control the growth.
CMB
On loan growth, CMB will consider credit risks, capital consumption and liquidity constraints. Policy guidance is one of the considerations, but not the only one.
Loan growth estimate is the same as guidance given at beginning of the year (9-10%), no change.
Industrial
Industrial bank has Rmb240bn new loans in 1H18 and they expect Rmb250bn new loans in 2H18 (implying FY18 +20% y/y loan growth)
Loan allocation: Industrial bank will support real economy and industries which align with national industrial policies, green financial and retail consumption.
Source: Company data, . Morgan
Table 13: Summary of analyst briefing on policies changes
Banks Details
CCB The management thinks policy makers are stabilizing economy starting from June.
ICBC
Management thinks the tightening on shadow banking will continue
It is important to support the real economy, but policy makers also focus on controlling leverage
High leverage in China has a reason, such as high deposits rate, this leads to higher indirect financing
ICBC thinks the leverage is not the biggest issue, but the key focus is on the efficiency of credit. Such as zombie companies, fast rise in consumer loans. So the
key thing is to improve the structure of leverage. If China’s macro growth remains stable, then deleveraging is not to fear.
Deleveraging is a dynamic process, the long term goal is to deleverage, but if macro growth slips fast, then it is normal to speed up loan growth to support
economy. The deleveraging process is not a one way street.
For ever-greening of MSE loans:
o ICBC thinks some borrowers have mis-match term of use and loan duration, so when liquidity is tight, this leads to rising credit risks as they may not be roll
over loans. ICBC thinks this change is reasonable and should have been implemented earlier. However, not every borrower is qualified - only those ones
with good operation but seeing balance sheet stress. Regulator has white list, and bank has another white list based on regulator’s one, on which borrowers
are allowed to enjoy this preferential treatment.
o These loans are only working cash flow loans, not project loans; this is not rollover to the whole nation, only by Dezhou CBIRC.
Industrial
Management thinks the policy is leaning towards: a) support domestic demand, encourage private investment and consumption; b) ensure stability of financial
system; c) active fiscal policy with local government bond issuance speeding up; d) neutralized monetary policy, and stabilize financial deleveraging; e) support
supply-side reforms and eliminate zombie companies.
Management thinks the refinancing risks for corporates still exist; there will be sufficient liquidity in 2H18, and mid-to-long term interest rates are likely to go
down.
Source: Company data, . Morgan
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Table 14: Summary of analyst briefing on local government bond
Banks Details
BOC BOC will increase in bond investment, including provincial bond and corporate bond
ICBC
Both local and central government bonds are sovereign credits
ICBC thinks default of local government is low probability event
Policy makers are very tight on allowing provincial government to increase new debts
ICBC is very prudent on managing credit.
BoCom
Rmb bonds represent : % are treasury bonds, % are provincial government bonds, % are policy bonds, and the rest (~20%) are
corporate bonds.
BoCom’s provincial government bond exposure is relatively high because provincial bonds are tax-free and yield 30-40bps more than treasury bonds of the
same tenor. If news reports that the risk weighting of provincial bonds will be cut from 20% to 0% are correct, then BoCom will increase allocations to provincial
bonds.
CMB CMB will increase asset allocation to local government bonds, if stripping out tax impact, actual yield on provincial government bond is %% .
Source: Company data, . Morgan
On asset quality
Banks are cautiously optimistic on asset quality. big 4 banks are still guiding that
NPL likely to be stable or slightly decline in 2H18.
Table 15: Summary of analyst briefing on asset quality
Banks Details
ABC
New NPL is mainly on manufacturing (60%), wholesale and Retail (15%) and Real Estate sector (9%). Geographically is mainly on Bohai Rim area.
Gross NPL formation rate is declining;
Rising NPL coverage - as there is still uncertainty on macro growth due to trade, etc. ABC is not aiming to have very high NPL coverage.
Since 2016, ABC has accelerated NPL ( 2017).
ABC has accelerated NPL disposal in 1H18. ABC reduced NPL by Rmb64bn by 1H18; cash collection (47%), write off (52%),
disposal, others including DES (). ABC prefers cash collection, followed by write off, lastly disposal. NPL disposal depending on market price.
ABC has FY18 NPL reduction target of Rmb125bn; Write off has more pressure on financials, but ABC is comfortable now as profits growth is strong.
ABC has tighter NPL recognition standard, such as for W&R loans, ABC may consider to put them into NPLs if there is any delinquency.
BOC
BOC reduced NPL + y/y
Corporate leverage declines, but trade conflicts create uncertainties on corporates.
Most branches of BOC saw drop in both NPL ratio and NPL amount.
In the long run, BOC needs to improve loan mix according to supply-side reform; they will monitor large customers closely
BOC believes 2H18 asset quality will be stable.
CCB
CCB expects NPL to be stable or slightly improve.
Fast loan product is entering into a full cycle (1 year), and NPL ratio is better than expected despite rise in overdue loan ratio.
ICBC
Some local government LGFV or local SOE may see some risks, but risks on central government SOE is low. Some private companies may also see asset
quality issues.
Management still sees uncertainties on external environment (. trade conflicts).
Manufacturing loans has relatively higher NPL (~% in 1H18), but ICBC will continue to support manufacturing sector.
Management thinks the credit risk of mortgage is low, but they have to be careful for other retail loans.
BoCom
In 2018, BoCom speed up the NPL disposal including recovery, write-off and transfers. They also strengthen the upfront risk management as well as loan
allocation of new loans.
BoCom has been growing retail loans in these 2 years; asset quality trend is stable, especially for mortgages.
BoCom will continue to improve post-loan management to improve asset quality.
Citic
Citic has proactively reclassified overdue loans 90+ days to NPLs; NPL/overdue loan 90+ is above 100%
Citic has adjusted Rmb normal loans into SMLs, resulting in rise in SML ratio.
Citic has been shrinking loan exposure to low-end manufacturing, wholesale & retail sectors these years.
Credit risk of private enterprises is higher in 1H18, especially Bohai, Northwestern and Northeastern areas. There is over Rmb 100mn NPL coming from above
regions.
Outlook: management thinks the asset quality of private enterprises will improve; overall 2H18 asset quality will stabilize.
CMB
Credit card NPL formation rate and overdue loans are going up, one of the reasons is the cross borrowing risks from other online and consumer lending
platforms. Management thinks the risks are within control for now, but they are building up internal credit database and model to prevent future risks. They will
also increase the provision level of these loans.
On the corporate side, aside from zombie companies, companies in over-capacity sectors and real estate sectors, they will also be cautious about companies
with a) high leverage and aggressive expansion strategy; b) relying on component import or product export business.
Industrial
Industrial has reclassified loans overdue 90+ into NPLs. NPL formation rate is picking up, but they will strengthen NPL disposal (including cash recover) to
stabilize asset quality.
Source: Company data, . Morgan
21
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02 September 2018
Katherine Lei
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@
On banks’ net interest margin trend
ABC and postal banks are guiding sequential contraction on NIM
BoCom, CCB and BOC still optimistic
CMB is guiding stable NIM in 2H18 vs 1H18
Banks in general are guiding on declining market rates, stable loan yield,
moderate rising trend on deposits costs
Table 16: Summary of analyst briefing on NIM
Banks Details
ABC
NIM is +7bps hoh, NIM flat q/q in 2Q18.
ABC’s NIM is related to market rates as ABC is a net interbank lender.
2H18 NIM is likely to be stable or slightly down.
Market rates are likely to go down
Loan yield likely to go down to lower corporate’ s financial burden; there is also a rise in credit supply due to increasing bond issuance, so overall asset yield is
likely to be stable or slightly down.
ABC’s funding costs may be stable to slightly up.
BOC
NIM improvement due to:
a) optimization of asset and liabilities mix; loans went up in asset mix; deposits went up in the IBL mix.
b) Fed rate hikes
c) PBOC cut RRR rates 3 times, so deposits with PBOC went down - this is positive to NIM
RMB depreciated and thus positive to NIM (when FX interest income is translated into RMB)
2H18 NIM likely will continue to improve.
CCB
Asset price went up
There is Rmb230bn liquidity from targeted RRR cut in 1Q18, NIM +3bps
CCB reclassify to take out credit card loans from denominator of NIM, this contributed to 3bps NIM expansion y/y in 1H18
On trend in 2H18, CCB expects NIM to be flat or stable h/h.
Market rates is coming down, this may lower NIM for many other banks, but not CCB.
ICBC
Asset side: interbank rates are going down, yield of short-duration bonds is down, but yield of long-duration bonds such as provincial bonds is more resilient.
Because the local government special bond (which have specific projects and collaterals) issuance in 2H18 will be in large amount, thus yield may be resilient.
On liabilities, customers’ deposits are key sources.
BoCom
Net interest income is up y/y if using old accounting standard
Asset yield is stable with upside, and funding costs are stable with some parts of funding seeing decline
Management expects 2H18 to see NIM recovery
Management expects 4Q18 to recover to the same level as 2017; and they expect NIM to be stable y/y on full year basis vs. 2017
Citic
NIM future outlook
1H18: NIM increase is due to changes in asset/liabilities structure, and foreign currency yield improved; the decrease of interbank rate is beneficial to Citic’s NIM
2H18: Funding cost will rise as deposits costs would increase; P2P assessment and MMF regulation are positive to on-balance deposits; Citic will continue to
focus on retail banking business in 2H18;
Citic has issued structural deposits, this has led to drop to NIM
CMB
Despite the drop in market rates, loan yield is still picking up.
2H18：
- Asset side: CMB will increase the local government bond investment; CMB will increase asset allocation to local government bonds, if stripping out tax impact,
actual yield on provincial government bond is %% .; CMB will also allocate resources to retail loans with higher returns and lower risks.
- Liability side: CMB will control structured deposits and issue NCDs to control overall funding costs.
- Management expects NIM to be stable vs. 1H18 level.
Industrial
Funding costs is going down due to declining market rates.
Management expects 2H18 NIM to continue to improve.
Source: Company data, . Morgan
On banks' WMP business
Banks are still guiding declining trend on off-balance sheet WMPs
Non-standardized assets continue to shrink, the relaxation in July is not going to
change that trend
22
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 17: Summary of analyst briefing on WMPs
Banks Details
ABC
ABC has increased NAV products for both on and off balance WMPs and they need to reduce NSCA duration mis-match
It is still uncertain how clients will react to “no bail out”.
WMP yield is likely to go down as NSCA is being limited.
On industry, growth continue to decelerate,
CCB 30% of CCB's WMP is NSCA
ICBC
ICBC has NSCA 900bn in WMP
WMP regulation has 2 years of transition period: 50% will mature by 2020, and some of the remaining will be converted to standardized assets from NSA, but
this needs to depend on subsequent implementation guideline from regulators. There is a small portion of NSCA which will be brought back to balance sheet.
ICBC commented that the underlying projects asset quality is good.
Regulators will give some flexibility on WMP regulation to make sure that this is a real transition period, not a one-off cut; otherwise this will lead to sharp decline
in liquidity. ICBC believes regulator will be practical.
BoCom
Management commented that it has increased the issuance of NAV products: The daily balance of NAV products was up 30% y/y in 1H18.
Non-standardized credit assets (NSCAs) in WMP were Rmb165bn, largely flat h/h, and accounted for % of total WMP outstanding at end-1H18 (vs. 10% at
end-2017). In the grace period from now to the end of 2020, BoCom will roll over existing NSCA WMPs to provide credit support to shadow loan borrowers. It
will try to restructure part of the NSCAs into standardized products or extend loans to replace those products by end-2020.
Citic WMP cost is going up, and expected product yield is %, +50% y/y
CMB
Direct WMP fees were -11% yoy in 1H18, non-standardized credit assets (NSCA) in WMPs declined (-16% h/h to Rmb 183bn, ~10% of WMP) leading to decline
in related fees. According to WMP regulation, NSCA needs to contract gradually, and this trend is likely to persist into 2019. So WMP sales fee will continue to
see pressure before adjustment on NSCA is done.
CMB is waiting for regulatory approval for setting up asset management subsidiary for WMP business. CMB is expanding asset management professionals to
ensure it is able to compete in AM business.
Industrial
WMP balance is Rmb , NAV accounts for over 30%, +7ppt vs. 2017.
Industrial is in preparation for asset management subsidiary.
Source: Company data, . Morgan
23
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
1H18 Review: Stable recovery
P&L review
Listed banks delivered profit growth of 7% y/y on average in 1H18, mainly strong
PPoP growth offset by rising loan loss provision. A few points:
NIM expanded by 5bps h/h and 12bps y/y, with smaller banks seeing slightly
stronger recovery. This is likely due to their higher reliance on interbank funding
amid declining interbank rates in 2Q18. Big 4 banks saw 3bps h/h increase in
NIM, as their funding costs are less affected by market rate changes.
Fee income growth saw positive growth (+2% y/y, vs. flat y/y in 2H18), although
still remained lackluster. PSBC and CMB registered strong fee growth than peers,
mainly driven by bank card fees and settlement & clearing fees. Citic, Minsheng
and CRCB saw declines, likely due to regulatory headwinds on WMP-related
income.
PPoP continued strong growth (+9% y/y vs. +8% y/y 2H17), as net interest
income grew steadily and OPEX growth was lighter. PSBC delivered the
strongest momentum with 43% y/y as a result of robust NIM expansion,
significant fee growth and improving cost management; we expect its NIM to see
some headwinds in 2H18 due to declining market rates (link). BoCom’s PPoP
growth was weak compared to peers, due to drop in NII and flat fee growth. Its
NIM is likely to see expansion in 2H18 (link).
Loan loss provision climbed by 22% y/y, mainly driven by increasing provision
of big 4 banks. As a result, NPL coverage ratio edged by 35ppt for big 4 banks
(vs. sector of 13ppt).
Cost income ratio declined by 1ppt yoy, and OPEX growth was up 2% at big
banks vs. 10% yoy for JSB+BoCom.
Table 18: Comparison of banks' 1H18 earnings growth
YoY growth
Net interest
income Fee income
Operating
income OPEX PPoP
Loan loss
provision Net profit
ABC 11% 3% 10% 0% 16% 61% 7%
BOC 7% -2% 1% 1% 2% 20% 5%
CCB 10% 1% 6% 6% 7% 6% 6%
ICBC 11% 3% 7% 2% 9% 27% 5%
PSBC 28% 9% 25% 14% 43% 77% 22%
BoCom -1% 0% 4% 12% 1% 3% 5%
Citic 1% -4% 6% 7% 6% 10% 7%
CMB 9% 8% 11% 18% 9% -8% 14%
Minsheng -18% -1% 6% 3% 7% 16% 5%
Industrial 4% 10% 8% 7% 8% 32% 7%
CRCB -13% -4% 16% 4% 21% 96% 5%
Huishang 15% 16% 24% 16% 27% -8% 13%
Big 4 10% 2% 7% 2% 8% 27% 6%
JSB + Bocom 0% 3% 7% 10% 6% 6% 8%
Sector 9% 2% 8% 5% 9% 22% 7%
Source: Company reports
24
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 19: NIM comparison
NIM 2H16 1H17 2H17 1H18 HoH YoY
ABC % % % % 3 bps 12 bps
BOC % % % % 3 bps 4 bps
CCB % % % % 4 bps 16 bps
ICBC % % % % 1 bps 14 bps
PSBC % % % % 16 bps 33 bps
BoCom % % . % . -9 bps
Citic % % % % 8 bps 12 bps
CMB % % % % 12 bps 11 bps
Minsheng % % % % 5 bps 24 bps
Industrial % % % % 18 bps 13 bps
CRCB % % % % 9 bps 12 bps
Huishang % % % % 7 bps 5 bps
Big 4 % % % % 3 bps 11 bps
JSB + Bocom avg % % % % 11 bps 15 bps
Sector % % % % 8 bps 14 bps
Source: Company reports.
Table 20: PPOP / average assets
PPOP / average assets 2H16 1H17 2H17 1H18 HoH YoY
ABC % % % % 39 bps 15 bps
BOC % % % % 23 bps -7 bps
CCB % % % % 43 bps 3 bps
ICBC % % % % 29 bps 3 bps
PSBC % % % % 40 bps 30 bps
BoCom % % % % 24 bps -7 bps
Citic % % % % 19 bps 13 bps
CMB % % % % 63 bps 8 bps
Minsheng % % % % 38 bps 8 bps
Industrial % % % % 15 bps 6 bps
CRCB % % % % 29 bps 20 bps
Huishang % % % % 30 bps 14 bps
Big 4 % % % % 34 bps 3 bps
JSB + Bocom avg % % % % 32 bps 6 bps
Sector % % % % 33 bps 9 bps
Source: Company reports.
Balance sheet review
Asset growth: On average assets growth was ~4% h/h in 1H18. Assets growth
was mainly driven by growth in loan book (+6% HoH), indicating that banks
have been shrinking their interbank and investment book, as a result of on-going
financial deleveraging in 1H18.
Loan growth: Gross loan growth was 6% on average h/h in 1H18, with big 4 of
5% and JSB/BoCom at 8%. Retail loans (+8% h/h) outpace corporate loan
growth (5% h/h). PSBC and Industrial are more aggressive on loan growth, which
were 11% and 10% h/h respectively.
Deposits growth: Listed banks' deposit growth was 6% h/h on average. Big 4
banks deliver 6% deposit growth, but deposit growth for JSB + BoCom was 4%
h/h. Banks are likely competing against deposits and they issue higher cost
deposits (. structured deposits) to attract customers. Note that deposits costs of
banks under our coverage went up by 14bps h/h.
Capital position: CET 1 ratio was down 1 bps h/h for listed banks. ICBC and
CMB saw 44bps and 45bps h/h respectively, driven by higher RWA growth
(ICBC 6% h/h, CMB +8% h/h, vs. sector 4% h/h). Despite the CET1 ratio drop,
their capital positions are still among the strongest compared to peers.
25
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Katherine Lei
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@
Table 21: Loan growth
Gross loans (RMB mn) 2H16 1H17 2H17 1H18 HoH YoY
ABC 9,719,639 10,411,918 10,720,611 11,463,138 7% 10%
BOC 9,973,362 10,650,703 10,896,558 11,403,241 5% 7%
CCB 11,757,032 12,507,021 12,903,441 13,452,388 4% 8%
ICBC 13,056,846 13,865,909 14,233,448 14,934,137 5% 8%
PSBC 3,010,648 3,340,454 3,630,135 4,016,429 11% 20%
BoCom 4,102,959 4,370,147 4,579,256 4,793,965 5% .*
Citic 2,877,927 3,091,095 3,196,887 3,379,294 6% 9%
CMB 3,261,681 3,539,938 3,565,044 3,877,868 9% 10%
Minsheng 2,461,586 2,706,294 2,804,307 3,052,658 9% 13%
Industrial 2,079,814 2,284,665 2,430,695 2,674,609 10% 17%
CRCB 300,421 323,730 338,347 362,230 7% 12%
Huishang 277,371 295,915 314,694 347,761 11% 18%
Big 4 44,506,879 47,435,551 48,754,058 51,252,904 5% 8%
JSB + Bocom 14,783,967 15,992,139 16,576,189 17,778,394 7% 11%
Sector 62,879,286 67,387,789 69,613,423 73,757,718 6% 9%
Source: Company reports. BoCom restated gross loan number in 1H18.
Table 22: Corporate Loan growth
Corporate loans (RMB mn) 2H16 1H17 2H17 1H18 HoH YoY
ABC 5,368,250 6,090,842 6,147,584 6,551,357 7% 8%
BOC 5,627,877 6,082,523 6,107,952 6,262,502 3% 3%
CCB 5,864,895 6,348,232 6,443,524 6,643,148 3% 5%
ICBC 6,912,746 7,438,154 7,522,279 7,776,976 3% 5%
PSBC 1,079,392 1,268,560 1,391,901 1,568,359 13% 24%
BoCom 2,790,183 2,940,934 3,030,416 3,090,127 2% .*
Citic 1,701,783 1,708,806 1,715,160 1,741,102 2% 2%
CMB 1,362,540 1,470,598 1,443,496 1,539,229 7% 5%
Minsheng 1,394,864 1,583,006 1,615,830 1,783,410 10% 13%
Industrial 1,271,347 1,428,247 1,482,362 1,587,248 7% 11%
CRCB 189,913 208,735 214,752 224,743 5% 8%
Huishang 179,201 185,814 187,111 209,648 12% 13%
Big 4 23,773,768 25,959,751 26,221,339 27,233,983 4% 5%
JSB + Bocom 8,520,717 9,131,591 9,287,264 9,741,116 5% 7%
Sector 33,742,991 36,754,451 37,302,367 38,977,849 4% 6%
Source: Company reports. BoCom restated corporate loan number in 1H18.
Table 23: Retail Loan growth
Retail loans (RMB mn) 2H16 1H17 2H17 1H18 HoH YoY
ABC 3,340,879 3,680,688 4,000,273 4,337,193 8% 18%
BOC domestic 3,404,393 3,679,058 3,923,857 4,159,814 6% 13%
CCB 4,338,349 4,806,101 5,193,853 5,551,275 7% 16%
ICBC 4,108,440 4,196,169 4,843,049 5,312,980 10% 27%
PSBC 1,582,175 1,792,039 1,946,473 2,155,641 11% 20%
BoCom 1,186,187 1,293,177 1,409,882 1,567,520 11% 21%
Citic 935,198 1,110,334 1,210,026 1,271,733 5% 15%
CMB 1,520,851 1,682,443 1,764,355 1,849,156 5% 10%
Minsheng 900,922 1,019,750 1,105,827 1,171,719 6% 15%
Industrial 750,538 827,261 910,824 1,017,790 12% 23%
CRCB 98,182 102,337 113,551 123,670 9% 21%
Huishang 81,408 96,596 112,374 125,051 11% 29%
Big 4 15,192,061 16,362,016 17,961,032 19,361,262 8% 18%
JSB + Bocom 5,293,696 5,932,965 6,400,914 6,877,918 7% 16%
Sector 22,247,521 24,285,952 26,534,344 28,643,542 8% 18%
Source: Company reports
26
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 24: Deposit growth
Deposits (RMB mn) 2H16 1H17 2H17 1H18 HoH YoY
ABC 15,038,001 16,104,949 16,194,279 16,939,933 5% 5%
BOC 12,939,748 13,732,059 13,657,924 14,352,853 5% 5%
CCB 15,402,915 16,274,393 16,363,754 16,965,489 4% 4%
ICBC 17,825,302 19,021,171 19,226,349 20,818,042 8% 9%
PSBC 7,286,311 7,806,235 8,062,659 8,332,830 3% 7%
BoCom 4,728,589 4,938,694 5,545,366 5,732,928 3% .
Citic 3,639,290 3,453,476 3,407,636 3,587,994 5% 4%
CMB 3,802,049 4,142,254 4,064,345 4,257,803 5% 3%
Minsheng 3,082,242 3,023,127 2,966,311 3,157,881 6% 4%
Industrial 2,694,751 3,008,219 3,086,893 3,103,429 1% 3%
CRCB 518,186 569,677 572,184 630,095 10% 11%
Huishang 462,014 511,080 512,808 532,552 4% 4%
Big 4 61,205,966 65,132,572 65,442,306 69,076,317 6% 6%
JSB + Bocom 17,946,921 18,565,770 19,070,551 19,840,035 4% 7%
Sector 87,419,398 92,585,334 93,660,508 98,411,829 5% 6%
Source: Company reports. BoCom restated deposits number in 1H18.
Table 25: Asset growth
Total assets (RMB mn) 2H16 1H17 2H17 1H18 HoH YoY
ABC 19,570,061 20,573,586 21,053,382 21,920,851 4% 7%
BOC 18,148,889 19,425,980 19,467,424 20,294,918 4% 4%
CCB 20,963,705 21,692,067 22,124,383 22,805,182 3% 5%
ICBC 24,137,265 25,514,046 26,087,043 27,303,080 5% 7%
PSBC 8,265,622 8,543,826 9,012,551 9,326,163 3% 9%
BoCom 8,403,166 8,930,838 9,038,254 9,322,707 3% 4%
Citic 5,931,050 5,651,216 5,677,691 5,807,444 2% 3%
CMB 5,942,311 6,199,690 6,297,638 6,537,340 4% 5%
Minsheng 5,895,877 5,767,209 5,902,086 6,061,143 3% 5%
Industrial 6,085,895 6,384,658 6,416,842 6,563,221 2% 3%
CRCB 803,158 855,426 905,778 908,637 0% 6%
Huishang 754,774 812,678 908,100 955,208 5% 18%
Big 4 82,819,920 87,205,679 88,732,232 92,324,031 4% 6%
JSB + Bocom 32,258,299 32,933,611 33,332,511 34,291,855 3% 4%
Sector 124,901,773 130,351,221 132,891,172 137,805,894 4% 6%
Source: Company reports
Table 26: RWA growth
RWA (RMB bn) 2H16 1H17 2H17 1H18 HoH YoY
ABC 11,857 11,989 12,606 13,219 5% 10%
BOC 11,270 11,998 12,158 12,584 4% 5%
CCB 11,938 12,622 12,920 13,456 4% 7%
ICBC 14,565 15,184 15,903 16,878 6% 11%
PSBC 3,996 4,162 4,440 4,464 1% 7%
BoCom 5,163 5,478 5,646 5,645 0% 3%
Citic 3,964 4,075 4,318 4,435 3% 9%
CMB 3,369 3,266 3,531 3,811 8% 17%
Minsheng 3,786 3,923 4,340 4,552 5% 16%
Industrial 3,803 4,233 4,317 4,601 7% 9%
CRCB 535 575 613 628 2% 9%
Huishang 529 574 621 677 9% 18%
Big 4 49,629 51,793 53,586 56,138 5% 8%
JSB + Bocom 20,085 20,975 22,152 23,045 4% 10%
Sector 74,774 78,079 81,413 84,952 4% 9%
Source: Company reports
27
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02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 27: Capital adequacy ratio
CAR (%) 2H16 1H17 2H17 1H18 HoH YoY
ABC % % % % 103 bps 161 bps
BOC % % % % -41 bps 37 bps
CCB % % % % 14 bps 114 bps
ICBC % % % % -37 bps 27 bps
PSBC % % % % 39 bps 123 bps
BoCom % % % % -14 bps 0 bps
Citic % % % % -31 bps -42 bps
CMB % % % % -40 bps 49 bps
Minsheng % % % % 1 bps -5 bps
Industrial % % % % -33 bps -1 bps
CRCB % % % % 18 bps 80 bps
Huishang % % % % 0 bps -80 bps
Big 4 % % % % 10 bps 85 bps
JSB + Bocom % % % % -26 bps 0 bps
Sector % % % % -14 bps 0 bps
Source: Company reports
Asset quality review
Overall NPL ratio picked up slightly by 1bps h/h. ABC’s NPL ratio declined by
19bps qoq, highest among peers, while PSBC and CRCB sharp increase of
22bps/26bps h/h respectively. Some banks have been reclassifying overdue loans
90+ into NPL category, thus banks under our coverage (except Minsheng and
Huishang) has NPL/overdue 90+ ratio above 100%. However, leading asset
quality indicator, overdue loans < 90 days ratio, has picked up slightly by 7bps
h/h.
NPL coverage ratio stayed flat h/h, while big 4 banks saw improving coverage
level (+22ppt h/h), which echoes their higher loan loss provision in 1H18.
PSBC's NPL coverage ratio dropped by 55ppt, likely due to sharp rise in NPLs.
Annualized credit costs in 1H18 were on average 113bps, up 8bps y/y and flat
h/h.
28
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02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 28: NPL provision write-off comparison
NPL provision reversed
due to write-off/disposal
(Rmb mn) 2H16 1H17 2H17 1H18 HoH YoY
ABC 44,477 28,320 65,973 39,567 -40% 40%
BOC 23,295 40,392 29,952 46,124 54% 14%
BoCom 20,220 16,388 20,603 18,103 -12% 10%
CCB 31,996 33,342 38,859 52,223 34% 57%
PSBC 4,397 3,099 3,396 2,819 -17% -9%
Citic 11,787 8,237 11,317 27,815 146% 238%
CMB 11,080 18,921 16,380 30,596 87% 62%
ICBC 19,539 9,836 14,447 10,490 -27% 7%
Minsheng 8,739 8,700 9,739 19,712 102% 127%
Industrial 20,063 2,237 19,292 8,931 -54% 299%
CRCB 1,255 296 1,301 1,486 14% 402%
Huishang 1,648 2,040 930 1,176 26% -42%
Big 4 119,988 118,442 155,387 156,017 0% 32%
Other banks 78,508 53,366 76,802 103,025 34% 93%
Sector 198,496 171,808 232,189 259,042 12% 51%
As % of previous NPL
ABC 2H16 1H17 2H17 1H18 HoH YoY
BOC 20% 12% 29% 20% 2 ppt 3 ppt
BoCom 16% 28% 20% 29% -6 ppt -4 ppt
CCB 11% 9% 11% 9% 3 ppt -7 ppt
PSBC 16% 16% 18% 24% -7 ppt -1 ppt
Citic 21% 12% 12% 10% -5 ppt NA
CMB 19% 13% 17% 42% 2 ppt -7 ppt
ICBC 29% 39% 32% 57% -26 ppt -16 ppt
Minsheng 35% 16% 24% 18% 1 ppt -27 ppt
Industrial 23% 21% 21% 41% -4 ppt 0 ppt
CRCB 63% 6% 53% 23% 29 ppt -19 ppt
Huishang 42% 10% 41% 45% 40 ppt 12 ppt
Big 4 63% 69% 30% 36% 15 ppt 35 ppt
Other banks 16% 16% 20% 21% -2 ppt -2 ppt
Sector 37% 23% 29% 34% 6 ppt -6 ppt
Source: Company reports
Figure 45: NPL/overdue ratios
Source: Company reports.
Figure 46: MSB and Huishang had the lowest NPL/overdue (over 90
days) ratios
Source: Company reports.
55% 59% 59%
66%
75% 75% 78%
85% 87% 89%
95%
104%
20%
40%
60%
80%
100%
120%
2H17 1H18
NPL/Overdue loans
77% 92%
106% 110%
124% 124% 124%127%
138%
152%157%
20%
50%
80%
110%
140%
170%
2017 1H18
NPL/Overdue loans (over 90 days)
29
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 29: Total overdue loans
Overdue loans (RMB mn) 2H16 1H17 2H17 1H18 HoH YoY
ABC 274,635 271,496 224,066 209,984 -6% -23%
BOC group 214,591 210,144 202,842 274,917 36% 31%
ICBC 346,127 308,616 286,075 269,610 -6% -13%
CCB 178,099 185,840 165,872 191,632 16% 3%
BoCom 108,183 102,157 99,498 91,844 -8% -10%
PSBC 29,000 32,963 35,273 40,795 16% 24%
Citic 93,753 96,609 91,524 91,791 0% -5%
CMB 69,879 71,587 61,857 63,553 3% -11%
MSB 86,154 93,076 89,117 96,465 8% 4%
Industrial 44,638 47,539 38,602 56,748 47% 19%
CRCB 4,592 9,453 5,003 5,922 18% -37%
Huishang 6,064 5,487 6,793 6,018 -11% 10%
Big 4 1,013,452 976,096 878,855 946,143 8% -3%
JSB + Bocom 402,607 410,968 380,598 400,401 5% -3%
Sector 1,455,715 1,434,967 1,306,522 1,399,279 7% -2%
Source: Company reports.
Table 30: Overdue loans over 90 days
Overdue loans over 90 days (RMB mn) 2H16 1H17 2H17 1H18 HoH YoY
ABC 195,090 193,444 132,966 134,968 2% -30%
BOC group 112,310 133,325 131,486 131,722 0% -1%
ICBC 195,012 196,366 178,857 181,640 2% -7%
CCB 121,925 130,350 112,482 130,501 16% 0%
BoCom 86,782 82,923 76,841 65,111 -15% -21%
PSBC 20,648 24,871 22,557 24,832 10% 0%
Citic 57,711 65,212 58,682 57,165 -3% -12%
CMB 47,873 48,462 45,679 44,523 -3% -8%
MSB 62,721 66,476 65,062 68,408 5% 3%
Industrial 27,075 32,066 24,782 32,640 32% 2%
CRCB 2,730 3,696 3,460 3,597 4% -3%
Huishang 4,455 4,304 4,156 3,837 -8% -11%
Big 4 624,337 653,485 555,791 578,831 4% -11%
JSB + Bocom 282,162 295,139 271,046 267,847 -1% -9%
Sector 934,332 981,495 857,010 878,944 3% -10%
Source: Company reports.
Table 31: Overdue loans within 90 days
Overdue loans over 90 days (RMB mn) 2H16 1H17 2H17 1H18 HoH YoY
ABC 79,545 78,052 91,100 75,016 -18% -4%
BOC group 102,281 76,819 71,356 143,195 101% 86%
ICBC 151,115 112,250 107,218 87,970 -18% -22%
CCB 56,174 55,490 53,390 61,131 14% 10%
BoCom 21,401 19,234 22,657 26,733 18% 39%
PSBC 8,352 8,092 12,716 15,963 26% 97%
Citic 36,042 31,397 32,842 34,626 5% 10%
CMB 22,006 23,125 16,178 19,030 18% -18%
MSB 23,433 26,600 24,055 28,057 17% 5%
Industrial 17,563 15,473 13,820 24,108 74% 56%
CRCB 1,862 5,757 1,542 2,325 51% -60%
Huishang 1,609 1,183 2,637 2,181 -17% 84%
Big 4 389,115 322,611 323,064 367,312 14% 14%
JSB + Bocom 132,268 130,861 126,447 153,023 21% 17%
Sector 521,383 453,472 449,511 520,335 16% 15%
Source: Company reports.
30
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 32: NPL ratios
NPL (%) 2H16 1H17 2H17 1H18 HoH YoY
ABC % % % % -19 bps -57 bps
BOC % % % % -2 bps 5 bps
CCB % % % % -1 bps -3 bps
ICBC % % % % -1 bps -3 bps
PSBC % % % % 22 bps 15 bps
BoCom % % % % -1 bps -2 bps
Citic % % % % 12 bps 15 bps
CMB % % % % -18 bps -28 bps
Minsheng % % % % 2 bps 4 bps
Industrial % % % % 0 bps -1 bps
CRCB % % % % 26 bps 26 bps
Huishang % % % % -3 bps -4 bps
Big 4 % % % % -6 bps -14 bps
JSB + Bocom % % % % -1 bps -2 bps
Sector % % % % 1 bps -3 bps
Source: Company reports.
Table 33: Special mention loans
SML (%) 2H16 1H17 2H17 1H18 HoH YoY
ABC % % % % -17 bps -52 bps
BOC % % % % 2 bps 16 bps
CCB % % % % -1 bps -2 bps
ICBC % % % % -72 bps -67 bps
PSBC % % % % -3 bps 7 bps
BoCom % % % % -34 bps -30 bps
Citic % % % % 40 bps 24 bps
CMB % % % % -10 bps -21 bps
Minsheng % % % % -35 bps 4 bps
Industrial % % % % 2 bps -54 bps
CRCB % % % % -1 bps -29 bps
Huishang % % % % -27 bps -72 bps
Big 4 % % % % -22 bps -26 bps
JSB + Bocom % % % % -7 bps -15 bps
Sector % % % % -13 bps -23 bps
Source: Company reports.
Table 34: NPL/overdue loan over 90 days
NPL / Overdue loans (over 90 days) 2H16 1H17 2H17 1H18 HoH YoY
ABC 118% 118% 146% 138% -8 ppt 20 ppt
BOC 130% 110% 121% 124% 3 ppt 14 ppt
ICBC 109% 111% 124% 127% 3 ppt 16 ppt
CCB 147% 145% 171% 152% -19 ppt 7 ppt
BoCom 72% 80% 89% 110% 21 ppt 30 ppt
PSBC 127% 110% 121% 157% 36 ppt 47 ppt
Citic 84% 78% 91% 106% 15 ppt 28 ppt
CMB 128% 125% 126% 124% -1 ppt 0 ppt
MSB 66% 69% 74% 77% 3 ppt 8 ppt
Industrial 127% 114% 156% 131% -25 ppt 16 ppt
CRCB 105% 85% 95% 124% 29 ppt 39 ppt
Huishang 67% 73% 79% 92% 13 ppt 19 ppt
Big 4 126% 121% 140% 135% -5 ppt 14 ppt
JSB + Bocom 95% 93% 107% 110% 2 ppt 17 ppt
Sector 107% 101% 116% 122% 6 ppt 20 ppt
Source: Company reports.
31
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 35: Core Tier 1 capital ratio
Core tier 1 ratio 2H16 1H17 2H17 1H18 HoH YoY
ABC % % % % 56 bps 61 bps
BOC % % % % -16 bps 6 bps
CCB % % % % -1 bps 40 bps
ICBC % % % % -44 bps -34 bps
PSBC % % % % 40 bps 28 bps
BoCom % % % % -16 bps 1 bps
Citic % % % % 4 bps -8 bps
CMB % % % % -45 bps -81 bps
Minsheng % % % % 1 bps -54 bps
Industrial % % % % -13 bps 29 bps
CRCB % % % % 21 bps 94 bps
Huishang % % % % 3 bps -11 bps
Big 4 % % % % -1 bps 18 bps
JSB + Bocom % % % % -14 bps -23 bps
Sector % % % % -1 bps 6 bps
Source: Company reports.
Table 36: Tier 1 capital ratio
Tier 1 ratio 2H16 1H17 2H17 1H18 HoH YoY
ABC % % % % 53 bps 54 bps
BOC % % % % -20 bps 2 bps
CCB % % % % -3 bps 84 bps
ICBC % % % % -46 bps -38 bps
PSBC % % % % 40 bps 135 bps
BoCom % % % % -17 bps -2 bps
Citic % % % % 2 bps -24 bps
CMB % % % % -51 bps 9 bps
Minsheng % % % % -1 bps -59 bps
Industrial % % % % -17 bps 24 bps
CRCB % % % % 21 bps 93 bps
Huishang % % % % 0 bps -48 bps
Big 4 % % % % -4 bps 26 bps
JSB + Bocom % % % % -17 bps -10 bps
Sector % % % % -3 bps 19 bps
Source: Company reports.
32
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
2Q18 Review: Small banks start to catch
up on profitability
When we say big banks, we refer to big 4 banks and Postal. We see small banks
performance improved significantly in 2Q, and here are some key trends
NIM expanded by 5bps q/q. Big 4 banks saw NIM contraction of 1bp q/q, mainly
led by CCB (-8bps q/q). If adding back part of CCB's net interest income
reclassified to trading income in 1H18 due to IFRS9 adoption, then implied NIM
contraction is only 2bps q/q. PSBC saw strong NIM rebound (+15bps q/q), but it
is likely to see NIM contract in 2H18 (link). Small banks (. Minsheng, Citic)
are likely to see easing NIM pressure, due to declining market rates in 2H18.
Asset quality: NPL balance of (JSB+BoCom) grew 4% q/q (vs. big 4 banks of
1%), and this is due to banks are reclassifying overdue loan 90+ into NPL
category. This results in rise in their NPL ratios (+2bps q/q, vs. big 4 banks of
2bps contraction).
Balance sheet growth: Deposits grew 1% q/q on average, and deposit growth of
smaller banks (+2% q/q) has outpaced that of big banks’ (+1% q/q). It is likely
due to smaller banks are issuing higher-cost deposit to compete for market share.
Loan growth remained stable at 3%, and JSB+BoCom have shown slightly higher
loan growth (+1ppt) vs. big 4 banks.
Reviews on P&L lines
Table 37: Comparison of banks’ quarterly earnings growth
In % Net interest income Fee income Operating income OPEX Loan loss provision Net income
QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY
ABC -1% 8% -13% 19% -4% 16% -5% 10% -7% 49% -3% 8%
BOC 5% 5% -13% -4% -1% 6% -11% 0% -18% 171% 23% 5%
CCB -5% 5% -18% 6% -4% 10% 6% 8% -25% 17% -1% 7%
ICBC 3% 9% -10% 5% -3% 6% 5% 1% -3% 38% 4% 6%
PSBC 10% 28% -35% 2% 9% 29% 12% 18% 59% 147% -3% 25%
BoCom -1% 0% -5% 4% 12% 11% 20% 21% 23% 14% 3% 5%
Citic 6% 5% 9% -5% 5% 7% -3% 1% 10% 18% 11% 7%
CMB 3% 9% -2% 15% 5% 16% 7% 16% 13% 9% -3% 15%
Minsheng 15% -11% 4% 5% 2% 11% -9% 4% 28% 35% -2% 6%
Industrial 8% 6% 20% 17% 8% 14% 0% 11% 85% 31% -9% 8%
CRCB -48% -40% 8% -3% -4% 12% 4% 5% 7% 54% -11% 5%
Big 4 0% 7% -13% 6% -3% 9% -2% 5% -12% 42% 4% 6%
JSB + Bocom avg 5% 3% 4% 7% 6% 12% 5% 12% 25% 19% -1% 8%
Sector 2% 7% -8% 6% 0% 11% 1% 8% 1% 38% 3% 8%
Source: Company reports
33
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 38: Net profits growth comparison
Net profits growth y/y (%) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC % % % % % 245 bps 308 bps
BOC % % % % % 30 bps -1755 bps
CCB % % % % % 172 bps 277 bps
ICBC % % % % % 176 bps 341 bps
PSBC % % % % % 547 bps 585 bps
BoCom % % % % % 126 bps -45 bps
Citic % % % % % 57 bps 560 bps
CMB % % % % % 102 bps 30 bps
Minsheng % % % % % 43 bps 291 bps
Industrial % % % % % 335 bps 75 bps
CRCB % % % % % 04 bps -399 bps
Big 4 % % % % % 156 bps -207 bps
JSB + Bocom avg % % % % % 134 bps 239 bps
Sector % % % % % 111 bps 85 bps
Source: Company reports.
Table 39: NIM comparison
NIM (%) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC % % % % % -1 bps -5 bps
BOC % % % % % 6 bps 2 bps
CCB % % % % % -8 bps 11 bps
ICBC % % % % % 0 bps 10 bps
PSBC % % % % % 15 bps 33 bps
BoCom % % % % % 2 bps -7 bps
Citic % % % % % 5 bps 17 bps
CMB % % % % % -2 bps 9 bps
Minsheng % % % % % 12 bps 34 bps
Industrial % % % % % 23 bps 35 bps
CRCB % % % % % 6 bps 17 bps
Big 4 % % % % % -1 bps 8 bps
JSB + Bocom avg % % % % % 9 bps 20 bps
Sector % % % % % 5 bps 17 bps
Source: Company reports. Note: To be comparable with peers,
Table 40: Fee income growth comparison
Fee income (Rmb mm) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC 16,994 15,672 14,766 23,386 20,251 -13% 19%
BOC 23,436 20,714 18,790 25,782 22,406 -13% -4%
CCB 29,313 25,569 24,149 37,931 31,073 -18% 6%
ICBC 35,712 30,973 31,982 41,613 37,647 -10% 5%
PSBC 2,950 3,269 2,435 4,662 3,020 -35% 2%
BoCom 9,982 9,347 9,943 10,844 10,338 -5% 4%
Citic 11,956 11,455 12,642 10,473 11,389 9% -5%
CMB 16,110 14,584 14,684 18,921 18,548 -2% 15%
Minsheng 11,796 11,701 11,564 11,928 12,399 4% 5%
Industrial 9,420 9,193 11,236 9,141 10,976 20% 17%
CRCB 596 525 615 535 579 8% -3%
Big 4 105,455 92,928 89,687 128,712 111,377 -13% 6%
JSB + Bocom 59,264 56,280 60,069 61,307 63,650 4% 7%
Sector 168,265 153,002 152,806 195,216 178,626 -8% 6%
Source: Company reports
34
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Reviews on balance sheet lines
Table 41: Asset growth comparison
Total assets (Rmb bn) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC 20,574 20,923 21,053 21,639 21,921 1% 7%
BOC 19,426 19,422 19,467 20,160 20,295 1% 4%
CCB 21,692 22,054 22,124 22,849 22,805 0% 5%
ICBC 25,514 25,765 26,087 26,494 27,303 3% 7%
PSBC 8,544 8,765 9,013 9,227 9,326 1% 9%
BoCom 8,931 8,936 9,038 9,267 9,323 1% 4%
Citic 5,651 5,537 5,678 5,625 5,807 3% 3%
CMB 6,200 6,169 6,298 6,252 6,537 5% 5%
Minsheng 5,767 5,713 5,902 6,003 6,061 1% 5%
Industrial 6,385 6,407 6,417 6,437 6,563 2% 3%
CRCB 855 875 906 899 909 1% 6%
Big 4 87,206 88,164 88,732 91,141 92,324 1% 6%
JSB + Bocom 32,934 32,762 33,333 33,583 34,292 2% 4%
Sector 129,539 130,566 131,983 134,851 136,851 1% 6%
Source: Company reports.
Table 42: Loan growth comparison
Gross loan (Rmb bn) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC 10,412 10,645 10,721 11,148 11,463 3% 10%
BOC 10,651 10,808 10,897 11,131 11,403 2% 7%
CCB 12,507 12,757 12,903 13,152 13,452 2% 8%
ICBC 13,866 14,096 14,233 14,568 14,934 3% 8%
PSBC 3,340 3,501 3,630 3,880 4,016 4% 20%
BoCom 4,370 4,413 4,579 4,704 4,794 2% 10%
Citic 3,091 3,168 3,197 3,298 3,379 2% 9%
CMB 3,540 3,634 3,565 3,716 3,878 4% 10%
Minsheng 2,706 2,781 2,804 2,907 3,053 5% 13%
Industrial 2,285 2,358 2,431 2,550 2,675 5% 17%
CRCB 324 333 338 351 362 3% 12%
Big 4 47,436 48,306 48,754 49,998 51,253 3% 8%
JSB + Bocom 15,992 16,354 16,576 17,176 17,778 4% 11%
Sector 67,092 68,493 69,299 71,404 73,410 3% 9%
Source: Company reports.
Table 43: Deposit growth comparison
Deposit (Rmb bn) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC 16,105 16,370 16,194 16,865 16,940 0% 5%
BOC 13,732 13,836 13,658 14,351 14,353 0% 5%
CCB 16,274 16,503 16,364 16,900 16,965 0% 4%
ICBC 19,021 19,330 19,563 20,198 20,818 3% 9%
PSBC 7,806 7,913 8,063 8,441 8,333 -1% 7%
BoCom 4,939 4,867 5,545 5,719 5,733 0% 16%
Citic 3,453 3,317 3,408 3,478 3,588 3% 4%
CMB 4,142 3,974 4,064 4,067 4,258 5% 3%
Minsheng 3,023 2,937 2,966 3,051 3,158 4% 4%
Industrial 3,008 2,949 3,087 3,090 3,103 0% 3%
CRCB 570 581 572 609 630 3% 11%
Big 4 65,133 66,039 65,779 68,313 69,076 1% 6%
JSB + Bocom 18,566 18,043 19,071 19,403 19,840 2% 7%
Sector 92,074 92,576 93,484 96,767 97,879 1% 6%
Source: Company reports.
35
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 44: Investment growth comparison
Investment (Rmb bn) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC 5,889 6,002 6,153 6,083 6,426 6% 9%
BOC 4,351 4,424 4,555 4,721 4,808 2% 10%
CCB 5,045 5,186 5,182 5,202 5,246 1% 4%
ICBC 5,570 5,641 5,757 6,154 6,258 2% 12%
PSBC 3,208 3,236 3,167 3,143 3,150 0% -2%
BoCom 2,474 2,512 2,562 2,669 2,708 1% 9%
Citic 1,691 1,472 1,445 1,316 1,460 11% -14%
CMB 1,556 1,515 1,578 1,544 1,451 -6% -7%
Minsheng 2,061 1,968 2,136 2,079 2,054 -1% 0%
Industrial 3,315 3,217 3,117 3,075 2,985 -3% -10%
CRCB 289 291 317 290 270 -7% -7%
Big 4 20,855 21,253 21,646 22,160 22,737 3% 9%
JSB+BoCom 11,097 10,684 10,839 10,683 10,657 0% -4%
Sector 35,449 35,463 35,969 36,276 36,814 1% 4%
Source: Company reports.
Asset quality review
Table 45: NPL growth comparison
NPL (Rmb bn) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC 228 210 194 187 186 -1% -19%
BOC 147 153 158 160 163 2% 11%
CCB 189 191 192 196 199 1% 5%
ICBC 217 220 221 225 230 2% 6%
PSBC 27 27 27 27 39 43% 42%
BoCom 66 67 69 71 72 1% 8%
Citic 51 53 54 56 61 9% 19%
CMB 60 60 57 55 55 1% -8%
Minsheng 46 47 48 50 53 6% 15%
Industrial 37 38 39 40 43 6% 16%
CRCB 3 3 3 4 4 8% 42%
Big 4 781 774 766 768 778 1% 0%
JSB + Bocom 260 264 266 271 283 4% 9%
Sector 1,072 1,068 1,062 1,071 1,104 3% 3%
Source: Company reports
Table 46: NPL ratio comparison
NPL ratio (%) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC % % % % % -6 bps -57 bps
BOC % % % % % 0 bps 5 bps
CCB % % % % % -2 bps -3 bps
ICBC % % % % % 0 bps -3 bps
PSBC % % % % % 27 bps 15 bps
BoCom % % % % % -1 bps -2 bps
Citic % % % % % 10 bps 15 bps
CMB % % % % % -5 bps -28 bps
Minsheng % % % % % 2 bps 4 bps
Industrial % % % % % 1 bps -1 bps
CRCB % % % % % 5 bps 26 bps
Big 4 % % % % % -2 bps -14 bps
JSB + Bocom % % % % % 2 bps -2 bps
Sector % % % % % 3 bps -3 bps
Source: Company reports
36
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Table 47: NPL coverage ratio comparison
NPL coverage ratio 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC % % % % % 10 ppts 67 ppts
BOC % % % % % -3 ppts 12 ppts
CCB % % % % % 4 ppts 33 ppts
ICBC % % % % % -1 ppts 27 ppts
PSBC % % % % % -83 ppts -19 ppts
BoCom % % % % % 5 ppts 20 ppts
Citic % % % % % -37 ppts -2 ppts
CMB % % % % % 20 ppts 91 ppts
Minsheng % % % % % -9 ppts 9 ppts
Industrial % % % % % 0 ppts -13 ppts
CRCB % % % % % 5 ppts -86 ppts
Big 4 % % % % % 2 ppts 35 ppts
JSB + Bocom % % % % % -5 ppts 30 ppts
Sector % % % % % -8 ppts 13 ppts
Source: Company reports
Table 48: Loan loss reserve ratio comparison
Loan reserve ratio (%) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC % % % % % 2 bps 4 bps
BOC % % % % % -5 bps 24 bps
CCB % % % % % 3 bps 44 bps
ICBC % % % % % -3 bps 38 bps
PSBC % % % % % 14 bps 25 bps
BoCom % % % % % 4 bps 32 bps
Citic % % % % % -47 bps 19 bps
CMB % % % % % 14 bps 68 bps
Minsheng % % % % % -16 bps 20 bps
Industrial % % % % % 4 bps -23 bps
CRCB % % % % % 23 bps 6 bps
Big 4 % % % % % -1 bps 28 bps
JSB + Bocom % % % % % -8 bps 23 bps
Sector % % % % % -1 bps 23 bps
Source: Company reports
Table 49: Annualized credit cost comparison
Annualized credit cost (%) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
ABC % % % % % -9 bps 46 bps
BOC % % % % % 2 bps 42 bps
CCB % % % % % -22 bps 6 bps
ICBC % % % % % -4 bps 18 bps
PSBC % % % % % -18 bps 18 bps
BoCom % % % % % 12 bps 3 bps
Citic % % % % % 1 bps 18 bps
CMB % % % % % 2 bps -17 bps
Minsheng % % % % % 20 bps 30 bps
Industrial % % % % % 37 bps 41 bps
CRCB % % % % % -65 bps 23 bps
Big 4 % % % % % -8 bps 28 bps
JSB + Bocom % % % % % 14 bps 15 bps
Sector % % % % % -4 bps 21 bps
Source: Company reports
37
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
Figure 47: Banks’ period-end LDR
Source: Company reports
Figure 48: Daily average LDR
Source: Company reports
Figure 49: Tier 1 ratio
Source: Company reports. Note: Huishang does not disclose relevant data on 1Q18 core tier 1
ratio.
Figure 50: CAR
Source: Company reports Note: Huishang does not disclose relevant data on 1Q18 core tier 1
ratio.
Table 50: Overview of banks’ LGFV exposure
LGFV balance (RMB bn) As % of total loans NPL ratio
RMB bn 2H17 1H18 2H17 1H18 2H17 1H18
Minsheng 120 150 4% 5% % %
CRCB NA NA NA NA NA NA
PSBC 40 NA 1% NA % %
ABC 170 150 2% 1% % %
ICBC 182 NA 1% NA % NA
CCB 171 151 1% 1% % %
BOC 181 159 2% 1% % %
CMB 99 104 3% 3% % %
BoCom 140 117 3% 2% % %
Citic 126 120 4% 4% % %
Sector 2% 2% % %
Source: Company data.
%
%
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%
%
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2H17 1H18
46%
59%
65%
69%
76% 78%
79% 81%
89%
93% 96%
30%
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60%
70%
80%
90%
100%
2H17 1H18
%
% %
%
%
% % %
% %
%
%
%
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%
1Q18 2Q18
% %
%
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1Q18 2Q18
38
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
2Q18 Review by bank
ABC: Asset quality surprises at the upside
ABC reported 1H18 net profits of RMB116bn, up 7% y/y, and beat JPM estimate by
2%. Pre-provisional profits are in line with our estimates, lower-than-expected tax
led to surprises on bottom line. This is a strong set of results with key upside surprise
on asset quality (NPL % -6bps q/q), provision level (NPL coverage +10ppt q/q to
248%). Net interest margin contracted 1bp q/q, in line with expectation. With
declining market rates, we expect margin to see further pressure in 3Q18. We remain
Neutral on ABC.
For detailed comments, please refer to our note: ABC: 1H18 results: Asset quality
surprises at the upside.
Table 51: Summary of ABC 2Q18 financials
In Rmb mm unless otherwise
stated
2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
Key P&L Items
NII 108,117 112,937 117,670 117,481 116,352 -1% 8%
Non-Interest Income 21,727 19,889 13,083 39,757 34,360 -14% 58%
Fees 16,994 15,672 14,766 23,386 20,251 -13% 19%
Non-fee 4,733 4,217 (1,683) 16,371 14,109 -14% 198%
Total Income 129,844 132,826 130,753 157,238 150,712 -4% 16%
Operating expenses (44,510) (43,946) (59,908) (51,923) (49,076) -5% 10%
PPOP 85,334 88,880 70,845 105,315 101,636 -3% 19%
LLP (17,826) (25,541) (25,868) (33,972) (32,683) -4% 83%
Pre-Tax 64,266 61,960 44,308 71,346 70,206 -2% 9%
Income Tax (11,375) (10,488) (11,317) (12,306) (13,270) 8% 17%
Attributable Income 52,883 51,417 32,952 58,736 57,053 -3% 8%
Key Balance Sheet Items
Gross Loans 10,411,918 10,644,608 10,720,611 11,147,527 11,463,138 3% 10%
Including NPL amount 228,431 209,834 194,032 186,952 185,895 -1% -19%
Total deposits 16,104,949 16,370,168 16,194,279 16,864,890 16,939,933 0% 5%
Total assets 20,573,586 20,923,117 21,053,382 21,639,047 21,920,851 1% 7%
Equity 1,355,200 1,405,981 1,426,415 1,459,992 1,565,226 7% 15%
Key Ratios
NIM % % % % % -1bps -5bps
Cost income ratio % % % % % -46bps -172bps
ROE % % % % % -119bps -48bps
ROA % % % % % -5bps 1bps
NPL Ratio % % % % % -6bps -57bps
NPL Coverage ratio % % % % % 965bps 6661bps
Loan loss reserve % % % % % 2bps 4bps
Credit cost % % % % % -9bps 46bps
LDR % % % % % 157bps 302bps
Core capital ratio % % % % % 72bps 61bps
Tier 1 ratio % % % % % 71bps 54bps
Total CAR % % % % % 100bps 161bps
Source: Company reports
39
Asia Pacific Equity Research
02 September 2018
Katherine Lei
(852) 2800-8552
@
BOC: NIM expansion ahead of big bank peers
BOC reported 1H18 attributable profits of RMB109bn, up 5% YoY and beat our
expectation by 2%. Pre-provisional profit was 2% higher than our estimate, and
2Q18 growth was 8% y/y, rebounding from -4% y/y in 1Q18. Net interest margin
expanded 6bps q/q (vs +2bps q/q 1Q18) and ahead of big banks peers (+1bps q/q) in
2Q18. Overseas business is a key profits contributor. Asset quality remains stable
with strong NPL coverage ratio (+ h/h) to 165%. However, rise in newly
delinquent loan ratio (+60bps h/h) could be a red flag. And growth on net fee income
and domestic deposits come slightly lower than our expectation.
For detailed comments, please refer to our note: BOC: 1H18 results – NIM
expansion ahead of big bank peers.
Table 52: Summary of 2Q18 financials
In Rmb mm unless otherwise stated 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
Key P&L Items
NII 86,434 87,042 86,305 86,051 90,650 5% 5%
Non-Interest Income 32,411 28,722 33,324 40,035 34,746 -13% 7%
Fees 23,436 20,714 18,790 25,782 22,406 -13% -4%
Non-fees 8,975 8,008 14,534 14,253 12,340 -13% 37%
Total Income 118,845 115,764 119,629 126,086 125,396 -1% 6%
Operating expenses (38,677) (43,167) (49,029) (43,397) (38,735) -11% 0%
PPOP 80,168 72,597 70,600 82,689 86,661 5% 8%
LLP (4,346) (22,839) (34,597) (15,495) (16,362) 6% 276%
Pre-Tax 75,745 50,049 32,476 67,683 74,278 10% -2%
Income Tax (15,523) (5,463) (2,625) (15,500) (10,886) -30% -30%
Attributable Income 57,041 41,816 26,901 49,001 60,087 23% 5%
Key Balance Sheet Items
Gross Loans 10,650,703 10,808,135 10,896,558 11,130,549 11,403,241 2% 7%
Including NPL amount 147,025 152,746 158,469 159,647 163,304 2% 11%
Total deposits 13,732,059 13,836,476 13,657,924 14,351,098 14,352,853 0% 5%
Total assets 19,425,980 19,422,438 19,467,424 20,159,826 20,294,918 1% 4%
Equity 1,451,378 1,481,233 1,496,016 1,504,277 1,526,978 2% 5%
Key Ratios
NIM % % % % % 6 bps 2 bps
Cost income ratio % % % % % -353 bps -165 bps
ROE % % % % % 279 bps 14 bps
ROA % % % % % 20 bps 0 bps
NPL Ratio % % % % % 0 bps 5 bps
NPL Coverage ratio % % % % % -331 bps 1233 bps
Loan loss reserve % % % % % -5 bps 26 bps
Credit cost % % % % % 2 bps 42 bps
LDR (Group) % % % % % 189 bps 189 bps
Core capital ratio % 11.
