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Chinese Banks: Macro, Property and LGFV Implications
Pramod Shenoi – Co-Head of Asia-Pacific Research
Zerlina Zeng, CFA – Senior Analyst - North Asia Corporates
Karen Wu, CFA – Analyst - Asia-Pacific Banks
EXECUTIVE SUMMARY
- We are changing our recommendation on the Chinese Big 5 banks and China Merchants Banks, given China’s weak macro outlook and challenging profit growth prospects for the banks, as well as technically tight bond trading levels compared to elsewhere in Asia.
- Profit growth for FY23 will be difficult for Chinese banks given lower NIMs, challenging fee income growth, as well as slowing loan growth.
- While the Chinese government’s macro support measures will impact banks’ profitability and asset quality, we have overall less concern as the authorities will ensure that key banks are adequately capitalized and have sufficient profitability to perform their national services, and small local banks’ capital will be replenished with the help of local governments via special purpose bonds.
- Property sector challenges continue – while banks have been guided to extend existing property loans and lower mortgage rates to support the property sector, new lending has largely been limited to state-linked developers; the continued issues with the sector means that NPLs will continue to increase and margins will reduce, while banks’ bond investments will also be impacted but to a limited extent.
- In the LGFV sector, we expect bank loan extensions, trust loan repayment delays, debt swaps and LGFV restructuring to resolve the short-term liquidity stress of the LGFVs; the ongoing LGFV loan extensions and potential loan restructuring at reduced interest rates will weigh on Chinese banks’ NIMs over an extended period of time because of the longer duration of these loans.
RELATIVE VALUE
We are changing our recommendation on the Chinese Big 5 banks and China Merchants Banks given China’s weak macro outlook and the banks’ challenging profit growth prospects as well as tight bond trading levels compared to elsewhere in Asia.
There has been limited supply from the Chinese banks; more recently we have had 3Y bonds from BCHINA and CCB, which trade around G+50 bp. We put a new 5Y bond at G+75 bp, given a 25 bp 3-5 year curve. The recent BOCAVI 04/28 is trading at G+105 bp; assuming a tight 30 bp differential for bank to leasing subsidiary, we also arrive at G+75 bp for a 5Y BCHINA. The Korean banks’ new 5yr papers are trading around G+90 bp, ~15 bp wider than Chinese bank seniors, which likely comes down to strong domestic bid for Chinese banks’ $ bonds, while we would expect Chinese banks to trade flat to Korean banks from a credit perspective. We therefore see limited potential for performance from these tight levels, although we acknowledge that these bonds will unlikely widen much should there be market volatility, given the supportive investor base from Chinese banks and securities houses in each others paper.
The tight spreads are not restricted to only senior bonds – CCB’s two Tier 2 bonds with call dates in 2024 and 2025 are also trading extremely tight at G+76 bp and G+91 bp respectively.
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