Chinese banks:July 2017banking volume-A temporary rebound in credit growth
Credit growth rebounded in July but we expect deleveraging to carry on
The PBOC reported July 2017 new loans of Rmb826bn and new TSF of Rmb1.22trn, both exceeding consensus estimates. Adding back strong municipal bond issuance of Rmb845bn, system credit growth rebounded to 15.4% yoy from 14.7% in June (Fig. 1). We attribute the stronger-than-expected credit data to 1) banks bringing off-B/S shadow credit into on-B/S, and 2) accelerating bond financing on lower rates. Given the still healthy macro data, we expect the financial deleveraging campaign to continue in order to delever financial markets and contain the asset bubble. Thus we maintain our forecast that system credit will fall to 13%-14% yoy by end-2017.
All borrowers levered up; weaker lenders slowed down
Borrowing by the corporate, household and government sectors were all strong in July, which made up 23%, 25% and 50% respectively of new system credit in July (Fig. 2) versus 50%/28%/19% in 1H17. Corporate medium-to-long-term loan growth rose further to 16.5% yoy in July (vs. 15.8% in June). Mortgage growth slowed to 27.6%, which was offset by accelerating short-term retail loans (15.3% in July vs. 7.3% in 2016). In terms of lender mix, China’s domestic banking assets grew by 11.4% yoy as of June 2017 versus 16.5% in 2016, dragged down by the slower growth of smaller banks. Total asset growth of joint-stock and city/rural banks (45% of total banking assets) decelerated notably to 12% yoy in June from 19% in 2016 (Fig. 3). Particularly, JSBs’ asset growth declined to 8.4% from 17.2% in 2016. In contrast, the Big Five banks (36% of total banking assets) expanded their asset base modestly faster at 8.8% yoy vs. 6.9% in 1H16.
Channel mix is shifting towards loans and bond finance
Bank loan growth in July rose to 13.2% yoy (vs. +12.9% in June), and bond financing recovered strongly with a net financing amount of Rmb284bn versus a decline of Rmb371bn in 1H17. We believe formal financing channels are replacing shadow banking channels following a series of tightening regulations. Total bank loans and bond financing represented 98% of TSF. In contrast, shadow banking finance remained muted, with entrusted loans up only Rmb16bn and undiscounted bill financing declining by Rmb204bn during the month. Trust financing also moderated to Rmb123bn versus Rmb247bn in June. We calculated that new loans to NBFI declined by Rmb87bn in July versus +Rmb87bn in June and +Rmb210bn in 2016. Other shadow banking channels not included in TSFs were also shrinking, for example AUM of brokers’ asset management schemes dropped by Rmb670bn in 2Q17.
Low M2 growth to continue amid financing deleverage; Buy big banks
Deposit growth slightly rebounded to 9.4% yoy in July (vs. +9.2% in June) and M2 growth came in at 9.2% yoy (9.4% in June), both behind credit growth of 13.2%. We believe China will continue to push for financial deleveraging as the goal has not been achieved and the economic conditions stayed resilient. Going forward, we expect the strict implementation of supply-side reforms and moderated property risks to relieve asset quality concerns and support banks’ asset yields. We prefer big banks and stay cautions on smaller ones. Top picks: ICBC and BOC.