Chinese Banks : Market Expecting new regulations to slow funding flow to shadow banks

New caps on non-standardized credit assets; limited impact on big banksAccording to news report published by 21st Century Business Herald on 6November 2013, the CBRC is planning to cap the exposure of commercialbanks to non-tradable credit-backed assets (named as non-standardized assets)backing (1) the inter-bank assets, especially financial assets held under reverserepo and (2) proprietary investments. We see these regulations, if implemented,as an extension of the Regulation No.8 put out in this March to limit theexposure of banks to non-standardized WMPs to 35% of total WMPs and 4%of assets, and should slow the funding flows into the shadow banking systemand reduce the systematic risks of the financial system. As of June 2013, weestimate that the non-standardized assets owned by the nine H-share listedbanks amounted to Rmb2.4trn, or 3% of assets only as the big four banks havethe lowest exposure (2% of assets). In contrast, the exposure amounted to 9%of assets for both MSB and CNCB and 13% for CRCB.

    Joint stock banks, like MSB and CNCB might face greater pressureAs we have highlighted before, we believe CBRC is moving in a right directionthrough new regulations to address the systematic concerns raised by thegrowth in shadow banking system arise from the reliance of shadow banks onfunding from the banking system. The latter is subject to tighter regulationssuch as a loan/deposit ratio of 75% and a risk-weighting of 100% for customerloans, compared to 20-25% for inter-bank assets, leading to lowergrowth/returns. While we believe the caps to be imposed by the CBRC shouldpose limited impact on capital/earnings for the big five banks, the risks appearto be the greatest for the joint-stock banks, which are the main intermediariesbetween the banking system and the non-banks. For details, please refer topage 14-20 of our report "Stay positive - Unintended benefits from the nextphase of financial sector reforms". Figure 1 shows the exposure of nonstandardizedcredit assets of the H-share listed banks as of June 2013.