Chinese Banks:April 2016banking volume,credit growth actually accelerated

Adjusted for municipal bonds, total credit growth printed at 17.6% yoy

    New RMB loans (Rmb556bn) and new TSF (Rmb751bn) came in softer than expected in Apr. However, adjusting for the strong issuance of municipal bonds of Rmb1.1tr (Figure 9), the total new credit actually amounted to Rmb1.8tr. This translates into an adjusted TSF balance growth of 17.6% yoy, rising from 17.1% in Mar 2016 (Figure 6). The accelerating credit growth suggests a continuation of aggressive fiscal policies, but it also pushes up China’s credit-to-GDP ratio with a deteriorating credit multiplier (credit growth/GDP growth). As such, we still prefer retail-oriented banks, i.e. ICBC and CMB.

    Slower M2 on fiscal deposits and tighter control of banks’ shadow credit

    Despite accelerating credit growth, M2 growth slowed to 12.8% yoy in April from 13.4% in March (Figure 14). There are two factors contributing to slower M2 growth. Firstly, fiscal deposits increased by Rmb932bn, due to issuance of municipal bonds and strong growth in tax revenue, which is a deduction from M2. Secondly, banks’ shadow credit, which is in the form of receivable investments, slowed due to regulators’ tighter controls on credit assets transfer (Circular No. 82) and implementation of the MPA framework (Macro Prudential Assessment). According to the PBOC, during a press conference, M2 growth may continue to slow, on high bases. The M2 growth lagged behind adjusted TSF growth by 4.8% in Apr, against the average M2-credit gap of 4.0% since 2007. Meanwhile, M1 kept strong growth of 22.9% yoy (Mar: 22.1%), indicating improving cash flow conditions from corporates.

    TSF mix: declines in bond issuance, undiscounted bills and FX loans

    Within the TSF mix in Apr, new corporate bond issuance slowed to Rmb210bn, the lowest level in the past 10 months (excluding Feb with Chinese New Year). This was a result of bond issuance cancellations, given higher costs, and falling demand on rising defaults. Undiscounted bills declined by Rmb278bn due to tightening regulatory scrutiny on bill businesses. Elsewhere, FX loans dropped by Rmb71bn, suggesting corporates are still paying off their forex debt.

    Mortgages still grew strongly, while corporate loans slowed on debt swap

    If adjusting for municipal bond issuance to swap bank loans (c.Rmb350bn), new RMB loans in Apr 2016 actually amounted to Rmb900bn, against Rmb708bn in Apr of last year. Looking into the breakdown (Figure 3), mortgage loans were the key driver, contributing 77% of net new loans (vs. 32% in Mar) followed by discounted bills (43%). In contrast, both the short-term and medium-to-long-term corporate loan balance declined in April, due mainly to debt swap from municipal bond issuance. Short-term retail loan growth in the month slowed to 7.3% yoy (March: 9.2%).

    Valuation and risks

    We value Chinese banks using a three-stage Gordon Growth Model (PV= (ROE-g)/(COE-g)), with target prices based on 2016E book values. Key downside risks include higher systemic liquidity risk, continued margin pressure and stricter regulation on shadow banking. Key upside risks include: stronger development in the retail banking franchise, softer regulation on shadow banking.