Chinese Banks:Limited implication from commodity rout on banks

Reigniting concerns on commodity financing; limited implication on banks。

    Reported by Bloomberg on 29 September 2015, Glencore, one of the largestcommodities companies, tumbled 29% on HKEx today, given fears of itsinadequate efforts to reduce debts amid weakening commodity prospects. Theweak market sentiment has led to reemerged concerns on commodityfinancing exposure of Chinese banks. Nevertheless, we expect limitedimplications on the asset-quality risks for listed banks, given their relativelysmall direct exposure and stricter risk controls imposed since the Qingdao portevent in June 2014, which exposed the issues of excessive borrowings andduplicated pledges of commodity warehouse receipts. At 0.73x 2015E P/B,which implies an NPL ratio of 6.2%, we stay positive on Chinese banks.

    Chinese banks have small, declining exposure to commodity financing。

    As commodity financing is primarily conducted through loans (lending tomining sector) and Letter of Credit (LoC, booked off-balance-sheet), whichaccounted for 2.9% and 3.3% of total loans for the listed banks as of 2Q15respectively, it represents a small risk exposure for the banking system.

    Further, reflecting rising risk aversion, listed banks’ total exposure, includingthe loan balance to the mining sector and the LoC position, has fallen to 6.2%of total loans as of 2Q15 from 7.8% as of 2013. Amongst listed banks, jointstockbanks are more exposed to commodity financing than big ones. Thebanks with higher exposure to LoC include BONJ (23% of total loans), CMB(8.8%) and INDB (7.3%), while MSB (5.4% of loans), PAB (4.8%) and BOC(4.1%) have heavier loan exposure to mining sector. That said, the miningsector witnessed weakening asset quality, with the NPL balance rising 70%hoh to 1.5% of loans extended to the sector.

    Risks are further buffered by stricter oversights imposed by banks。

    Our channel checks suggest that Chinese banks have tightened risk controlson commodity financing with a higher level of margin deposits required andstricter oversights on documentation and the lending process. Taking copperfinancing as an example, a typical type of falsified transaction previously, somebanks have cut off the credit lines completely or require at least 50% of theloan amount as margin deposit (30% previously). Banks focus heavily on thereal trade background by examining contracts and documents more carefullythan before, which leads to slower turnover of funds and hence lower returnsfor those arbitrageurs. In addition, banks require borrowers to set up escrowaccounts to monitor fund flows closely.

    Regional banks’ exposure all recorded at single digit, estimated by DB analysts。

    Korean banks have loan exposure of 9%, most of which is extended to the oil,chemical and steel sectors. Philippine banks have 5.2% of loans, granted toagricultural and mining sectors in combination. In Indonesia, 3.5% of loans aremade to the mining sector and 6.1% to agriculture, livestock, forestry andfishery. Indian banks have loan exposure of roughly 6.4% to metal & miningsectors. Overall exposure for the Singaporean banks is 5% of the loan book.