Chinese banks:February 2017banking volume –softened credit momentum

Credit growth and impulse trended down; Remain vigilant on structural issues

    The PBOC reported new loans of Rmb1.17tr and TSF of Rmb1.15tr for February 2017. Although new loans beat forecasts, new TSF was lower than consensus of Rmb1.45tr. Credit balance growth has slowed further to 16.1% yoy from 16.4% as of the end of 2016. If measured by credit impulse, it has come down to close to the 10-year average from the high end a month ago (Figure 5). Slower credit growth was a function of muted shadow banking credit, slower mortgages and a decline in corporate bond issuance, offset partly by strong corporate long-term loans. We expect credit momentum to continue to soften in the coming months and hence we remain neutral on the sector.

    Who is borrowing? Strong infrastructure, less mortgages, muted shadow

    We estimate that the corporate, household and government sectors made up 64%, 27% and -1% respectively of new system credit in February (Figure 2). Corporate borrowing was mainly for infrastructure builds, as medium- to long-term corporate loans were recorded at Rmb602bn or 52% of February’s new loans. Household mortgage lending moderated to Rmb380bn (vs. the Rmb470bn monthly average for 2016) or 33% of new loans (45% in 2016). In terms of channels, shadow banking credit recorded muted growth due to intensified curbs by regulators. Trust loans, entrusted loans and undiscounted bills totaled only Rmb52bn in February 2017vs. Rmb1.2tr in January. In the near future, we expect two more new regulations to be issued, as indicated by the CBRC’s new head. One is targeting banks’ WMPs and the other is a comprehensive regulation for the asset management businesses of various financial institutions.

    Who is lending? Smaller banks and policy banks

    On the lending side, smaller city/rural banks and policy banks (combined assets: 34% of the system total) remained the major lenders, with asset growth of 16-23% yoy in February (Figure 3). Asset growth of the big five (37% of banking assets) and joint-stock banks (19%) moderated to 9.3% yoy and 15.1% yoy respectively.

    Funding side of banking system - tighter liquidity hurts highly levered banks

    Deposit growth of 11.4% yoy and M2growth of 11.1% yoy were still slower than credit growth of 16.1% in February. This suggests that the banking system is becoming increasingly reliant on wholesale funding (borrowing from banks and NBFIs). If measured by the credit-to-deposit ratio of the banking system, calculated as total banking credit as a percentage of deposits, it has risen sharply by 27ppt since 2011to 116% as of January 2017(for details see our report Stay vigilant on structural issues). To contain the leverage risk, the PBOC has tightened domestic liquidity modestly. The weighted average repo rate was 2.61% in February, which was 40bps higher than the average in 2016. With escalating financial deleveraging efforts to kick in, we view joint-stock banks as the most vulnerable to higher rates given their heavier reliance on wholesale funding, with big banks as beneficiaries. We recommend Buy ICBC/CMB while Sell MSB/CNCB in H-shares amid China’s financial deleveraging.