Chinese banks:China's credit card boom?
JSBs reported strong revenue growth from credit cards in 1H17。
The eight joint-stock banks (JSBs) we cover have released 1H17results and itis worth noting that all of them reported faster growth in the credit cardbusiness. With receivable accelerating to 43% yoy and fees up 51% yoy, creditcard revenue has contributed 20% of JSB’s revenue in 1H17(2016: 16%). Thispartly explains the recent surge in China’s short-term consumer debt, which isnow growing at 34-35% yoy (see report China’s consumer debt boom). Thestronger credit card business should boost banks’ revenue in the near term,but it is unlikely to fully offset the deleveraging pressure faced by JSBs, andthe asset quality and growth sustainability will be tested in coming years.。
What is driving this? Deleveraging pressure, policies, wealth effect。
On the supply side, we view the strong credit card growth as a result of a shiftin JSBs’ business focus when they are subject to rising earnings and capitalpressure from financial deleveraging (see our reports Rising funding pressure,Series I, II, III and IV). Being more wholesale-funded and more exposed toshadow banking, JSBs recorded NIM compression (Figure 6) and notable assetgrowth slowdown or even shrinkage in 1H17(Figure 7). To offset thedeleveraging pressure, JSBs stepped up efforts to promote a better-margincredit card business. Policy wise, this is also supported by government’sinitiative to promote inclusive financing. On the demand side, consumerconfidence has surged to a ten-year high (Figure 11) and our China economistteam argued that this was driven by the wealth effect of a property bubble (seereport China’s consumption boom? dated 25Aug 2017).。
Is this a game changer for joints-stock banks? Asset quality and sustainability。
The short answer is, probably not yet. Indeed stronger credit card businessboosts the revenue for JSBs and relieves their pressure amid deleveraging tosome extent in the near term. Yet, given such strong growth, we are notentirely sure that the banks maintained strict underwriting standards andmonitored the uses of funds properly. The eight JSBs issued 40m new creditcards in total in just six months (up 58% yoy), which already exceeded the totalnew credit cards for the full year of 2016for all of China. While the NPL ratiostayed low (1.77%), the regulator has warned about the potential risks relatedto credit card instalment loans. For example, in the past months, the CBRC hasimposed fines on some banks regarding lending to unqualified borrowers andlack of proper post-lending monitor (Figure 17). Another issue is that thesustainability may be questionable. As the recent consumption boom wasmainly driven by wealth effect from property bubble, the credit cardmomentum may soften if property price in China starts to flatten or drop.。
How to position? We still recommend adding big banks ahead of results。
Net net, we expect JSBs to continuously be subject to earnings and capitalpressure, as they remain wholesale funded and their shadow banking exposureis still high. The short-term boost in credit card business is not enough to offsetthe negative impact. By contrast, we prefer big four banks and recommendadding them ahead of results (see our report Better earnings quality shoulddrive big banks’ re-rating dated 15Aug 2017). We forecast big banks toachieve around 10% PPoP yoy growth in 2Q17post one-off gains. Top picksremain ICBC and BOC.。