Banks | CHINA 2011 Outlook NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] Donger Wang +852 2252 1590 [email protected] BULLISH
ANCHOR REPORT
A leap of faith Stocks for action We think the Year of the Rabbit will be favourable for early believers in China banks. We remain positive on the sector, with We believe the market is undervaluing the near-term operational outlook, overplaying CMB (SME focus), BOC (RMB regulatory risks and ignoring emerging growth. We look for NIMs to expand in the near deregulation), ABC (rural financing) and to medium term, and see the pace accelerating in 1Q11F and 2Q11F on the back of ICBC (defensive play) our top H-share the two rate hikes in late 2010. The fear factor has changed from LGFV exposure to picks. Industrial Bank (mortgage rate liberalisation, particularly deposit liberalisation, but this is likely to take a long time portfolio) is our A-share pick.
in our view, and we do not expect significant margin erosion (50bps decline implied by market valuations) in the next three years as China’s inflation and benchmark rates are Local Price Stock Rating price target on the rise while the PBoC addresses the issues of negative deposit rates and “zero” ABC-H (1288 HK) BUY 3.99 4.80 real lending rates. We do acknowledge that the introduction of different RRRs changes ICBC-H (1398 HK) BUY 5.87 7.60 the playing field and this is an overhang on the stocks, but we believe we are the first CCB-H (939 HK) BUY 7.06 8.60 BOC-H (3988 HK) BUY 4.14 5.20 on the Street to analyse this in detail and conclude that what it really means is that the BOCOM-H (3328 HK) NEUTRAL 8.03 9.00 PBoC wants to align economic growth more closely with resource allocation. Therefore, CMB-H (3968 HK) BUY 20.20 26.86 we believe banks with a rural focus such as ABC or an SME/retail focus such as CMB CITIC Bank-H (998 HK) BUY 5.22 6.30 Minsheng Bank-H (1988 HK) NEUTRAL 6.59 7.40 are likely to benefit, and these are our top BUYs along with BOC (beneficiary of RMB Downgrading from Buy; Raising PT; Cutting PT deregulation). That said, we believe BOCOM’s growth profile will be compromised a Closing prices as of 7 January 2011 little by differential RRR and we downgrade to NEUTRAL. Analysts Even more controlled lending to curb inflationary pressures Lucy Feng +852 2252 2165 Implied sustainable ROEs already reflect bear case scenario [email protected]
Stock picks: rural players immune to tighter new policies Donger Wang +852 2252 1590 [email protected] Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.
Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 153 to 156.
Nomura 14 January 2011
Banks | CHINA 2011 Outlook NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] Donger Wang +852 2252 1590 [email protected] BULLISH
Action Stocks for action While we reiterate our fundamentally Bullish stance, we think 1Q11F monthly loan We remain positive on the sector, with figures will be subject to close scrutiny by the market as a barometer of things to CMB (SME focus), BOC (RMB come under the new environment in 2011. We expect a more moderate pace of deregulation), ABC (rural financing) and rate hikes especially in 1H11F to cushion the impact of loan demand. Our top picks: ICBC (defensive play) our top H-share CMB, BOC, ABC and ICBC. picks. Industrial Bank (mortgage portfolio) is our A-share pick. Catalysts Local Price Strong 4Q10F and 1Q11F results may improve investment sentiment and provide Stock Rating price target better earnings visibility for 2011. ABC-H (1288 HK) BUY 3.99 4.80 ICBC-H (1398 HK) BUY 5.87 7.60 Anchor themes CCB-H (939 HK) BUY 7.06 8.60 BOC-H (3988 HK) BUY 4.14 5.20 Margin expansion and front-loading new loans are the key themes investors will BOCOM-H (3328 HK) NEUTRAL 8.03 9.00 look for in 1H11F, but negative sentiment from ongoing policy overhang still weighs CMB-H (3968 HK) BUY 20.20 26.86 CITIC Bank-H (998 HK) BUY 5.22 6.30 on valuation. We think that, with rate liberalization a medium-term theme, share Minsheng Bank-H (1988 HK) NEUTRAL 6.59 7.40 prices reflect a worst-case scenario on asset quality and margin deterioration. Downgrading from Buy; Raising PT; Cutting PT Closing prices as of 7 January 2011
A leap of faith Analysts Even more controlled lending to curb inflationary pressures Lucy Feng +852 2252 2165 In our view, the monthly monitoring of banks’ lending and different required reserve [email protected] rates (RRR) for different banks lets the People’s Bank of China (PBoC) control bank lending more closely using subjective measures. We believe the different Donger Wang RRRs, if implemented strictly, are likely to affect the lending appetite of banks, +852 2252 1590 causing them to be more cautious with regard to the pace of lending as well as the [email protected]
areas they lend to. The use of the anti-cyclical capital buffer is useful to absorb the impact from excessive lending in the system. On the other hand, it is increasingly apparent that liquidity is becoming tighter and it will be interesting to see whether the continued pressure for funding will cause the erratic yield spikes at the end of the month to persist. We understand that local bank branches have continued to be active in selling short-term savings products to attract liquidity. We believe that large-cap banks will dominate 2011 loan growth, given their lower LDR and larger deposit base. Implied sustainable ROEs already reflect bear case scenario We estimate that under current valuations, Chinese banks have implied sustainable ROEs of 13-14%. In our view, interest-rate deregulation remains a medium-term target for the PBoC and it is likely to be a gradual process. The China Banking Regulatory Commission (CBRC) is progressively helping Chinese banks to be ready for Basel III through using related concepts as part of new regulatory tools. We see no imminent credit risks or earnings downside, and reiterate that the early believers will be rewarded. Stock picks: rural players immune to tighter new policies We maintain that the objective of the PBoC under the new different RRR system is to align economic growth more closely with resource allocation. Therefore, we believe banks with a rural focus such as ABC or an SME/retail focus such as CMB are likely to benefit. Our sector top picks: CMB (SME focus), BOC (RMB deregulation), ABC (rural financing is subject to more relaxed monetary policy) and ICBC (defensive play).
Nomura 1 14 January 2011
Banks | China Lucy Feng
Contents
Executive summary 4
Five themes in 2011 6 (1) Different RRR for different banks is a more micro approach and changes the playing field 6 (2) New rules help banks getting used to Basel III 7 (3) The need to find loan supply to meet the demand 7 (4) Seeking a solution to end-of-month pressure on yields 9 (5) Rate deregulation remains a medium-term target 10 Look for banks that have over-reacted on the news 11 1Q11 to provide a few clues to the riddle 11
Macro and monetary policy 13 CPI inflation likely to stay on uptrend throughout 1H11F 13 Two rate hikes in 2010, four more in 2011F 14 Central Economic Work Conference laid positive foundation for banks in 2011F 15 Overall loan and deposit growth trends in November 16
4Q10 preview and 2011 earnings forecasts 25
Risks from LGFV loan default should remain remote 28
County area banking in China 32 County areas in China 32 County area banking in China 38
Rural banking industry analysis and case studies 45 County area economy development under China’s urbanisation 45 Key provinces overview 50 Jiangsu Zhangjiagang Rural Commercial Bank 55 Jiangsu Xizhou Rural Commercial Bank 57 Jiangsu Changshu Rural Commercial Bank 59 Shanghai Rural Commercial Bank 61 Zhuhai Rural Credit Cooperatives 63 Jiangsu Taicang Rural Commercial Bank 65 Hefei Science & Technology Rural Commercial Bank 67 Foshan Shunde Rural Commercial Bank 69 Jilin Jiutai Rural Commercial Bank 71 Jiangsu Jiangyin Rural Commercial Bank 72 Jiangsu Wujiang Rural Commercial Bank 74 Guangdong Rural Credit Union 77
Appendix 78
PBoC benchmark rate 79
Breakdown data by banks 80
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Banks | China Lucy Feng
Regional banks valuation comparison 97
Regional banks’ performance comparisons 99
Latest company views Agricultural Bank of China 101 ICBC 106 China Construction Bank-H 110 Bank of China (H-share) 114 Bank of Communications 118 China Merchants Bank 122 China CITIC Bank 127 China Minsheng Bank - H 131 Shanghai Pudong Development Bank 135 Shenzhen Development Bank 139 Industrial Bank 143 Huaxia Bank 147
Also see our Anchor Report: Asia Pacific Also see our Anchor Report: China Strategy — Strategy — Deflation, inflation and the return Higher ground of the productive economy (6 December, 2010) (7 December, 2010)
Nomura 3 14 January 2011
Banks | China Lucy Feng
Drilling down Executive summary “The best thing about the future is that it comes one day at a time” – Abraham Lincoln The year 2010 marks one of the worst years of performance for China banks on both relative terms (they underperformed 10% versus the HSI and 4% versus the HSCEI) and absolute terms (-4% versus +15% on average in 2005-10). As the sector appears inexpensive and stayed so in the past 12 months (7x to 8x P/E 2011F), we think investors have come to the conclusions that (1) the sector is a valuation trap as the trade was dominated by policies rather than fundamentals, and (2) the sector is cheap for “deep-rooted” reasons/problems, which may cause a medium to long term de-rating. While investors’ concern on the policy overhangs prevail, worry shifted from local government funding vehicles (LGFV) to “interest-rate liberalization”, particularly the pace and space, timetable, as well as the fundamental implications, for the sector.
Exhibit 1. Sector performance comparison Exhibit 2. Historical share price performance
Gaming, Hotels and Leisure 2011 2010 Health care & Pharm (%) (YTD) 1H10 2H10 (full year) Media & Internet ICBC 1 (10) 1(9) Transport/Logistics CCB 1 (4) 106 Industrials Oil & Gas/Chemicals BOC 1 (6) 3(3) Consumer Related BCOM 3 (3) (6)(9) Telecoms CMB 3 0 44 China - Total Citic 4 (23) 1(22) Solar Conglomerates Minsheng (1) (8) (3)(10) Financials Sector 2 (7) 4(4) Basic Materials Hang Seng Index 3 (8) 14 6 Property HSCEI 2 (10) 110 Power and Utilities Technology MSCI Financials - World 1 (14) 17 0 MSCI Financials - Europe (1) (26) 15 (15) (%) (50) 0 50 100 150 MSCI Financials - US 2 (6) 16 10 Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research
It is our view that rate liberalization, particularly deposit liberalization, will take longer Rate liberalization will take longer than expected to implement. Initially the central bank probably will introduce pilot tests than expected to implement for a few selected banks for a few selected products (such as large-size, long-maturity term deposits). Thus, the impact for the sector should be limited and will be closely monitored by the regulators. Significant margin erosion (50bps decline implied by the market) is unlikely to happen in the next three years, in our view, as China’s inflation and benchmark rates are on the rise while the PBoC addresses the issues of negative deposit rates and “zero” real lending rates.
Contrary to conventional wisdom, we believe that China banks’ NIM will expand in the near to medium term, and that the pace will accelerate in 1Q11F and 2Q11F, with the backdrop of two rate hikes in late 2010. Long term, we believe that now would be a good time for regulators to introduce rate liberalization, as a rising rate environment helps the banks absorb margin pressure from price competition. Hence, banks can either re-orientate their lending business towards higher margin SMEs (though better risk-pricing skills are required) or re-model their business model towards less capital- consuming fee products. In Asia, the ASEAN banks have posted solid NIMs attributed to rising interest rates and a profit-driven lending model.
Nomura 4 14 January 2011
Banks | China Lucy Feng
Exhibit 3. NIM comparison of banks in regional Exhibit 4. Market implied margin erosion from countries potential rate liberalisation
(%) 2009 2010F (%) 8 0.0
6 (0.2)
4 (0.4)
2 (0.6)
0 (0.8) India ABC CCB Kong Hong BOC CMB China ICBC South Korea CITIC Taiwan BCOM Thailand Australia Malaysia Indonesia Minsheng Singapore
Source: Company data, Nomura estimates Source: Bloomberg, Nomura estimates
While all trading patterns seem to call for an underweight stance on the sector, we remain positive for the aforementioned reasons. China banks have underperformed for the past 15 months for the same reason – policies and policy tightening. And emotional markets tend to decline (or rally) much longer than is perceived possible.
Judging from the feedback of our past five weeks’ marketing, we conclude that most investors do not expect further policy announcements to be worse than what they already know. Even the bears do not expect rate liberalization to occur overnight and cut sector NIMs by a quarter — the level perceived by the market (13bps to 60bps deterioration).
The fear or “hope” for a further correction is especially prevalent amongst investors with a technical bent. This divergence between short-term and medium-term perspectives reflects a difficult dilemma for investors, most of whom are equal to underweight China banks, in our view.
Many expect a “perfect storm” in 1Q under an “inflationary shock” event, for bottom fishing. Timing, as they say, is everything. We think that the much-speculated-about pullback will not occur in 1Q, as we do not expect any inflationary shock in the next few weeks. In the next section we summarize five themes we will look into in 2011and we point out that most of the positive catalysts, which should drive a re-rating of the sector, will occur in 1Q11F, in our view.
Nomura 5 14 January 2011
Banks | China Lucy Feng
2011 outlook Five themes in 2011
(1) Different RRR for different banks is a more micro approach and changes the playing field We think that from the beginning of 2011, the PBoC will start monitoring individual We think PBoC will start banks on a monthly basis and issue different RRRs accordingly. Different RRRs are monitoring banks through likely to be applied to national financial institutions initially. We think that the PBoC will issuance of different RRR allow a grace period of three quarters. We believe that the PBoC is considering lowering the interest rate for required reserves to lower the banks’ own costs. We believe that this system allows the PBoC to control bank lending more closely, in addition to the loan quota, which at times to us appears inadequate in controlling seasonal fluctuations and excessive lending by certain banks. Interestingly, this appears to be moving in the opposite direction to the further deregulation of the Chinese banking system.
We believe that the different RRRs, if implemented strictly, would be likely to affect the lending appetite of banks, and that this could have implications for loan growth. The market has been speculating that this could lead to more lending in early 2011, due to the grace period in the first three quarters, which would effectively allow for a lower level of different RRRs.
Exhibit 5. RRR versus banking sector PB Exhibit 6. RRR versus banking sector PB (large cap banks and small & medium banks)
(%) (x) (%) RRR - Large Depository Institution (LHS) (x) RRR - Small and Medium Depository Institution (LHS) 20 4.0 20 Large cap banks PB (RHS) 4.0 18 3.5 Small & Medium banks PB (RHS) 16 3.0 18 3.5 2.5 14 3.0 2.0 16 12 1.5 2.5 10 14 1.0 2.0 8 0.5 12 6 0.0 1.5 10 1.0 8 0.5 Jul-10 Jul-06 Apr-07 Oct-08 Oct-05 Jan-08 Jun-09 Jun-05 Mar-10 Mar-06 Feb-09 Nov-09 Nov-06 Dec-10 Aug-07 May-08 6 0.0 RRR - Large Depository Institution (LHS) RRR - Small and Medium Depository Institution (LHS) Jul-09 Apr-10 Apr-06 Oct-08 Jan-08 Jun-08 Mar-09 Nov-09 Nov-05 Aug-10 Dec-10 sector PB (RHS) Aug-06 Dec-06 Sep-07 May-07
Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research
Regulators becoming stricter to control lending In setting its lending strategy, a bank must consider its deposit growth/LDR, provisioning and capital. It appears to us that both the PBoC and CBRC now have a tighter grip on each of these factors. We believe that through these measures the regulatory authorities hope to make banks more cautious in their lending.
Interest rate paid for the different RRRs is not certain The different RRRs will usually earn an interest rate on the reserve, which is now 1.62%. However, if a bank has been lending excessively or has been asked to have a different RRR a number of times then the excess RRR interest rate (0.72%) might apply or the PBoC might pay no interest.
Linking RRR with CAR We understand that the PBoC is contemplating setting the different RRRs by applying a factor of stability-adjustment specifics for the bank and multiplying this by the difference between the required CAR and the actual CAR. We think the factor of
Nomura 6 14 January 2011
Banks | China Lucy Feng
stability adjustment will be set subjectively by the PBoC and is likely to be driven mainly by 1) liquidity, leverage, provisioning levels, credit rating, and internal controls of a bank; and 2) the actual lending by the bank including the sectors.
In our view, the goal of the PBoC under the new different RRR system is to align economic growth more closely with loan allocation. Therefore, we believe that banks with a rural focus, such as ABC, or an SME/retail focus, such as CMB, are likely to benefit.
Exhibit 7. RRR versus loan and deposit growth Exhibit 8. RRR versus LDR
(%) (%) (%) (%) 20 40 20 80
15 30 15 75 10 20 10 70 5 10 5 65 0 0 0 60 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
RRR - Large Depository Institution (LHS) Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 RRR - Small and Medium Depository Institution (LHS) RRR - Large Depository Institution (LHS) y-y loan growth (RHS) RRR - Small and Medium Depository Institution (LHS) y-y deposit growth (RHS) LDR (RHS)
Source: CEIC, Nomura research Source: CEIC, Nomura research (2) New rules help banks getting used to Basel III The linking of the RRR to the capital-adequacy ratio (CAR) is a new concept. At the Different RRRs are likely to help moment the required CAR is the mean of the minimum CAR (8%), system important Chinese banks ready themselves for Basel III excess capital, and anti-cyclical capital buffer. Both the system important excess capital and anti-cyclical capital buffer are also new concepts introduced under Basel III, which, in our view, the CBRC is considering to use as a new regulatory tool. Therefore, the implementation of a different RRR is also likely to help Chinese banks to be ready for Basel III over time. For the system important excess capital, the PBoC would consider a bank’s asset size, mix of counterparties and volume, market share and client impact. The PBoC stated that ABC, ICBC, CCB, BOC, and BCOM are systemically important banks. For other smaller banks, BCOM’s asset size relative to that bank could be used as a factor to determine the system important excess capital. For the anti-cyclical capital buffer, the PBoC calculates this as a bank’s contribution to pro-cyclical lending multiplied by [bank lending growth minus (GDP target growth plus CPI target growth)]. For a bank’s contribution to pro-cyclical lending, there are two references:
Total lending divided by GDP and its spread from the long-term mean;
A bank’s lending relative to the total. The PBoC stated that the anti-cyclical capital buffer is useful to absorb the impact from excessive lending in the system.
(3) The need to find loan supply to meet the demand 2011 is the first year of the new 12th Five-year Plan, in which there is likely to be new The issue is whether banks have projects and strong loan demand. It will be intriguing to see how this will be affected by the capacity and willingness to what seems to be tightening liquidity and shrinking loan supply. We understand that lend Chinese banks still have on hand a good amount of projects that require loans, so the issue is whether banks have the capacity and willingness to lend.
Nomura 7 14 January 2011
Banks | China Lucy Feng
For Chinese banks, we estimate that around RMB21.6-21.8tn of loans will mature during 2011. Assuming 2011 sector new loans hit Rmb7-8tn, effectively a net number, this means gross new loans are circa RMB28.6-29.8tn in our view.
Exhibit 9. Percentage of loans with maturity <1 year Exhibit 10. RRR versus monthly new lending to total loans (as of June 30, 2010)
(%) (%) (RMBbn) 60 20 2,000 1,500 50 15 1,000 10 40 500 5 0 30 0 (500) 04 05 06 07 08 09 10 20 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Monthly new loan (RHS) Citic ABC CCB BOC CMB ICBC RRR - Large Depository Institution (LHS)
BOCOM RRR - Small and Medium Depository Institution (LHS) Minsheng
Source: Company data, Nomura research Source: CEIC, Nomura research
We believe that most banks, assuming they do not have liquidity issues, should be Banks are willing to lend given willing to lend given new loans will be subject to the now higher interest rates. The that the new loans are subject to pace of lending, however, will be subject to their expectations of further rate hikes. We higher interest rates expect a more moderate pace of rate hikes, especially in 1H11F, to cushion the impact of loan demand. Assuming that new bank lending is done at a loan deposit ratio (LDR) of below 75%, this implies that new deposits must be at RMB9-11bn.
Exhibit 11. Personal deposits vs corporate deposits Exhibit 12. Time deposits vs demand deposits (as of (as of 30 June, 2010) June 30, 2010)
(RMBbn) (RMBbn) Time deposits Demand deposits Peronal deposits Corporate deposits 12,000 12,000
10,000 10,000
8,000 8,000
6,000 6,000
4,000 4,000
2,000 2,000
0 0 Citic ABC ABC CCB CCB BOC BOC CMB CMB ICBC ICBC CITIC BOCOM BOCOM Minsheng Minsheng
Source: Company data, Nomura research Source: Company data, Nomura research
In our view, the monthly new loan and deposit figures during 1Q11F will be subject to scrutiny by the market, not only the size but the structure as well. We believe they will impact total lending for 2011F.
Nomura 8 14 January 2011
Banks | China Lucy Feng
Exhibit 13. Net new loans/deposits breakdown in for Jan/Feb/Mar for past few years
2005 2006 2007 2008 2009 Jan Feb MarJan Feb Mar Jan Feb Mar Jan Feb Mar JanFeb Mar Loans Monthly net new loans 288.5 95.9 341.9 483.9 149.0 537.4 568.4 413.8 441.7 800.5 247.0 283.4 1,652.7 1,071.6 1,891.7 As % of total new loans in the year 17.5 5.8 20.7 15.8 4.9 17.5 15.6 11.4 12.2 19.2 5.9 6.8 17.2 11.1 19.6 Deposits Monthly net new deposits 394.4 338.3 682.1 427.4 623.5 786.1 467.8 530.7 880.4 218.0 1,337.6 1,076.6 1,538.9 1,650.8 2,451.8 As % of total new deposits in the year 8.6 7.4 14.9 8.8 12.9 16.3 8.7 9.8 16.3 2.8 17.4 14.0 11.7 12.6 18.6 Source: CEIC, Nomura Research
Given larger banks generally have a relatively lower LDR and also potentially higher deposit growth, they are the ones with the capacity to lend in our view. At the same time, the larger banks tend to be more cautious and strategic in their lending approach. Finally, we think bills remain the key source of short-term funding for corporates. Under a tighter liquidity environment, their flexibility could be used as a tool for banks to manage liquidity.
Exhibit 14. Discounted bills as percentage to total Exhibit 15. Yield on discounted bills (with maturity of loans 6 months)
(%) (%) 4.6% as of 7 Jan, 2010
12 7 3.29% at end-Nov, 2010 10 6 5 8 4 6 3 4 2 2 1 0 0 Jul-10 Apr-10 Oct-10 Jun-10 Jan-11 Jan-07 Jan-08 Jan-09 Jan-10 Jan-10 Mar-10 Feb-10 Nov-10 Aug-10 Sep-10 Dec-10 Sep-07 Sep-08 Sep-09 Sep-10 May-10 May-07 May-08 May-09 May-10
Source: CEIC, Nomura research Source: www.zgpj.net (4) Seeking a solution to end-of-month pressure on yields It is increasingly apparent that liquidity is becoming tighter and it will be interesting to see whether the continued month-end pressure on yields will cause the erratic spikes during month-end to persist.
We understand post speaking with bank branch management that large-cap banks have continued to be active in selling short-term (meaning single-digit days) savings (or what they package as investments) products to attract liquidity (or in fact deposits). Meanwhile, large-cap banks seem to fund medium to smaller banks through inter-bank activities which could generate handsome income, given the ongoing spike in short- term inter-bank rates.
Nomura 9 14 January 2011
Banks | China Lucy Feng
Exhibit 16. Historical SHIBOR yields Exhibit 17. SHIBOR yield curve
(%) Overnight (%) Today 3 months ago 1 year ago 12 1 week 5.0 1 month 10 4.5 3 month 4.0 8 6 month 3.5 6 1 year 3.0 4 2.5 2 2.0 0 1.5 1.0 Apr-07 Apr-08 Apr-09 Apr-10 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Overnight 1 week 1 month 3 month
Source: CEIC, Nomura research Source: CEIC, Nomura research
Exhibit 18. RRR versus SHIBOR Exhibit 19. RRR versus 7-day repo rate
(%) (%) (%) (%) 20 5.0 20 12 4.0 10 15 15 3.0 8 10 2.0 10 6 5 4 1.0 5 0 0.0 2 0 0 Jul-08 Apr-09 Oct-06 Jun-07 Mar-08 Feb-07 Nov-07 Dec-08 Aug-09 Dec-09 Sep-10 May-10 Jul-06 Apr-07 Oct-09 Jan-09 Jun-09 Jun-10 Mar-06 Feb-10 Nov-06 Nov-10 Aug-07 Dec-07 Sep-08 RRR - Large (LHS) May-08 RRR - Small and Medium (LHS) RRR - Large (LHS) SHIBOR- 1 month (RHS) RRR - Small and Medium (LHS) SHIBOR- 3 month (RHS) SHIBOR - 1 year (RHS) 7d repo rate (RHS)
Note: Large=Large Depository Institution; Small and medium= Small and medium Note: Large=Large Depository Institution; Small and medium= Small and medium Depository Institution Depository Institution Source: CEIC, Nomura research Source: CEIC, Nomura research (5) Rate deregulation remains a medium-term target A recent article published on the PBoC website regarding the potential acceleration of interest-rate deregulation prompted discussion in the market and created an overhang for bank shares, in our view. The article suggested deregulation of the lending market and allowing a higher cap for deposit rates. The article mentioned that deregulation can happen by steps through initially longer-term and larger deposits and moving to shorter-term and smaller deposits.
We assume the PBoC hopes to maintain price stability and enhance efficient resource Interest-rate deregulation remains allocation through interest-rate deregulation, because expectations of rate change to be a medium-term theme… would be the key driver for market rates after the deregulation. We continue to believe that interest-rate deregulation remains more of a medium-term theme for Chinese banks. Moreover, we highlight that discounted bills and bond yields are already subject to market-determined rates so, in a way, over a quarter of Chinese banks’ assets already have liberalised interest rates. The sector is at an FY11F PB of 1.2-2.1x with an implied sustainable ROE range of 13.0-15.5%. Assuming long-term gross NPL formation is around 100bps (50bps higher than our forecast for 2011F and 2012F), 5% to 8% loan growth, cost/income ratio (CIR) of 40% and fee income of 15% to 20%, we derive a long-term NIM of 2% to 2.2% on average for the sector. This implies another 30bps to 50bps erosion from the current level, and is lower than for most other banks in Asia — particularly for the countries
Nomura 10 14 January 2011
Banks | China Lucy Feng
experiencing rising inflation and interest rates, such as India, Indonesia, Malaysia, and Thailand. We note that China is officially on a rising rate cycle since the PBoC announced a “prudent” monetary policy for 2011.
Exhibit 20. Current PB implied LT ROE by banks Exhibit 21. FY11F ROE erosion (difference between FY11F ROE and implied LT ROE)
(%) (%) 16 0
(2) 15 (4) 14 (6) 13 (8)
12 (10) ABC ABC CCB CCB BOC BOC CMB CMB ICBC ICBC CITIC CITIC BOCOM BOCOM Minsheng Minsheng
Note: Closing prices as of 7 Jan, 2011 Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates Look for banks that have over-reacted on the news As a result of the above policy speculation, certain banks under our coverage have, in our view, again become easy targets by the market’s use of certain assumptions for risk exposures and the consequent capital, liquidity, and provisioning required. We point out that:
The regulator has not yet confirmed such news on liquidity (dynamic RRRs), capital or provisioning requirements;
We believe that the recent subdued share-price performance of Chinese banks already more than accounts for the worst-case scenario of any of these changes. Therefore, we would recommend that investors accumulate Chinese banks that have over-reacted on this news flow as we believe that their fundamental story remains intact. Our top picks are CMB (key beneficiary for rate hike, SME-oriented business), BOC (RMB liberalization), ABC (county area exposure which is subject to more relaxed monetary policy) and ICBC (defensive play).
1Q11 to provide a few clues to the riddle We understand the market’s concern over policy risks and sense that investors are more frustrated about the continued underperformance of China banks. Yet discounted bill yields have been falling since the beginning of the year (dropped to 4.6% on 7 January 2011 from 6.5% in December 2010), which coincided with their outstanding balance as a percentage of total loans reaching a low level (3.3% as at the end of November 2010). We expect that this may cause monthly new loans to surprise on the upside for 1Q11F, which could shift sentiment as the market gauges how the recent lending rate hikes have affected loan demand.
SHIBOR yields have been moving up (one-year SHIBOR rose to 3.6620% on 7 January 2011 from 3.1103% on 1 December 2010), which we attribute to the recent hikes in RRR and the subsequent tighter liquidity. We expect this to support bargaining power for banks with more liquidity but, at the same time, it naturally seems better for the ones more exposed to the SMEs, or subject to more relaxed monetary polices (such as rural financial institutions).
Nomura 11 14 January 2011
Banks | China Lucy Feng
Exhibit 22. Price targets, ratings and key forecasts
ABC ICBC CCB BOC BCOM CMB CITIC Minsheng SPDB Industrial SZDB Huaxia Rating BUY BUY BUY BUY NEUTRAL BUY BUY NEUTRAL NEUTRAL BUY NEUTRAL REDUCE TP HK$4.80 HK$7.60 HK$8.60 HK$5.20 HK$9.00 HK$26.86 HK$6.30 HK$7.40 RMB14.65 RMB33.00 RMB16.64 RMB8.71 Target P/BV (x) 2.0 2.2 2.1 1.7 1.7 2.8 1.5 1.5 1.4 1.7 1.5 1.0
2010F NIM (%) 2.59 2.41 2.48 2.12 2.42 2.69 2.68 2.91 2.60 2.69 2.62 2.22 Loan growth (%) 19 18 17 17 20 19 22 22 19 19 25 19 Credit cost (%) 0.78 0.30 0.43 0.46 0.60 0.50 0.55 0.35 0.37 0.13 0.47 0.97 NPL ratio (%) 2.06 1.27 1.30 1.43 0.20 0.68 0.85 0.96 0.77 0.46 0.63 1.50 Coverage ratio (%) 155 182 184 156 161 310 152 226 261 271 192 164 Y-Y NPAT growth (%) 44 31 29 19 32 50 33 33 48 46 31 42 EPS (RMB) 0.32 0.49 0.57 0.35 0.76 1.26 0.50 0.62 1.43 3.61 1.97 0.90 BVPS (RMB) 1.64 2.39 2.88 2.24 3.90 6.31 3.00 3.67 9.20 16.44 9.41 7.88
2011F NIM (%) 2.76 2.54 2.61 2.23 2.64 2.96 2.76 3.03 2.73 2.81 2.68 2.33 Loan growth (%) 20 17 17 18 23 19 22 23 19 20 20 18 Credit cost (%) 0.69 0.40 0.50 0.58 0.65 0.58 0.70 0.40 0.47 0.18 0.40 1.01 NPL ratio (%) 1.79 1.20 1.40 1.44 0.15 0.73 0.81 1.10 0.78 0.58 0.71 1.50 Coverage ratio (%) 179 191 164 156 163 305 177 216 270 204 186 164 Y-Y NPAT growth (%) 34 16 18 18 24 34 22 25 23 19 27 20 EPS (RMB) 0.39 0.56 0.65 0.41 0.88 1.70 0.55 0.64 1.75 4.03 2.32 0.94 BVPS (RMB) 1.96 2.74 3.28 2.46 4.39 7.66 3.33 4.02 10.81 20.13 11.00 8.72
2012F NIM (%) 2.87 2.63 2.72 2.36 2.74 3.22 2.73 3.09 2.86 2.87 2.67 2.44 Loan growth (%) 22 18 18 19 23 20 20 23 19 20 20 19 Credit cost (%) 0.69 0.40 0.50 0.62 0.60 0.61 0.70 0.40 0.76 0.21 0.40 1.07 NPL ratio (%) 1.82 1.12 1.52 1.48 0.15 0.76 0.77 1.21 0.89 0.68 0.80 1.54 Coverage ratio (%) 175 201 155 155 161 304 203 204 278 170 176 163 Y-Y NPAT growth (%) 24 17 22 22 18 29 22 22 14 17 19 20 EPS (RMB) 0.48 0.65 0.79 0.50 1.04 2.18 0.60 0.78 1.99 4.72 2.77 1.12 BVPS (RMB) 2.27 3.14 3.78 2.74 4.99 9.37 3.73 4.32 10.64 24.44 13.02 9.70 Source: Nomura estimates
Nomura 12 14 January 2011
Banks | China Lucy Feng
Macro and monetary policy Macro and monetary policy
CPI inflation likely to stay on uptrend throughout 1H11F China’s CPI inflation surged to 5.1% y-y in November, the fifth consecutive rise since June 2010, and the highest reading in 28 months (source: CEIC data). This triggered renewed market concern about further rate hikes in the coming months in order to rein in inflation and anchor inflation expectations.
In our view, China’s CPI inflation should continue its uptrend, albeit in a milder way, in the coming months, and it is unlikely to peak in January 2011. Our economics team expects CPI inflation to reach 4.1% y-y and 4.5% y-y, respectively, in 1Q11 and 2Q11. We believe this is because, although food prices started easing since late November due to the central government’s policy measures to control food prices (eg, wholesale prices of vegetables in 36 cities in China have been falling for four weeks in a row as of 5 December 2010; source: CEIC), non-food prices have been steadily rising in recent months and we expect this to continue in the near future. But we do not think that China’s inflation will get out of control.
Exhibit 23. China’s CPI inflation Exhibit 24. China’s CPI inflation vs Hang Seng index
(% y-y) (Index) HSI index (LHS) (% y-y) Headline CPI 25 35,000 China CPI inflation (RHS) 10 20 8 CPI: Food 30,000 15 6 10 CPI: Non food 25,000 4 5 20,000 2 0 0 15,000 (5) (2) (10) 10,000 (4) Jul-07 Jul-08 Jul-09 Jul-10 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jan-07 Jan-08 Jan-09 Jan-10 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: CEIC, Nomura research Source: CEIC, Bloomberg and Nomura research
Nomura’s economics team believes that the rise in non-food prices is mainly driven by rising input costs (raw materials and wages), excess liquidity and reduced overcapacity in the manufacturing sector. Given an average of above-20% minimum wage hikes implemented in 29 of 31 provinces in 2010, we expect growth in labour costs to continue climbing in the quarters ahead, pushing input costs higher. Moreover, given a weakening US dollar and high liquidity due to the US’ QE2 exercise totalling US$600bn, global commodity prices are set to rise firmly in the first half of 2011, contributing to higher inflation in China, in our view.
As we think China’s CPI inflation should be on a steady but milder rising trend in the first few months and is unlikely to peak in January 2011, there is a possibility that the PBoC might disappoint the market with no rate hikes in January or February 2011. We think the stock market has fallen such that there is little chance of a new low before 2Q11F, as we believe there will be no new policy measures to dampen the market to a new low until then. As such, we think it is time for investors to accumulate China banks stocks.
Nomura 13 14 January 2011
Banks | China Lucy Feng
Two rate hikes in 2010, four more in 2011F The PBoC has recently raised interest rates twice: once in October, once in December 2010. Both were asymmetrical, hiking longer maturity (>1 year) time deposit rates by a greater magnitude than lending rates with the same maturity.
Exhibit 25. Recent two hikes of PBoC's benchmark interest rates Before 20 Oct, 2010 Since 20 Oct, 2010 Change (bps) Since 26 Dec, 2010 Change (bps) Deposit rate (%) Demand 0.36 0.36 0 0.36 0 Time - 3 months 1.71 1.91 20 2.25 34 - 6 months 1.98 2.20 22 2.50 30 - 1 year 2.25 2.50 25 2.75 25 - 2 years 2.79 3.25 46 3.55 30 - 3 years 3.33 3.85 52 4.15 30 - 5 years 3.60 4.20 60 4.55 35 Lending rate (%) - 6 months 4.86 5.10 24 5.35 25 - 6-12 months 5.31 5.56 25 5.81 25 - 1-3 years 5.40 5.60 20 5.85 25 - 3-5 years 5.76 5.96 20 6.22 26 - >5 years 5.94 6.14 20 6.40 26 Source: PBoC, Nomura research
We see the PBoC’s recent rate hikes as moves to narrow the deeper negative real deposit rate and anchor inflation expectations. The 1-year real deposit rate has remained in negative territory since February and dipped much deeper in recent months, with November CPI climbing to 5.1% y-y and the 1-year deposit rate remaining at 2.50% in the same month. We believe the prolonged negative deposit rate heightens expectations of higher inflation.
Exhibit 26. China's 1-year deposit rate and CPI Exhibit 27. Breakdown of loans by maturity (as of inflation June 30, 2010)
(%) CPI, % y-o-y (RMBbn) Loans mature in more than 1 year 10 Saving deposit rate: 1 year 7,000 Loans mature in 1 year 6,000 8 5,000 6 4,000 4 3,000
2 2,000 1,000 0 0 (2) Citic ABC CCB BOC CMB ICBC BOCOM Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Minsheng
Source: CEIC, Nomura research Source: Company Data, Nomura research
Nomura 14 14 January 2011
Banks | China Lucy Feng
Central Economic Work Conference laid positive foundation for banks in 2011F China’s 2010 Central Economic Work Conference (CEWC) closed on 12 December in Beijing, having set the tone for economic policymaking in 2011F. While it did not release specific targets for GDP growth, CPI inflation and new loan growth in 2011F, it did set forth the main tasks for the government’s economic work in the coming year:
Strengthen and improve macro control to maintain stable economic growth; Promote the development of modern agriculture to guarantee the efficient supply of agricultural products;
Accelerate the strategic adjustment of economic structure to improve the harmony and competitiveness of economic development;
Improve basic public service and encourage innovation in the mechanisms of social management; Enhance the reform, and promote transformation, of the economic growth model;
Continue to open up and promote global cooperation.
More importantly, in our view, the meeting highlighted that China’s monetary policy will officially shift from relatively loose to prudent in 2011F in an effort to control excess liquidity in the economy. It put a high priority on stabilising prices in the year 2011. As such, we believe the market is now expecting a RMB7trn new loan quota and multiple rate hikes in 2011F. Post our conversation with regulators, we believe new loan targets in 2011F should be slightly lower than those for 2010. We see rigid credit control in 1H11F, given that CPI inflation is likely to remain elevated before mid-year. However, we believe monetary policy will be reviewed in 2H11 when inflation moderates, and thus the loan target is likely to be revised up.
Moderate loan quota plus rate hikes should help expand NIM In our view, tighter new loan quota and multiple rate hikes should be positive for China Banks will be more selective of banks’ earnings outlook in 2011F. This is because banks’ earnings are more sensitive their customers, allowing for better pricing to changes in margin than to new loan volume, in our view. On the one hand, tightening of new loans should mean that banks can be more selective of their customers and thus should enjoy more pricing power while undertaking new lending. For instance, during its January 2011 analyst briefing Minsheng stated that it sees much-improved pricing power in January 2011 compared with the same period in 2010. As a result, the price of its SME product — Shang Dai Tong — has climbed to 10% pa, according to comments by Minsheng management. The current rate hike cycle should have helped China banks’ margin expansion, given Current rate hike cycle should the rate for demand for deposits was unchanged. As the next Exhibit shows, by end have helped banks’ NIM expansion 1H10, over 50% of China banks’ deposits were demand deposits, most notably at ABC (55.7%), ICBC (50.8%), CCB (53.5%) and CMB (56.2%). This indicates that more than half of banks’ deposits would not be subject to higher rates, thus adding nil in extra funding costs for China banks. Further, 45.5%, on average, of banks’ loans have a maturity of less than one year; we believe these loans would be subject to re-pricing within one year if the PBoC announces additional rate hikes, which would in turn expand banks’ NIMs.
Exhibit 28. % shares of demand deposits and short-term loans of China banks 1H10 (%) ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng % share of demand deposits in total deposits 55.7 50.8 53.5 42.9 49.3 56.2 47.2 47.8 % share of short-term loan in total loans 39.7 34.2 38.0 40.3 48.4 53.5 57.3 52.9 Source: Company data, Nomura research
Nomura 15 14 January 2011
Banks | China Lucy Feng
What could go wrong in our bullish forecast? We expect 6-27bps margin expansion in 2011F, based on the following factors: Mortgage rate will be re-priced in January 2011 for all existing mortgages; hence, a narrowing discount rate will be applied for new home buyers, in our view.
Front-loaded new loans – new loans will be lent out at a higher benchmark rate and more than 35% of the new loans quota will be used in 1Q11F.
More rate hikes in early 2011F.
Still, since PBoC governor Zhou Xiaochuan views the current round of inflation as liquidity-driven, there exists the risk of the central bank using more of a quantitative monetary policy, rather than price monetary policy, to absorb excess liquidity from the economy to ease rising inflation. If this proves to be the case, the PBoC will probably hike rates by less than the market is expecting, which brings downside risk to our forecast for NIM expansion in 2011F.
Exhibit 29. Yield on discounted bills (with maturity of 6 months)
(%) 4.6% as of 7 Jan, 2010
7 6 5 4 3 2 1 0 1/4/2010 2/4/2010 3/4/2010 4/4/2010 5/4/2010 6/4/2010 7/4/2010 8/4/2010 9/4/2010 1/4/2011 10/4/2010 11/4/2010 12/4/2010
Source: www.zgpj.net
Overall loan and deposit growth trends in November Under the PBoC’s lower loan quota introduced in January 2010 (RMB7.5tn in 2010 versus RMB9tn in 2009), new loans made by banks moderated when compared with 2009. Although new loans rebounded strongly recently (RMB600bn in September, RMB588bn in October and RMB564bn in November, compared with RMB545bn in August), outstanding loan growth dropped to 20% y-y in November 2010, from 34% a year ago. However, in 2010 total new loans to November amounted to RMB7.47tn, almost reaching the official target of RMB7.5tn. We expect loan growth in 2010 will be down significantly but total new loans in 2010 will probably exceed the official target.
Nomura 16 14 January 2011
Banks | China Lucy Feng
Exhibit 30. Monthly new loans Exhibit 31. Loans and deposits: y-y growth
(RMBbn) 2009 2010 (%) Loan Deposit 2,000 40 1,800 35 1,600 30 1,400 25 1,200 20 1,000 15 800 10 600 400 5 200 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Source: CEIC, Nomura research Source: CEIC, Nomura research
On the other hand, new deposits in November rebounded to RMB592bn after a significant drop in October (from RMB1,456bn in September to RMB177bn in October), with deposit growth remaining stable at 20% y-y in October. Given that new loans continued to surge, LDR (rolling 6 months) on incremental loans over deposit was further boosted to 149% in November from 143% in October, while outstanding LDR rebounded to 66.9% in November from 66.7% in October. The level remained stable throughout 2010. A closer look at banks’ LDRs reveals that the high ratios (and leverage) are more of a problem for small and medium-sized banks than large banks. The loan-to-deposit ratio of large banks stayed at 65% in November; however, the loan-to-deposit ratio of small and medium-sized banks was 84% in November, much higher than the regulator’s requirement of 75%.
Exhibit 32. Monthly new deposits Exhibit 33. Monthly new loans and deposits
(RMBbn) 2009 2010 (RMBbn) Loan Deposits 3,000 1,800 1,600 2,500 1,400 1,200 2,000 1,000 1,500 800 600 1,000 400 200 500 0 0 Jul-10 Apr-10 Oct-10 Jun-10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-10 Mar-10 Feb-10 Nov-10 Aug-10 Sep-10 May-10
Source: CEIC, Nomura research Source: CEIC, Nomura research
Nomura 17 14 January 2011
Banks | China Lucy Feng
Exhibit 34. Loan-to-deposit ratio: outstanding and Exhibit 35. Loan-to-deposit ratio by bank type rolling new loans and deposits
(%) LDR (LHS) (%) (%) Large banks Small & Medium banks 95 2.0 95 New LDR (rolling 6 months) (RHS) 90% 90% 88% 85% 86% 86% 84% 83% 82% 84% 84% 90 1.5 85 85 1.0 75 63% 63% 62% 63% 64% 63% 65% 65% 64% 65% 65% 65 80 0.5 55 75 0.0 45 70 (0.5) 35 65 (1.0) 25 60 (1.5) 15 Jul-10 Jul-01 Jul-08 Apr-10 Oct-10 Jun-10 Jan-10 Jan-98 Jan-05 Mar-10 Feb-10 Mar-99 Mar-06 Nov-10 Aug-10 Sep-10 Nov-03 Nov-10 Sep-02 Sep-09 May-10 May-00 May-07 Source: CEIC, Nomura research Source: CEIC, Nomura research
In terms of total loans, the percentage share of corporate loans has been falling since April 2009, to the current level of 76.5%, while that of household loans has been consistently rising, to 23.4% as of November 2010. Households are increasingly becoming loan growth drivers, especially in long-term household loans, which account for 69% of total outstanding household loans and are continuing to rise at a steady pace.
Exhibit 36. Percentage of total outstanding loans Exhibit 37. Percentage of total new loans
(%) Household (LHS) (%) (%) Household (LHS) (%) 24 Corporate (RHS) 86 85 Corporate (RHS) 100 23 84 68 80 22 82 21 51 60 20 80 19 78 34 40 18 76 17 17 20 16 74 15 72 0 0 Jul-07 Jul-07 Oct-08 Jan-10 Jun-10 Oct-08 Jan-10 Jun-10 Mar-09 Mar-06 Feb-07 Nov-10 Dec-07 Aug-09 Dec-04 Mar-09 Feb-07 Nov-10 May-08 Dec-07 Aug-09 May-08 Source: CEIC, Nomura research Source: CEIC, Nomura research
Among corporate loans too, long-term loans have continued to account for a higher percentage of total loans, while short-term loans (for working capital) have continued to fall. Meanwhile, the percentage share of discounted bills remained at a historically low level in November. We believe the higher proportion of long-term household and corporate loans should benefit banks in the form of higher loan yields over the long term.
Nomura 18 14 January 2011
Banks | China Lucy Feng
Exhibit 38. Household loan breakdown: as % of total Exhibit 39. Corporate loan breakdown: as % of total outstanding loans outstanding loans
(%) Household - short term (LHS) (%) Discounted Bills (LHS) (%) 18 Household - long term (LHS) 11 Corporate - short term (RHS) 50 Corporate - long term (RHS) 16 10 45 14 9 12 8 40 7 10 6 35 8 5 30 6 4 4 3 25 Jul-07 Jul-07 Oct-08 Jan-10 Jun-10 Oct-08 Jan-10 Jun-10 Mar-09 Mar-06 Feb-07 Nov-10 Aug-09 Dec-07 Dec-04 Mar-06 Mar-09 Feb-07 Nov-10 Dec-04 Dec-07 Aug-09 May-08 May-08 Source: CEIC, Nomura research Source: CEIC, Nomura research
In terms of total deposits, while deposit growth was relatively strong in the first eleven months of 2010, it was driven by strong enterprise deposit growth, which we think is probably a result of improving corporate profits since the turn of 2010. According to the PBoC, enterprise deposit increased by RMB574bn (accounting for 97% of total new deposits) in November, while household deposits grew by RMB133bn. If this trend continues, it could weigh on Chinese banks’ deposit costs as corporate (wholesale) deposits are generally more expensive than household (retail) deposits. The PBoC said it is concerned about household deposits moving away from the system due to high inflation expectations, and has hiked interest rates twice by 25bps each time in late October and December in order to address the situation.
Separately, the proportions of time and demand deposits remained relatively stable in November, suggesting stable funding costs for Chinese banks.
Nomura 19 14 January 2011
Banks | China Lucy Feng
Exhibit 40. Deposit breakdown as % of total Exhibit 41. Deposit breakdown as % of total deposits: household and enterprise deposits: demand and time
(%) (%) Total Demand Total Time Household Saving Enterprise 55 55
50 50
45 45
40 40
35 35
30 30 Jul-07 Jul-07 Oct-08 Oct-08 Jan-10 Jun-10 Jan-10 Jun-10 Mar-09 Mar-09 Feb-07 Feb-07 Nov-10 Nov-10 Aug-09 Aug-09 Dec-07 Dec-07 May-08 May-08 Source: CEIC, Nomura research Source: CEIC, Nomura research
Exhibit 42. As % of total household saving deposits Exhibit 43. As % of total enterprise deposit
(%) Demand Time (%) Demand Time 70 65 65 60 60 55 55 50 50 45 45 40 40 35 35 30 30 Jul-07 Jul-07 Oct-08 Oct-08 Jan-10 Jun-10 Jan-10 Jun-10 Mar-09 Mar-09 Feb-07 Feb-07 Nov-10 Nov-10 Dec-07 Aug-09 Dec-07 Aug-09 May-08 May-08 Source: CEIC, Nomura research Source: CEIC, Nomura research
Loan/deposit growth trends by bank size At large banks in China, household deposits made up over half of total deposits while enterprise deposits accounted for around a third based on our analysis of the 3Q10 financial statements of China banks. In contrast, household deposits only accounted for 20% or so at small and medium-sized banks, while enterprise deposits accounted for 54% of the total deposit base. In general, enterprise (wholesale) deposits are more expensive than household (retail) deposits; as a result, small and medium-sized banks are bearing much more of the higher funding cost than large banks. In addition, as they attract the majority of household deposits, we believe large banks would benefit more from the growth in household deposits as the PBoC has reversed its monetary policy and raising deposit rates will be the tool to address inflation.
Nomura 20 14 January 2011
Banks | China Lucy Feng
Exhibit 44. Large banks: deposits as % of total Exhibit 45. Small and medium-sized banks: deposits as % of total
Household Saving Enterprise Household Saving Enterprise (%) (%) 60 56% 55% 55% 55% 55% 55 52% 51% 51% 55% 54% 54% 54% 54% 51% 51% 50% 51% 51% 51% 50% 50% 55 53% 50 50 45 45 40 40 32% 32% 35 31% 32% 32% 32% 32% 31% 31% 32% 32% 35 30 30 25 25 19% 21% 20% 20% 20% 20% 20% 19% 20% 19% 19% 20 20 15 15 Jul-10 Jul-10 Apr-10 Apr-10 Oct-10 Oct-10 Jun-10 Jan-10 Jan-10 Jun-10 Mar-10 Mar-10 Feb-10 Feb-10 Nov-10 Nov-10 Aug-10 Sep-10 Aug-10 Sep-10 May-10 May-10
Source: CEIC, Nomura research Source: CEIC, Nomura research
Again, the proportions of demand and time deposits at large banks were stable in 2010, with the former accounting for 43% and the latter 38% by end-November based on the disclosures by large banks. For small and medium-sized banks, the proportion of demand deposits and time deposits was stable at 39% and 34% as of end-November. We think some corporates entered into a negotiated deposit rate with small and medium-sized banks, categorised as other deposits. Small and medium-sized banks have a higher percentage share of such other deposits, which usually carry higher interest rates than demand deposits. This again points to higher funding costs for small and medium-sized banks in China.
Exhibit 46. Large banks — deposits as % of total Exhibit 47. Small and medium-sized banks –deposits as % of total
Total Demand Total Time Total Demand Total Time (%) (%) 45 43% 42% 43% 42% 43% 43% 43% 43% 42% 43% 43% 45 40% 41% 41% 40% 40% 40% 40% 41% 40% 40% 40% 39% 40% 39% 40% 39% 40% 39% 39% 39% 40 38% 40 38% 35% 34% 34% 35% 34% 34% 34% 34% 36% 34% 34% 35 35 30 30 25 25 20 20 15 15 Jul-10 Jul-10 Apr-10 Apr-10 Oct-10 Oct-10 Jan-10 Jan-10 Jun-10 Jun-10 Mar-10 Mar-10 Feb-10 Feb-10 Nov-10 Nov-10 Aug-10 Sep-10 Aug-10 Sep-10 May-10 May-10 Source: CEIC, Nomura research Source: CEIC, Nomura research
Most household deposits tend to be in time deposits (for saving), both for large banks and small and medium-sized banks, while most enterprise deposits are in demand (for working capital). In particular, enterprises hold a higher proportion in time deposits at small and medium-sized banks than in large banks, according to our analysis.
This was particularly the case in 1H10, when smaller banks aggressively took deposit market share from large peers in order to deleverage their balance sheet and meet the 75% LDR requirement, according to a report by the 21st Century Business Herald in June 2010. The price war not only pushed up deposit costs for small and medium- sized banks, but resulted in added operational costs allocated to account managers for their marketing expenses and the gifts they offered new depositors. Given the three- time 50bps RRR hikes in November and December, we expect competition for
Nomura 21 14 January 2011
Banks | China Lucy Feng
deposits will still be keen till end-2011. We saw this trend of keen competition for deposits resume in 4Q10. Given that tighter liquidity pushed interbank rates higher, we think Chinese banks were promoting more short-term structured financial products at higher yields. For instance, CCB offered a 3.9% pa rate for 3-day and 7-day deposit products on 29, 30, and 31 December 2010.
Exhibit 48. Large banks: as % of total household Exhibit 49. Small and medium-sized banks: as % of savings total household savings
(%) Demand Time (%) Demand Time 65 60% 75 60% 60% 60% 60% 59% 59% 59% 58% 59% 58% 60 64% 64% 63% 63% 64% 62% 64% 63% 63% 63% 63% 55 65 50 55 42% 45 40% 40% 40% 40% 40% 41% 41% 41% 42% 41% 40 45 36% 36% 37% 37% 36% 38% 36% 37% 37% 37% 37% 35 30 35 25 25 20 15 15 Jul-10 Jul-10 Apr-10 Apr-10 Oct-10 Oct-10 Jun-10 Jan-10 Jan-10 Jun-10 Mar-10 Mar-10 Feb-10 Feb-10 Nov-10 Nov-10 Aug-10 Sep-10 Aug-10 Sep-10 May-10 May-10
Source: CEIC, Nomura research Source: CEIC, Nomura research
Exhibit 50. Large banks: as % of total enterprise Exhibit 51. Small and medium-sized banks: as % of deposits total enterprise deposits
(%) Demand Time (%) Demand Time 75 71% 70% 70% 70% 71% 65 60% 60% 69% 69% 69% 70% 70% 67% 61% 59% 60% 60% 60% 59% 59% 60% 60 57% 65 55 50 55 43% 45 41% 39% 41% 40% 40% 40% 40% 40% 41% 40% 45 40 35 31% 31% 31% 33% 35 29% 30% 30% 30% 30% 30% 29% 30 25 25 20 15 15 Jul-10 Jul-10 Apr-10 Apr-10 Oct-10 Oct-10 Jun-10 Jun-10 Jan-10 Jan-10 Mar-10 Mar-10 Feb-10 Feb-10 Nov-10 Nov-10 Aug-10 Sep-10 Aug-10 Sep-10 May-10 May-10
Source: CEIC, Nomura research Source: CEIC, Nomura research
On the assets front, medium- to long-term loans account for a major chunk of total loans of large banks, accounting for 73% of their total loans in November 2010 based on our analysis of their financial statements. On the other hand, medium- to long-term loans only made up 52% of total loans for small and medium-sized banks and short- term loans accounted for 45% in November 2010. We think that this is likely because large banks have more SOE borrowers who need more long-term loans for fixed-asset investment and infrastructure construction projects. In contrast, small and medium- sized banks have 40-80% of SME corporate clients who are more in need of short- term working capital loans.
Nomura 22 14 January 2011
Banks | China Lucy Feng
Exhibit 52. Large banks: as % of total loans Exhibit 53. Small and medium-sized banks: as % of total loans
(%) Short-term Medium-Long term Bill financing (%) Short-term Medium-Long term Bill financing
80 71% 72% 72% 72% 73% 73% 73% 73% 73% 73% 60 71% 49% 50% 51% 51% 51% 52% 52% 52% 52% 52% 52% 70 50 46%46% 45% 44% 44% 44% 44% 44% 44% 44% 45% 60 40 50 40 30 30 24% 24% 24% 24% 24% 24% 24% 24% 24% 24% 24% 20 20 10 5% 4% 4% 4% 10 5% 4% 3% 4% 4% 3% 3% 3% 3% 2% 2% 4% 4% 4% 4% 3% 3% 3% 0 0 Jul-10 Jul-10 Apr-10 Apr-10 Oct-10 Oct-10 Jun-10 Jun-10 Jan-10 Jan-10 Mar-10 Mar-10 Feb-10 Feb-10 Nov-10 Nov-10 Aug-10 Sep-10 Aug-10 Sep-10 May-10 May-10
Source: CEIC, Nomura research Source: CEIC, Nomura research
Deposit growth still holds the key Generally, LDRs of Chinese banks declined slightly over the first three quarters of 2010, with most banks under our coverage meeting the 75% LDR requirement. That said, we reckon deposit costs would have continued to rise for the rest of 2010 as banks continued to compete for deposits, given the importance of maintaining deposit growth. In our view, banks should try to avoid the vicious cycle where slower deposit growth leads to slower loan growth, which, in turn, results in slower deposit growth.
In addition, we reckon that banks with lower LDRs and capacity to lend will continue to enjoy better loan-deposit spreads, and thus would be more selective in choosing customers.
Exhibit 54. LDR (1Q10 – 3Q10)
(%) 1Q10 2H10 3Q10 90 80 70 60 50 40 30 20 10 0 ABC CCB BOC CMB ICBC CITIC SZDB SPDB Huaxia BOCOM Industrial Minsheng Note: Huaxia did not disclose LDR in 1Q10 and 3Q10 results announcement Source: CEIC, Nomura research
The PBoC raised RRR twice in November and once more in December to absorb excess liquidity in the market. Based on our estimates, banks will have to park an additional RMB1,050bn of their deposits at the central bank. As a result, banks are under more pressure to compete for deposits in order to meet the regulatory LDR of 75% by the year end. In our view, the impact will be less significant for large-cap banks which generally have a lower LDR and wider deposit base. We expect to see rising funding costs as banks compete to attract more deposits, especially as we expect the RRR to continue its upward trend in 2011.
Nomura 23 14 January 2011
Banks | China Lucy Feng
Exhibit 55. Impact of recent three-time RRR hikes on Chinese banks’ LDR LDR (%) LDR after three-time RRR hike (%) Impact on LDR (pct) ABC 55.15 55.99 0.84 ICBC 58.24 59.13 0.88 CCB 61.34 62.27 0.93 BOC 74.68 75.81 1.13 BOCOM 77.44 78.61 1.17 CMB 73.71 74.82 1.12 CITIC 73.29 74.40 1.11 Minsheng 72.28 73.38 1.10 SPDB 70.37 71.44 1.07 Industrial 76.31 77.47 1.16 SZDB 74.23 75.35 1.12 Huaxia 72.79 73.89 1.10 Note: LDRs as of 30 September 2010, except Huaxia (30 June 2010) Source: Company data, Nomura research
We think the three-time 50bps RRR hikes have lifted the sector's LDR by 0.84-1.17%, which, we believe, is one of the reasons the PBoC slowed new-loan growth in November and December 2010. Based on our analysis, most large-cap banks are immune to the hikes because their LDR ratios are much lower than 75% – LDR ratios of ABC (55.15%), ICBC (58.24%) and CCB (61.34%) would be well below the requirement – and because they have plenty of excess reserves. However, there would have been more pressure on other peers to meet the 75% requirement as the year-end checks approached. We believe this will restrain those banks with higher LDR ratios from expanding their loans substantially. Moreover, we see greater pressure on joint-stock banks not to raise funding costs in the course of attracting more deposits in an effort to bring down their LDR ratios.
Nomura 24 14 January 2011
Banks | China Lucy Feng
A preview of the new environment in 2011: different RRR, loan supply and yields 4Q10 preview and 2011 earnings forecasts We believe the upcoming 2010 annual results should record solid operating trends for We expect NIM to expand by 8-32 Chinese banks, with their earnings growing at 19.7-49.8% y-y for the full year. We bps to reach 2.12-2.91% in 2010 expect NIM to have expanded by 8-32bps to reach 2.12-2.91% for 2010F, helped by improving pricing power resulting from both recent rate hikes and tighter liquidity, especially in 4Q10. While interest income continues to grow steadily, we estimate fee income growth should reach 22.1-41.5% y-y, further underpinning the earnings growth in 2010.
Looking forward, we remain positive on China banks’ earnings growth in 2011F. We We expect NIM to expand 6-27bps forecast 16.2-34.1% y-y NPAT growth for China banks under our coverage based on in 2011 our assumption of bullish NIM expansion of 6-27bps in 2011F, given our economics team’s expectation of four rounds of 25bps rate hikes, one in each quarter of the year. We think banks with more exposure to SMEs will be able to enjoy better pricing power and thus higher NIM expansion in 2011F. In particular, we believe CMB’s FY11F NIM should expand by 27bps, CCB’s by 13bps and Citic’s by 8bps. On the balance sheet side, we think new loan growth is likely to reach RMB7.2-7.5trn, translating into estimated growth of 15-16% y-y in 2011F. Meanwhile, as regulators may adopt monthly monitoring and different RRR for individual banks, we see joint-stock banks facing more intense competition in attracting deposits for the purpose of bringing down their LDR ratios to meet the 75% requirement in each month/quarter. However, we reckon that credit costs should largely stay steady at 50bps, on average, in 2011F.
Rate hike sensitivity test for 2011F We believe the recent rate hikes by the PBoC should benefit China banks as they should boost NIMs in 2011F. Given that the demand deposit rate remains unchanged and, as of 1H10, about half of the total deposits of H-share banks are demand deposits — ABC (55.7%), ICBC (50.8%), CCB (53.5%), BOC (42.9%), BOCOM (49.3%), CMB (56.2%), Citic (47.2%) and Minsheng (47.8%) — while around 58.5%, on average, of these banks’ loans will be re-priced within one year, we believe the last two rounds of rate hikes should be largely positive for China banks as their NIMs should be boosted by 3.7-11.7bps and net profits by 1.4-6.8% in 2011F.
Exhibit 56. Time deposits vs demand deposits (as of Exhibit 57. Personal deposits vs corporate deposits June 30, 2010) (as of 30 June, 2010)
(RMBbn) Time deposits Demand deposits (RMBbn) Personal deposits Corporate deposits 12,000 12,000
10,000 10,000
8,000 8,000
6,000 6,000
4,000 4,000
2,000 2,000
0 0 Citic ABC CCB ABC BOC CCB CMB BOC CMB ICBC ICBC CITIC BOCOM BOCOM Minsheng Minsheng
Source: Company data, Nomura research Source: Company data, Nomura research
Nomura 25 14 January 2011
Banks | China Lucy Feng
Exhibit 58. Deposits breakdown (as of 30 June, 2010) (RMBmn) ABC ICBCCCB BOC BOCOM CMB CITICMinsheng Demand deposit 4,651,708 5,503,161 4,702,362 3,337,253 1,332,932 985,467 768,661 630,278 - Corporate deposits 2,434,994 3,448,278 3,137,269 2,055,842 991,074 603,281 689,544 564,740 - Personal deposits 2,216,714 2,054,883 1,565,093 1,281,411 341,858 382,186 79,117 65,538 Time deposit 3,445,418 4,952,712 3,786,779 3,420,745 1,365,527 766,933 860,641 686,611 - Corporate deposits 858,867 1,914,605 1,463,682 1,281,571 840,919 473,956 659,964 535,570 - Personal deposits 2,586,551 3,038,107 2,323,097 2,139,174 524,608 292,977 200,677 151,041 Subtotal: corporate deposits 3,293,861 5,362,883 4,600,951 3,337,413 1,831,993 1,077,237 1,349,508 1,100,310 Subtotal: personal deposits 4,803,265 5,092,990 3,888,190 3,420,585 866,466 675,163 279,794 216,579 Other Deposits 235,712 155,325 461,336 4,472 2,671 Overseas Deposit 15,982 221,591 102,560 Total 8,348,820 10,832,7898,591,701 7,219,334 2,702,931 1,752,400 1,629,3021,319,560 Source: Company data, Nomura research
Exhibit 59. Cumulative impact of the two interest-rate hikes in 2010 ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng Impact on FY11F NIM (bp) 5.7 3.7 4.0 6.3 8.8 9.6 8.6 11.7 Impact on FY11F net profit (%) 3.1 1.4 1.6 4.0 4.7 4.4 4.6 6.8 Impact on FY12F NIM (bp) 7.1 3.6 4.2 6.7 9.4 9.1 8.6 12.1 Impact on FY12F net profit (%) 3.6 1.3 1.5 3.8 4.9 3.9 4.5 6.5 Source: Nomura estimates
Our economics team continues to see a higher CPI inflation of 4.5% in 2011F. They believe the PBoC needs to quicken the process of interest-rate normalization, hence the expectation of a 25bp rate hike in each quarter of 2011F.
If this proves to be true, we believe it should serve as a positive catalyst for Chinese banks’ earnings growth in 2011F. Assuming 25bp symmetrical rate hikes in each quarter of 2011, which is our baseline forecast, Chinese banks’ NIM should expand by 9-17bp and net profit should grow by 2.7-9.7% in 2011F.
Exhibit 60. Chinese banks’ NIM expansion and earning growth in 2011F (baseline scenario) ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng Impact on FY11F NIM (bp) 9.4 6.2 7.1 9.6 12.8 14.1 13.0 16.5 Impact on FY11F net profit (%) 5.4 2.7 3.1 6.0 7.0 6.7 7.4 9.7 Impact on FY12F NIM (bp) 11.2 6.2 7.2 10.1 13.5 13.6 13.0 16.9 Impact on FY12F net profit (%) 5.8 2.5 2.9 5.8 7.1 5.9 7.2 9.3 Source: Nomura research
That said, we see a chance of fewer rate hikes in 2011F. If the PBoC turns out to announce only one round of 25bp symmetrical rate hikes, based on our estimates, it would boost banks’ NIM by only 2.5-6.6bp and earnings by 1.1-3.9% in 2011F. If there are two rounds of 25bp symmetrical rate hikes, we expect FY11F NIM to expand by 4.4-11.6bp and net profits to increase by 1.9-6.8%. Three rounds of 25bp symmetrical rate hikes should boost NIM by 5.6-14.9bp and earnings growth by 2.4-8.8% in 2011F, by our estimates.
Exhibit 61. NIM expansion and earning growth provided one 25bp symmetrical rate hike in 2011F ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng Impact on FY11F NIM (bp) 3.7 2.5 2.8 3.8 5.1 5.6 5.2 6.6 Impact on FY11F net profit (%) 2.2 1.1 1.2 2.4 2.8 2.7 2.9 3.9 Impact on FY12F NIM (bp) 4.5 2.5 2.9 4.0 5.4 5.4 5.2 6.8 Impact on FY12F net profit (%) 2.3 1.0 1.2 2.3 2.9 2.4 2.9 3.7 Source: Nomura research
Nomura 26 14 January 2011
Banks | China Lucy Feng
Exhibit 62. NIM expansion and earning growth provided two 25bp symmetrical rate hikes in 2011F ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng Impact on FY11F NIM (bp) 6.5 4.4 4.9 6.7 9.0 9.8 9.1 11.6 Impact on FY11F net profit (%) 3.8 1.9 2.2 4.2 4.9 4.7 5.2 6.8 Impact on FY12F NIM (bp) 7.8 4.4 5.1 7.1 9.4 9.5 9.1 11.9 Impact on FY12F net profit (%) 4.1 1.8 2.0 4.0 5.0 4.1 5.0 6.5 Source: Nomura research
Exhibit 63. NIM expansion and earning growth provided three 25bp symmetrical rate hikes in 2011F ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng Impact on FY11F NIM (bp) 8.4 5.6 6.4 8.6 11.5 12.7 11.7 14.9 Impact on FY11F net profit (%) 4.8 2.4 2.8 5.4 6.3 6.0 6.6 8.8 Impact on FY12F NIM (bp) 10.1 5.6 6.5 9.1 12.2 12.2 11.7 15.2 Impact on FY12F net profit (%) 5.2 2.3 2.6 5.2 6.4 5.3 6.5 8.4 Source: Nomura research
However, if the expected rate hike turns out to be asymmetrical, we believe it would have a negative impact on Chinese banks and reduce their NIMs by 7.8-11.7bp and earnings growth by 5.2-8.1%, assuming 25bp rate hike on deposit rate while the lending rate remains unchanged. Having said that, we think there is a small chance the PBoC will take such action. As such, we remain positive on the China banks sector in 2011F.
Exhibit 64. Impact of asymmetrical rate hikes: 25bps rate hike on deposit rate, lending rate unchanged ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng Impact on FY11F NIM (bp) (9.3) (10.3) (9.7) (7.8) (8.9) (9.5) (11.7) (9.7) Impact on FY11F net profit (%) (6.0) (5.9) (5.2) (4.9) (5.5) (5.2) (8.1) (6.5) Impact on FY12F NIM (bp) (9.5) (10.7) (9.5) (8.2) (8.8) (9.6) (11.8) (9.4) Impact on FY12F net profit (%) (5.4) (6.0) (4.7) (4.7) (5.2) (4.9) (8.1) (6.0) Source: Nomura research
Nomura 27 14 January 2011
Banks | China Lucy Feng
Risks from LGFV loans Risks from LGFV loan default should remain remote Although we believe monetary policy will shift to being prudent and thus new loan growth is likely to slow – only slightly, in our view – in 2011F, there is only a small chance of a high default ratio for LGFV loans. We understand from management of China banks that most LGFV loans are concentrated in eastern coastal areas where local governments have plenty of fiscal firepower to provide support to these LGFV loans. For example, 25.9% of ICBC’s total LGFV loans were lent to Shanghai, 11.4% to Shandong province, 10.9% to Tianjin, 10.4% to Guangdong province, 7.7% to Hebei province and 4% to Beijing, accounting for 61.3% of its total LGFV loans.
Local government fiscal revenue has grown steadily, at a CAGR of 19% from 1999 to 2009 (data for 2010 are not yet available), and we believe the trend should continue in 2010. Revenue from land use accounted for 2.8-2.9% of total fiscal revenue in 2008 and 2009, according to NBSC. With rising land prices in 2010, we expect a higher percentage of revenue from land use in 2010. As China will continue to carry out proactive fiscal policy in 2011F, in our view, we reckon that local-government sponsored projects will obtain more financing via fiscal channels to ensure continuation of these projects. Thus, we do not think there should be a significant increase in LGFV loan defaults just because of slower new loan growth in 2011F.
Exhibit 65. Local government revenue Exhibit 66. Land price
(% share) (RMBbn) (RMB/sqm) 5 3,500 3,000 Total local government 4 revenue (RHS) 2,800 2,800
% share from use of land 3 2,100 2,600 (LHS) 2,400 2 1,400
2,200 1 700 2,000 0 0 Jun-08 Jun-09 Jun-10 Mar-08 Mar-09 Mar-10 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: CEIC, Nomura research Source: CEIC, Nomura research
Moreover, LGFV loans accounted for only what we consider to be a reasonable proportion of 7.8-19.2% of total loans for China banks under our coverage, according to disclosures by banks. And, as reported in the 21st Century Business Herald, 24% of all the LFGV loans are with full coverage and 50% with basic or partial coverage, if classified by the new method of four categories based on their risks. As a result, we are not concerned about any significant rise in NPLs of LGFV loans in 2011F.
Exhibit 67. LGFV loans of China banks ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng Country total 1Q10 3Q10 3Q10 1H10 1H10 3Q10 3Q10 3Q10 1H10 Total LGFV loans (RMBmn) 530,000 830,000 718,600 419,700 139,000 130,000 220,000 190,500 7,660,000 % of total loans (%) 11.9 12.0 13.1 7.8 8.0 10.0 18.3 19.2 17.2 Source: Company data, Nomura research
Nomura 28 14 January 2011
Banks | China Lucy Feng
Latest measures on LGFV loans Recently the 21st Century Business Herald reported that the regulator will introduce a more stringent loan classification method and risk-weighted measurement standards for LGFV loans, according to a 22 December 2010 article, “China Sets New Rules on Financing to Local Governments.”
Exhibit 68. LGFV details of China banks
(RMBmn, except %) ABC ICBC CCB BOC BCOM CMB Citic Minsheng Country total 2010 As of 30 Nov As of 30 Sep As of 30 Sep As of 30 Jun As of 30 Jun As of 30 Sep As of 30 Sep As of 30 Sep As of 30 Jun Full 389,400 622,500 406,300209,850 na 116,142 218,680 133,350 1,838,400 Basic 20,750 na 11,258 32,385 50,364 3,830,000 Partial 270,600 312,300 na 2,132 1,320 186,750 24,765 No 159,486 na 468 1,991,600 Total 660,000 830,000 718,600419,700 139,000 130,000 220,000 190,500 7,660,000 % of total loans 11.9 12.0 13.1 7.8 8.0 10.0 18.3 19.2 17.2 NPL ratio 0.58 0.02 na 0.07 na na na 0 na NPL balance 3,828 166 na 301 na na na 0 na Source: Company Data, Nomura Research
LGFV loans re-classified into five categories As stated in the news article, the CBRC may require lenders to classify LGFV loans into five categories – 1) pass, 2) special mention, 3) substandard, 4) doubtful and 5) loss. Loans are classified based on the sufficiency of a borrower’s cash flow, the amount of the guarantee and the realized value of collateral of the related projects.
According to the article, in order for loans to be classified as “pass” or “special mention,” the total value of cash flow, guarantee and collateral should be over 120% of the loan amount. Those below 120% should be classified as non-performing loans, whereby the ratio of “substandard” loans must be above 80%.
Risk weighting for LGFV loans Moreover, the article also disclosed that the regulator may assign higher risk weights to LGFV loans, with 100% risk weightings on loans fully covered by the borrower’s cash flow, 140% on loans with cash flow coverage of 70-100%, 250% on loans with cash flow coverage of 30-70%, and as much as 300% on loans for which the cash flow coverage is lower than 30%.
Exhibit 69. Classification and risk weighting of LGFV loans Coverage Classification method Treatments % of Total Risk weight (%) FULL Ratio is 100% or above – Will be reclassified as corporate loan if the requirements 24 100 borrower's cash flow is sufficient for categorising into corporate loan can be fulfilled. BASIC Ratio is between 70% and 100% Can be classified as corporate loan after going through 50 140 and a portion of the loan requires project stripping, restructuring and adding in new fiscal guarantee borrowers and guarantors. For loans that are mainly PARTIAL Ratio is between 30% and 70% and guaranteed or repayment sources are local fiscal 250 requires partial fiscal guarantee income, given that the original repayment relationship of the loan remains unchanged, certain features such as guarantee principal, land, high quality enterprise shares, effective income rights and other legal equitant collateral can be added to reduce risks. NO Ratio is below 30% and majority of There will be attempts to recover or exit from the loan. 26 300 the loan requires fiscal guarantee Source: 21st Century Business Herald, Nomura research
Nomura 29 14 January 2011
Banks | China Lucy Feng
Manageable impact on capital adequacy and earnings It is still difficult to verify the accuracy of the news report or if the CBRC would implement this measure this year. However, assuming the regulator does implement this measure, we believe Chinese banks' capital adequacy levels and earnings will be affected. According to our sensitivity analysis, the new measures, if they had been implemented, would have decreased China banks’ CAR by 0.52-1.48pct in 2010 and 0.42-1.23pct in 2011F and Tier 1 CAR by 0.39-1.13pct and 0.33-0.95pct, respectively, in 2010F and 2011F. Among all the China banks under our coverage, we see ABC as the most affected while CMB would be the most resilient.
We believe the regulator will introduce the new measures with a phase-in period of 2-3 years, and we do not expect another round of capital raising in the near term.
Exhibit 70. Impact of new risk weighting of LGFV loans on FY10F CAR and T1 CAR FY10F ABC ICBCCCB BOC BCOM CMB CiticMinsheng CAR (%) 12.89 12.90 12.27 12.40 13.62 11.26 10.15 11.33 T1 CAR (%) 9.70 9.95 9.42 9.57 9.48 8.36 8.23 8.09 Impact on CAR (pct) (1.48) (1.22) (1.26) (1.09) (1.17) (0.52) (0.74) (1.27) Impact on T1 CAR (pct) (1.12) (0.94) (0.96) (0.84) (0.81) (0.39) (0.60) (0.91) Note: assume the current risk weight of LGFV loans to be 50%. As some of the banks did not disclose the detailed proportion under different coverage ratio, we could only estimate based on the data available and assume the same proportion as the nationwide results as of 30 June 2010 Source: Nomura Research estimates
Exhibit 71. Impact of new risk weighting of LGFV loans on FY11F CAR and T1 CAR FY11F ABC ICBCCCB BOC BCOM CMB CiticMinsheng CAR (%) 12.58 11.96 11.31 11.69 13.42 10.88 10.99 10.88 T1 CAR (%) 9.73 9.37 8.94 9.08 9.44 8.48 9.14 7.76 Impact on CAR (pct) (1.23) (0.94) (0.97) (0.90) (1.02) (0.42) (0.67) (1.12) Impact on T1 CAR (pct) (0.95) (0.74) (0.77) (0.70) (0.72) (0.33) (0.55) (0.80) Note: assume the current risk weight of LGFV loans to be 50%. As some of the banks did not disclose the detailed proportion under different coverage ratio, we could only estimate based on the data available and assume the same proportion as the nationwide results as of 30 June 2010 Source: Nomura research estimates
Sensitivity analysis on FY11F NPAT After taking into consideration the loan-loss provision ratio requirement of 2.5% which will likely be implemented by the regulator, the impact on credit costs and hence earnings would be dampened, in our view. We estimate that ABC would be the most affected, given its comparatively lower coverage ratio (160% as of 30 September, 2010) and hence less excess provision. For some of the listed banks such as CMB, Citic and Minsheng, there would be no further impact if they were to meet the 2.5% loan-loss provision ratio.
We conducted a sensitivity analysis under three scenarios assuming that all banks would have met the loan-loss provision ratio requirement of 2.5% by the end of 2011.
In our base case, where we assume allowance of 35% and 100% to be applied to NPL derived from categories of “partial coverage” and “no coverage,” respectively, most of the banks would not be affected, except ABC with a 13% decrease in FY11F NPAT.
In a worse case, where we assume allowance of 100% to be applied to NPL derived from LGFV downgrades, the impact would be limited (within 5% for the sector except 22% for ABC). Hence, the earnings of ICBC, CMB, Citic and Minsheng would be largely intact, in our opinion.
In the worst case, where we assume allowance of 150% to be applied to NPL loans derived from LGFV downgrades, the impact would be more significant. China banks’ FY11 NPAT would be dragged down by 0%-36%, with ABC the most
Nomura 30 14 January 2011
Banks | China Lucy Feng
affected. CMB, Citic and Minsheng, which already have more credit cost pressure from the 2.5% loan-loss provision ratio requirement, would not be subject to any further impact from such an arrangement on LGFV loans, per our estimation. However, we think this scenario is unlikely to happen.
Exhibit 72. Impact of the new LGFV arrangement on FY11F NPAT if the 2.5% loan-loss provision ratio requirement is applied to all existing loans by the end of FY11F (RMBmn, except %) ABC ICBC CCB BOC BCOM CMB Citic Minsheng As of 30 September, 2010: Coverage ratio (%) 160 210 213 194 168 304 176 259 Loan-loss provision ratio (%) 3.32 2.42 2.43 2.19 2.05 1.94 1.43 1.93 If 2.5% loan-loss provision is applied to existing loans: Additional provision required 0 5,130 3,890 17,319 9,724 7,722 12,885 5,623 At end-FY11F: Adjusted total provision allowance 158,802 164,288 137,543 138,879 54,372 34,549 30,012 24,811 Excess provisions on top of 150% coverage 9,645 50,691 43,633 44,813 14,496 21,313 15,426 13,716 Sensitivity test on new method of LGFV loan classification (i) Base case Provision shortfall (20,797) 0 0 0 0 0 0 0 Impact on FY11F NPAT (%) (13) 0 0 0 0 0 0 0 (ii) Worse case Provision shortfall (35,455) 0 (8,417) (1,354) (3,227) 0 0 0 Impact on FY11F NPAT (22) 0 (4) (1) (5) 0 0 0 (iii) Worst case Provision shortfall (58,005) (19,340) (34,442) (24,438) (12,088) 0 0 0 Impact on FY11F NPAT (%) (36) (8) (16) (16) (19) 0 0 0 Note: Provisions on top of 150% coverage are used to cover NPL derived from LGFV loans in our calculation. Assume (i) Base case - 25% of categories 3 & 4 of LGFV loans will become NPL, and 35% and 100% provision are applied to NPL loans derived from LGFVs; (ii) Worse case - 25% of categories 3 & 4 of LGFV loans will become NPL, and 100% provision are applied to NPL loans derived from LGFVs; (iii) Worst case - 25% of categories 3 & 4 of LGFV loans will become NPL, and 150% provision are applied to NPL loans derived from LGFVs. Source: Nomura research
Nomura 31 14 January 2011
Banks | China Lucy Feng
County area banking in China County area banking in China
County areas in China “County areas” refer to areas designated as counties or county-level cities under China’s administrative division system, which include economically more developed county centres, towns and the vast rural areas within their jurisdictions. As an administrative division unit, a county or county-level city is generally under the direct supervision of its corresponding municipal-level or provincial-level government. As of 31 December, 2008, there were 2,003 counties and county-level cities in China, covering a total of 34,301 towns.
The county area economy is a key component of China’s new national economic The county area economy is a key development strategies, which have been set to expand domestic consumption, component of China’s economic development increase urbanisation and balance regional development, such that county area economic development becomes a driver of China’s long-term economic growth.
The county area economy plays a significant role in China’s national economy. County areas had a population of 928mn at end-2008, accounting for 69.8% of China’s total population. In 2008, GDP attributable to county areas stood at RMB15tn, or 49.6% of China’s total GDP (source: CEIC).
Exhibit 73. National GDP vs county area GDP Exhibit 74. National GDP per capita vs county area
GDP per capita
(RMBbn) County Area GDP (LHS) (%) (RMB) National GDP per capita 35,000 National GDP (LHS) 50 25,000 County Area GDP per capita % of County Area GDP in national GDP (RHS) 30,000 49 20,000 25,000 48 20,000 15,000 47 15,000 10,000 46 10,000 5,000 5,000 45
0 44 0 2001 2002 2003 2004 2005 2006 2007 2008 2005 2006 2007 2008
Source: NBSC, Nomura research Source: CEIC, Nomura research
Over the past decade, the county area economy has achieved significant growth as county areas in China continue to undergo urbanisation, industrialization and industry migration based on our analysis of CEIC data. During 2001-2008, the nominal GDP of county areas grew at a CAGR of 16.8%, higher than that of national nominal GDP, which stood at 15.5%. We believe that the county area economies in relation to the national economy will continue to grow in importance, driven by factors such as urbanisation, industrialization, industrial migration and supportive government policies.
Nomura 32 14 January 2011
Banks | China Lucy Feng
Exhibit 75. Fixed asset investment in rural areas Exhibit 76. Average consumption expenditure per
capita in rural households
(RMBbn) (%) (%) FAI in rural areas (LHS) Average consumption expenditure 4,000 per capita in rural household (LHS) 50 3,000 y-y (RHS) 25 3,500 y-y (RHS) 2,500 40 20 3,000 2,000 30 15 2,500 1,500 2,000 20 10 1,500 1,000 10 1,000 5 500 0 500 0 0 0 (10) 2001 2002 2003 2004 2005 2006 2007 2008 2001 2002 2003 2004 2005 2006 2007 2008
Source: CEIC, Nomura Research Source: CEIC, Nomura Research
The income of people living in county areas has maintained an upward trend over the past few years (source: CEIC). The average wage in county areas rose from RMB10,083 in 2004 to RMB21,570 in 2008. The growth rates each year in 2005-2008 were 31%, 11%, 23% and 19%, respectively, outpacing those of national average, except in 2006. The improving income level in county areas has followed overall national economic development in China.
Exhibit 77. National average wage vs County area Exhibit 78. y-y growth in national average wage and average wage county area average wage
(RMB) National average County area average (%) National average 35,000 35 County area average 30,000 30
25,000 25
20,000 20
15,000 15
10,000 10
5,000 5
0 0 2004 2005 2006 2007 2008 2005 2006 2007 2008
Source: CEIC, Nomura research Source: CEIC, Nomura research
Rapid urbanisation, increasing business flows between urban areas and county areas, and the continued shift to a more consumption-driven economy have stimulated strong growth in urban areas and county areas alike, in our view. The government has implemented several economic development initiatives to stimulate domestic demand, narrow the urban and rural development gap, accelerate urbanisation and promote development across all regions. We believe continued urbanisation will further increase county areas’ contribution to China’s GDP.
Nomura 33 14 January 2011
Banks | China Lucy Feng
Exhibit 79. Urbanisation ratio Exhibit 80. Comparison of urbanisation ratio in 2008
(%) (%) 50 100 45 40 80 35 60 30 25 40 20 15 20 10 0 China Japan Korea US UK 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
Source: CEIC, Nomura research Source: CEIC, Nomura research
Favourable policies to support county areas To support the development of county areas, the Chinese government has undertaken several policy initiatives designed to promote agricultural production, rural development and income growth for farmers. These policies have played a significant role in promoting county area economic growth. Government policy support includes: Agricultural subsidies; Price support for certain agricultural products; Agriculture tax exemption; Increasing investment in agricultural modernisation; Improving rural infrastructure; Supporting the development of rural public facilities; Increasing funding for mandatory education in rural areas; Developing rural cooperative health care, social security and pension insurance systems; Promoting sales of home appliances, vehicles and motorcycles in rural areas. In addition, the government has launched a series of comprehensive rural reform initiatives, including: County area and urban area integration and rural property rights reform; A pilot programme in select provinces under which counties are given more authority and, as administrative units, are placed directly under the supervision of provincial governments. Specifically, for financial institutions in county areas: Implementation of differential regulation and monetary policies to rural credit cooperatives and other rural financial institutions including: 1) exempting rural credit cooperatives from business supervision fees and institution supervision fees; and 2) exercising a statutory deposit reserve ratio lower than that of general commercial banks for rural credit cooperatives. On 29 October, 2004, the PBoC cancelled the upper limit of loan interest rate for commercial banks, and increased the upper limit of loan interest rate for urban and rural credit cooperatives to 2.3x the benchmark interest rate.
Nomura 34 14 January 2011
Banks | China Lucy Feng
On 22 April, 2009, the MoF issued Provisional Measures on Administering Funds for Rewarding Increases in Agriculture-related Loans by County Area Financial Institutions. On 21 August, 2009, the MoF and the SAT (State Administration of Taxation of the PRC) jointly issued a Notice on Policies for Pre-Tax Deduction of Loss Provisions for Agriculture-related Loans and SME Loans Made by Financial Enterprises, allowing a financial enterprise to deduct from its tax payable a specified percentage of its loan-loss provision for agriculture-related loans and SME loans upon completion of the risk classification of such loans by the financial enterprise. In 2009, the MoF issued a Notice on Issues Relating to Write-off of Non-performing SME Loans and Non-performing Agriculture-related Loans, allowing commercial banks to write off on an after-tax basis any individual non-performing loan to small businesses and county area customers in an amount less than RMB5mn, provided that a good faith effort to collect the debt was made during the prior year. On 13 May, 2010, the MoF and the SAT issued a Notice on Rural Finance Tax Policy. Pursuant to the notice, from 1 January, 2009 to 31 December, 2013, financial institutions are: 1) exempt from paying business tax for interest income from small loans to agricultural households; and 2) entitled to take into account only 90% of interest income from these loans when calculating taxable income. Further, during the same period, rural credit cooperatives, township banks, rural mutual cooperatives, and loan companies and other corporate entities established solely by banking industry institutions, rural cooperative banks and rural commercial banks that are located at or below the county level under the PRC’s administrative division system are subject to a reduced business tax rate of 3% for their banking and bancassurance income.
County area financial institutions enjoy more favourable policies China’s banking and financial markets have undergone significant reforms over the past two decades; urban area banking is heading for a more mature stage. Regulations on urban area financial institutions are also becoming more and more stringent and are approaching international standards. In the meantime, the county area banking market remains relatively underdeveloped. To address this situation, the Chinese government has focused on increasing access to financial services in county areas through policy initiatives.
Financial institutions in county area generally have looser regulations such as less stringent control of loan growth and lower minimum RRR and capital requirements, and enjoy more favourable measures and incentives such as subsidies and tax benefits. We believe the government will continue to launch favourable policies to support the development of county area banking.
Set-up criteria: The set-up criteria vary among different financial institutions, while rural financial institutions generally require lower minimum registration capital. Compared to the minimum registration capital of RMB0.1bn for setting up a city commercial bank, for example, the minimum registration capital for a setting up a town- level village level bank would be RMB1mn, and for starting a rural mutual cooperative it would be RMB0.1mn.
Capital requirement: Rural financial institutions generally have a less strict minimum CAR requirement than urban financial institutions. Minimum CAR of 8% is applicable nationwide. As one of the preferential policies, rural credit cooperatives, rural credit cooperative unions and small loan companies are not required to meet a minimum capital level. Moreover, a minimum T1 CAR of 4% is only applied to commercial banks (including rural commercial banks) and rural cooperative banks. Other rural financial institutions can enjoy the flexibility of not having any core capital requirement.
RRR requirement: There is no minimum RRR requirement for modern rural financial institutions (except village-level banks, which need to fulfil the requirement of local
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rural credit unions) and small loan companies. For rural credit cooperatives and rural credit cooperative unions, the minimum level is 15.5%, which is 1% lower than that of commercial banks. Rural commercial banks and rural cooperative banks need to follow the same level as commercial banks at 16.5%, but this still 2.0 percentage points lower than that of large-cap banks. Given a lower RRR requirement than urban financial institutions, rural financial institutions can retain less of a reserve and make better use of its funding for earning a higher return.
Taxation policies: Since 1 January 2009, a number of preferential taxation measures have been launched that benefit financial institutions that grant loans in rural areas or loans to agricultural households. From 1 January, 2009 to 31 December 2013, there is exemption from the 5% business tax, which is applicable to all financial institutions, for interest income from loans to agricultural households with outstanding principal of less than RMB50,000. In addition, only 90% of such interest income will be counted toward taxable income for income-tax purposes. For rural cooperative banks, rural credit cooperatives, rural credit cooperative union, modern rural financial institutions and small loan companies, income is charged at a beneficial level of 3% on business tax, effective from 1 January 2009 to 31 December 2011. From the above, we note that tax benefits can always be found in county lending over the next three years, in our view, while no such policies are likely to be launched in urban lending.
Government subsidy: Modern rural financial institutions can enjoy an annual government subsidy equivalent to 2% of average loan amounts during the year, provided that the following conditions are fulfilled: 1) more than 15% y-y increase in average loan size; 2) DLR ratio above 50% by year end; 3) year end NPL ratio below 3%; and 4) no breaking of other CBRC rules and regulations. There are no such benefits granted to other financial institutions.
Given the government’s continuing emphasis on urbanisation and development of financial services in county areas, we believe preferential policies for county lending will be maintained. According to “The General Working Plan for New-Type Rural Financial Institutions: 2009-2011” proposed by CBRC, there are plans to establish about 1,300 more new-type rural financial institutions across China during the next three years. Those institutions will be distributed mainly in unbanked and under- banked rural areas to fill the financial services gap and encourage competition among different kinds of local financial institutions.
Through end-June 2009, 118 new-type rural financial institutions had been established, attracting a variety of capital worth RMB4.7bn, absorbing RMB13.1bn in deposits, and providing RMB5.5bn in loans to rural households and RMB8.2bn to rural small and medium-sized enterprises.
To secure the implementation of the three-year Working Plan, the CBRC requires that the sponsors of new-type rural financial institutions first consider the key counties of the national poverty alleviation and development program in central and western regions. While banks are accorded the freedom to select the location for new presence, the CBRC has installed an incentive mechanism to guide them to set up units in underdeveloped and poorer areas. For instance, if the sponsors are actively establishing village banks in poor areas, the CBRC will provide stronger support to their business growth in developed areas.
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Banks | China Lucy Feng
Exhibit 81. Comparison of preferential policies for commercial banks and county area FIs
Commercial banks Rural cooperative financial institutions Modern rural financial institutions Non-financial institutions
Rural Rural Credit National commercial City Rural commercial Rural credit Loan companies Rural mutual Small loan companies Items cooperative Cooperative Village level banks banks commercial banks banks Cooperatives (Note 4) cooperatives (Note 5) banks Union (Note 3) Limited companies>=RMB County/city >=RMB Registration County/city level >=RMB 3mn 5mn >=RMB1bn >=RMB 0.1bn >= RMB50mn >= RMB20mn >= RMB1mn >= RMB10mn >=RMB 0.5mn 0.3mn capital Town level >=RMB1mn Joint stock companies>=RMB Town level >=RMB0.1mn 10mn No. of To be in compliance of To be in compliance of To be in compliance of Company Ordinance >=1,000 >=500 >=1,000 >=10 shareholders Company Ordinance Company Ordinance Setup criteria Reformed from rural Reformed from Farmers and rural SMEs Qualification of To be initiated by financial To be fully funded by na na credit unions or rural rural credit na na who voluntarily Any legal capital shareholders institutions commercial banks or cooperative banks unions participate rural cooperatives banks Shareholding by large cap Shareholding banks>=20%; na na No shareholding by local government is allowed Shareholding by individual shareholding <=10% structure other individual shareholder<=10% CAR >=8% (Note 6) na na >=8% na Regulation on T1 CAR >=4% (Note 6) na na na na na na capital To fulfill the requirement of structure 18.5% or 16.5% (Note 1) 15.5% RRR local rural credit unions na na na Deposit cost 0 - 1x of PBOC bench mark rates Loan yield Above 0.9x of PBOC benchmark rates Above 0.9x - 2.3x of PBOC benchmark rates Above 0.9x of PBOC benchmark rates Regulation on No cross region operation operating; Loan service to local No cross region operating. Others Nation-wide operation Local operation only No cross region operation No cross province loan lending Do not absorb public union members only Do not absorb public deposits deposits Exemption of business tax for interest income from small loans to 1) A lower business tax of 3% (1 Jan 2009 - 31 Dec 2011); and Business tax Regulation on agricultural households (1 Jan 2009 - 31 Dec 2013) 2) Exemption of business tax for interest income from small loans to agricultural households (1 Jan 2009 - 31 Dec 2013) taxation Income tax To take into account of only 90% of interest income from small loans to agricultural household for calculation of taxable income (1 Dec 2009 - 31 Dec 2013) (Note 2)
Regulation on Write-off of non-performing SME loans and agriculture-related loans Write-off of non- accounting with individual loan size less than RMB 5mn is allowed on an after-tax na performing loan treatment basis. Annual subsidy of amount equivalent to 2% of average loan amount during the year Government Subsidy na (The following conditions should be fulfilled as well: 1) More than 15% y-y increase in average loan size; and 2) subsidy DLR ratio to above 50% by year end 3) Year end NPL ratio bel Note: 1. RR for big banks currently stands at 18.5% (19.0% for ICBC, CCB, ABC and BOCOM), and that for small & medium banks stands at 16.5% (17.0% for Minsheng). Big banks refer to ICBC, ABC, BOC, CCB, BCOM and the Postal Deposit Bank. Small and medium ban 2. As defined by MOF Notification, "Small loans to agricultural households" are loans lent to farmers with individual deal amount no larger than RMB 50,000. 3. Rural Credit Cooperative Union are formed by a number of Rural Credit Cooperatives. The lowest level of Rural Credit Cooperative Union is on county. 4. As defined by PBoC, loan companies are fully funded companies by commercial banks or rural cooperative banks. Loan companies are non-bank FIs and are regulated by CBRC and PBoC. 5. As defined by PBoC, small loan companies are non-FI that provide small loan business. They are managed by provincial level government. 6. It is reported that CBRC and PBoC are considering revising the CAR and T1 CAR requirement to 10% and 8%, respectively. The CAR ratio requirement may be raised to 15% by 2012 for big-cap banks. Currently, CBRC requires a CAR ratio of no less than 11.5 Source: 1. PBoC China rural financial services report dated September 2008 http://www.gov.cn/gzdt/att/att/site1/20080919/00123f3793250a3df83e01.pdf 2. MOF Notification (2010) No. 42 - Guidance on rural financial institutions subsidy http://www.gov.cn/zwgk/2010-06/02/content_1619270.htm 3. MOF Notification [2010] No. 117 - Further implementation on subsidy to FIs with agriculture-related loan growth http://www.gov.cn/zwgk/2010-10/11/content_1719454.htm 4. MOF and SAT Notification [2010] No.4 - Taxation policies on rural financial institutions 5. PBoC & CBRC Notification [2008] No. 137 - Policies on village level banks, loan companies, rural mutual cooperatives and small loan companies http://www.cnluye.com/html/main/gjjView/46721.html 6. PBoC & CBRC Notification [2008] No.23 - Guidance on pioneer small loan companies http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=2008050844C6FDE83536CF44FFF6E85E5BC32C00 7. PBoC & CBRC Notification [2007] No.6 - Policies on loan companies http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=200701293C5D24EA6CAB2F61FFE84FAF2846BB00 8. PBoC & CBRC Notification [2006] No.80 - Regulation on rural cooperative banks and rural commercial banks http://www.cbrc.gov.cn/upload/zwgk/ml3/2/1-2-7.doc
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Banks | China Lucy Feng
County area banking in China Although China’s banking and financial markets have undergone reforms in the last two decades, its county area banking market remains underdeveloped. To address this situation, the Chinese government has focused on increasing access to financial services in county areas through policy initiatives such as easing market-entry requirements and creating new incentive mechanisms such as subsidies, tax benefits and lower minimum capital requirements.
Development and reform of county area banking The banking sector of the county areas is covered mainly by four categories of financial institutions: Agricultural Bank of China, Agricultural Development Bank of China, Postal Savings Bank of China and rural financial institutions. Rural financial institutions play a role in providing banking services to the county areas of China in terms of network coverage.
The rural credit cooperatives system was initiated during China’s rural cooperative movement in the 1950s. Initially, rural credit cooperatives provided financial services to cooperative members, generally comprised of farmers and farming households. In 1997, the PBoC assumed the central management of the rural credit cooperatives.
In 2003, the State Council issued the Pilot Program for Deepening Rural Credit Cooperative Reform to reform the fundamental structures of the rural credit cooperatives. The reform brought about financial restructuring of the rural credit cooperatives, restructuring of their ownership structures, transfers of their management to provincial level governments, and assigned the supervisory role to the CBRC. As part of financial restructuring, substantial funds were provided through the PBoC to rural credit cooperatives to purchase and write off non-performing loans and to improve their capital base. As a result of the financial restructuring, the average non-performing loan ratio of rural credit cooperatives decreased to 9.3% in 2007 from 37.0% in 2002. In 2004, rural credit cooperatives made an aggregate profit for the first time in roughly ten years.
As part of the restructuring, some of the larger rural credit cooperatives were transformed into joint stock rural commercial banks and rural cooperative banks. Some rural credit cooperatives were consolidated to form credit unions at the county and provincial levels. Provincial-level credit unions normally assumed responsibility for administering multiple institutions. In December 2006, the CBRC introduced a series of policies and measures to promote the development of non-traditional rural financial institutions, which include village and township banks, loan companies, and rural mutual credit cooperatives. Preferential tax policies and other incentives were provided to encourage domestic and foreign firms to invest in these non-traditional rural financial institutions.
As of December 31, 2008, there were 4,965 rural credit cooperatives, 22 rural commercial banks, 163 rural cooperative banks, and 107 non-traditional rural financial institutions comprising 91 township banks, 6 loan companies and 10 rural mutual cooperatives. Of these non-traditional rural financial institutions, seven were established by foreign bank entities, such as HSBC Bank (China) Co. Ltd., Citibank (China) Co. Ltd. and Standard Chartered Bank (China) Ltd.
During 2009, CBRC made further efforts to develop new-type rural financial institutions, with the latter continuing to grow in 2009 both in number and geographical coverage. As of 31 December, 2009, there were 3,056 rural credit cooperatives, 43 rural commercial banks, 196 rural cooperative banks and 172 non-traditional rural financial institutions (increased by 65 since the end of 2008) comprising 148 township banks, 8 loan companies and 16 rural mutual cooperatives.
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Exhibit 82. Major players in China's county area banking (as at end-2009) Type of institution Name of institution or sub-type Number of institutions Large Commercial Bank Agricultural Bank of China 1 Policy Bank Agricultural Development Bank of China 1 Postal Savings Bank Postal Savings Bank of China 1 Small and Medium-sized Rural Rural credit cooperative institutions: Financial Institutions - rural credit cooperatives 3,056 - rural commercial banks 43 - rural cooperative banks 196 New-type rural financial institutions: - village and township banks 148 - lending companies 8 - rural mutual credit cooperatives 16 Source: CBRC
According to “The General Working Plan for New-Type Rural Financial Institutions (2009-2011),” an additional 1,300 institutions are to be established around the country with priority being given to the under-banked regions in central and western China. According to CBRC, progress was made by rural small and medium-sized financial institutions in 2009. By the end of 2009, the total number of villages and towns without financial institutions had been reduced to 2,792 from 2,945 at the end of June 2009, and the total number of villages and towns without financial services had been reduced to 342 from 708.
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Banks | China Lucy Feng
Exhibit 83. Key data of major rural commercial banks in China (as of 31 December, 2009)
Balance (RMBbn) Market share (%) Assets Loans Deposits Assets Loans Deposits Beijing Rural Commercial Bank 284.30 122.10 262.20 0.361 0.305 0.439 (北京农村商业银行 ) Shanghai Rural Commercial Bank 212.25 118.78 179.23 0.269 0.297 0.300 (上海农村商业银行 )
Guangzhou Rural Commercial Bank 185.69 91.54 152.37 0.236 0.229 0.255 (广州农村商业银行 ) Chengdu Rural Commercial Bank 126.19 67.81 103.68 0.160 0.170 0.173 (成都农村商业银行 ) Dongguan Rural Commercial Bank 110.30 51.40 95.50 0.140 0.129 0.160 (东莞农村商业银行 ) Foshan Shunde Rural Commercial Bank 101.56 49.72 84.69 0.129 0.124 0.142 (佛山顺德农村商业银行 ) Shenzhen Rural Commercial Bank 76.12 0.00 0.00 0.097 0.000 0.000 (深圳农村商业银行 ) Wuhan Rural Commercial Bank 54.55 30.81 46.65 0.069 0.077 0.078 (武汉农村商业银行 ) Jiangshu Jiangyin Rural Commercial Bank 41.57 25. 6 35.84 0.053 0.063 0.060 (江苏江阴农村商业银行 ) Jiangsu Changshu Rural Commercial Bank 40.37 21.76 35.00 0.051 0.054 0.059 (江苏常熟农村商业银行 ) Jiangshu Xizhou Rural Commercial Bank 36.60 23.22 32.04 0.046 0.058 0.054 (江苏锡州农村商业银行 ) Jiangsu Zhangjiagang Rural Commercial Bank 32.52 18.01 26.23 0.041 0.045 0.044 (江苏张家港农村商业银行 ) Wujiang Rural Commercial Bank 31.56 19.89 28.66 0.040 0.050 0.048 (吴江农村商业银行 ) Jiangsu Kunshan Rural Commercial Bank 24.98 16.30 22.38 0.032 0.041 0.037 (江苏昆山农村商业银行 ) Erdosds Rural Commercial Bank 2 .73 6.52 13.50 0.026 0.016 0.023 (鄂尔多斯市东胜农村商业银行 ) Heifei Science＆Technology Rural Commercial Bank 19.69 9.54 16.61 0.025 0.024 0.028 (合肥科技农村商业银行 ) Taicai Rural Commercial Bank 12.28 8.12 11.06 0.016 0.020 0.019 (江苏太仓农村商业银行 ) Jilin Jiutai Rural Commercial Bank 5.85 2.51 5.10 0.007 0.006 0.009 (吉林九台农村商业银行 Chizhou Jiuhua Rural Commercial Bank 4.10 2.40 3.70 0.005 0.006 0.006 (池州九华农村商业银行 ) Anhui Feixi Rural Commercial Bank 3.23 2.19 3.01 0.004 0.005 0.005 (安徽肥西农村商业银行 ) Source: PBoC, Xinhua, Caixin and www.gdcct.gov.cn
Increasing foreign banks’ presence in county areas With urbanisation and emerging rural areas, foreign banks have been looking for opportunities in China’s county areas for years, given the low penetration of financial services there and huge growth potential. In China, there are 120 million agricultural households with loan demands; however, only 60% can be met at the moment, with the remaining 40% leaving unsatisfied, according to a survey conducted by PBoC. Of approximately 35,000 counties and towns in China, 71.4% have no access to any type of financial services.
As large-cap Chinese banks have been cutting their resources in county areas due to longer investment return periods, limited profitability and higher risks in county area business, foreign banks have been able to fill the vacancy in recent years by opening solely funded banks or acting as strategic investors in county areas. By the end of 2010, there were seven foreign banks – HSBC, Citibank, Standard Chartered, Bank of East Asia, Rabobank, AMZ and International Finance Corporation (IFC) – running or investing in rural financial institutions in 10 of 31 provinces and all four municipalities in China, according to the PBoC. Among these foreign banks, HSBC has the most extensive presence in county areas across western, central and eastern China.
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Banks | China Lucy Feng
HSBC was the first foreign bank to establish a solely funded rural bank back on 13 December, 2007 in Sanligang county in Hubei province, merely engaging in deposit- taking services for both enterprises and households, as well as lending services for agriculture-related enterprise. Following its entry, HSBC has established a total of 10 rural banks in China, including its latest in Pingjiang county of Hunan province, opened on 30 December, 2010. All of these rural banks are mainly providing loans to agricultural households while taking deposits from agriculture-related enterprises and households in local areas. Some also provide non-collateral small-amount loans for agricultural households and individual industrial and commercial households in local areas, so as to meet their financing demands, according to a survey conducted by PBoC in 2008. Bank of East Asia set up its first rural bank on 15 December 2010 in Dongya village in Hubei province, which is also the first foreign rural bank in Shaanxi province. The bank mainly provides “Sannong” (the three areas of the agricultural economy that the government has identified as requiring assistance) loan services and loans to SMEs by offering a series of bank services for agricultural households and enterprises as well as SMEs in order to satisfy their demand for funding and financial management. At the early stage, the bank would focus on taking deposits, lending to agriculture-related business and settlement transactions. It would provide loans ranging from RMB1,000 to RMB2mn for “agriculture-related” industry. In contrast, Citibank has been building up small-loan companies instead of rural banks in county areas in China. Citibank has established three solely funded small-loan companies in county areas – one in Gong An (Hubei province), one in Chi Bi (Hubei province), and one in Wafangdian (Liaoning province). They mainly provide different kinds of loans, including collateral and non-collateral, to households, individuals, industrial and commercial households and micro-enterprises.
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Banks | China Lucy Feng
Exhibit 84. Foreign financial institutions’ investment in China rural banks
Foreign financial Time of foundation/ Nature of institutions Rural commercial banks investment Provinces/Cities investment Shareholding Rabobank Hangzhou Uni n rural commercial bank 5-Feb-05 Jiangsu Strategic investor Rabobank (9.94%) International Finance 杭州联合农村合作银行 IFC (4.97%) Corporation (IFC) Australia nd New Shanghai rural commercial banks 25-Aug-05 Shanghai Strategic investor 19.90% Zealand Bank (ANZ) 上海农村商业银行 HSBC Hubei Suizhou Zengdu village bank 13-Dec-07 Hubei Founder 100% 湖北随州曾都汇丰村镇银行 International Finance Tianjin Pinhai rural commercial bank 29-Dec-07 Tianjin Strategic investor 10% Corporation (IFC) 天津滨海农村商业银行 HSBC Chongqing Dazu village bank 2-Sep-08 Chongqing Founder 100% 重庆大足村镇银行 Citibank Loan companies in Liaoning, and Hubei 7-Oct-08 Liaoning (Wa Fang Dian) Founder 100% 贷款公司 (辽宁，湖北) Hubei (Gong An & Chi Bi) HSBC Fujian Yongan village bank 15-Oct-08 Fujian Founder 100% 福建永安汇丰村镇银行 Standard Chartered Bank Neimenggu Helinger HSBC village bank 4-Feb-09 Neimenggu Founder 100% 内蒙古和林格尔村镇银行 HSBC Guangdong Enping village bank 19-Mar- 9 Guangdong Founder 100% 广东恩平村镇银行 HSBC Beijing Miyun village bank 2-Dec-09 Beijing Founder 100% 北京密云汇丰村镇银行 HSBC Chongqing Fengdu village bank 21-Dec-09 Chongqing Founder 100% 重庆丰都汇丰村镇银行 HSBC Dalian Fulan village bank 28-Dec-09 Shandong Founder 100% 大连普兰汇丰村镇银行 SBC Hubei Tianmen village bank 14-Sep-10 Hubei Founder 100% 湖北天门汇丰村镇银行 HSBC Chongqing Rongchang village bank 3-Dec-10 Chongqing Founder 100% 重庆荣昌汇丰村镇银行 Bank of East Asia Shaanxi Fuping BEA 14-Dec-10 Shaanxi Founder 100% 陕西富平东亚村镇银行 HSBC Hunan Pingjiang village bank 30-Dec-10 Hunan Founder 100% 湖南平江汇丰村镇银行 Source: Nomura research
Potential growth in county area banking County area banking is not about providing micro loans to farmers, but rather supporting China’s fast-growing agriculture-related business development, rural SMEs and tertiary business. Rural customers include leading enterprises involved in the agriculture modernisation process, major production centres of agriculture goods, wholesalers, merchandise distributors, SMEs as suppliers or distributors of leading agriculture enterprises, as well as affluent households. We believe that growth of the county area economy will result in continued improvement in the operating environment for county area banking business. With more balanced economic development between urban areas and county areas, we expect the county area banking market to continue expanding – providing China’s banking industry with a significant growth opportunity.
County lending is benefiting from China’s rapid urbanisation, with villages being transformed into towns and cities with their own shops, banks and bases of economic activity. With yields on county lending 50-100bps higher than on urban corporate loans, we think county banking (as well as overall “Sannong”-related rural and micro loans) could be more lucrative and hold better prospects than urban banking.
As uncertainty over the global economic recovery continues, particularly with the ongoing European sovereign debt crisis, we consider coastal and export-oriented exposure as more leveraged to a fallout in the external environment. In this context, we believe inner China is sheltered, since it is driven more by domestic consumption and will continue to have government support for development aimed at slowing the widening gap between the coastal and central and western regions.
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Banks | China Lucy Feng
Given the to-be-launched loan-loss provision requirement of 2.5%, as required by the regulator, we believe Chinese banks must undertake initiatives to increase their profitability through channels such as higher margins or non-interest income. In our view, county banking is one of the ways out. Given increasingly intense competition for quality customers and projects in urban banking, banks’ pricing power has continued to fall. County banking together with its urbanisation theme, which in turn implies industrialisation for agriculture and other manufacturing, is an ideal place for Chinese banks seeking growth opportunities, in our view. We believe the government will continue to launch favourable policies to support development in county area banking. According to CBRC, in 2010 it will further provide strong support for rural financial service development. Measures include promoting the expansion of coverage and services of rural financial institutions, guiding the large commercial banks and policy banks to provide financial services to rural areas, encouraging further innovation of rural financial products and services, and facilitating the synergy of combining banking and insurance services in rural areas.
On the back of continuing government emphasis and support, we believe banks operating in county areas will continue to benefit from preferential measures and incentives. In our view, banks that already have an operating network in county areas, particularly ABC, will benefit the most. Other peers need to consider their business strategies when pursuing more market share in county areas, given the potentially substantial initial capital, time and approvals needed.
Exhibit 85. Total assets of banking institutions (2003-2009)
Balance (RMBbn) Percentage of total (%) Institutions/Year 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 Banking institutions 27,658 31,599 37,470 43,950 52,598 62,388 78,769 Policy banks & the CDB 2,125 2,412 2,928 3,472 4,278 5,645 6,946 7.68 7.63 7.82 7.90 8.13 9.05 8.82 Large commercial banks 16,051 17,982 21,005 24,236 28,007 31,836 40,089 58.03 56.91 56.06 55.15 53.25 51.03 50.89 Joint-stock commercial 2,960 3,648 4,465 5,445 7,249 8,809 11,785 10.70 11.54 11.92 12.39 13.78 14.12 14.96 banks City commercial banks 1,462 1,706 2,037 2,594 3,340 4,132 5,680 5.29 5.40 5.44 5.90 6.35 6.62 7.21 Rural commercial banks 38 57 303 504 610 929 1,866 0.14 0.18 0.81 1.15 1.16 1.49 2.37 Rural cooperative banks 0 0 275 465 646 1,003 1,279 0.00 0.00 0.73 1.06 1.23 1.61 1.62 Urban credit cooperatives 147 179 203 183 131 80 27 0.53 0.57 0.54 0.42 0.25 0.13 0.03 Rural credit cooperatives 2,651 3,077 3,143 3,450 4,343 5,211 5,493 9.58 9.74 8.39 7.85 8.26 8.35 6.97 Non-bank financial 910 873 1,016 1,059 972 1,180 1,551 3.29 2.76 2.71 2.41 1.85 1.89 1.97 institutions Postal savings bank 898 1,085 1,379 1,612 1,769 2,216 2,705 3.25 3.43 3.68 3.67 3.36 3.55 3.43 Foreign banks 416 582 715 928 1,252 1,345 1,349 1.50 1.84 1.91 2.11 2.38 2.16 1.71 Source: CBRC, Nomura research
Exhibit 86. Total liabilities of banking institutions (2003-2009)
Balance (RMBbn) Percentage of total (%) Institutions/Year 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 Banking institutions 26,594 30,325 35,807 41,711 49,568 58,601 74,335 Policy banks & the CDB 2,029 2,300 2,776 3,301 3,920 5,265 6,539 7.63 7.59 7.75 7.91 7.91 8.98 8.80 Large commercial banks 15,400 17,218 20,045 22,882 26,433 29,878 37,903 57.91 56.78 55.98 54.86 53.33 50.99 50.99 Joint-stock commercial 2,862 3,533 4,332 5,254 6,911 8,368 11,222 10.76 11.65 12.10 12.60 13.94 14.28 15.10 banks City commercial banks 1,412 1,647 1,954 2,472 3,152 3,865 5,321 5.31 5.43 5.46 5.93 6.36 6.60 7.16 Rural commercial banks 38 54 287 479 577 876 1,755 0.14 0.18 0.80 1.15 1.16 1.49 2.36 Rural cooperative banks 0 0 257 436 605 938 1,194 0.00 0.00 0.72 1.04 1.22 1.60 1.61 Urban credit cooperatives 146 177 200 178 125 76 25 0.55 0.58 0.56 0.43 0.25 0.13 0.03 Rural credit cooperatives 2,665 3,003 3,011 3,301 4,157 4,989 5,258 10.02 9.90 8.41 7.91 8.39 8.51 7.07 Non-bank financial 768 774 913 942 796 949 1,265 2.89 2.55 2.55 2.26 1.61 1.62 1.70 institutions Postal savings bank 898 1,085 1,379 1,612 1,757 2,194 2,671 3.38 3.58 3.85 3.87 3.54 3.74 3.59 Foreign banks 375 533 653 853 1,135 1,203 1,182 1.41 1.76 1.82 2.05 2.29 2.05 1.59 Source: CBRC, Nomura research
Nomura 43 14 January 2011
Banks | China Lucy Feng
Exhibit 87. NPAT of banking institutions (2007-2009)
Balance (RMBbn) Percentage of total (%) Institutions/Year 2007 2008 20092007 2008 2009 Banking institutions 446.7 583.4 668.4 Policy banks & the CDB 48.9 23.0 35.3 10.95 3.94 5.27 Large commercial banks 246.6 354.2 400.1 55.20 60.72 59.86 Joint-stock commercial banks 56.4 84.1 92.5 12.63 14.42 13.84 City commercial banks 24.8 40.8 49.7 5.55 6.99 7.43 Rural commercial banks 4.3 7.3 14.9 0.96 1.25 2.23 Rural cooperative banks 5.5 10.4 13.5 1.22 1.78 2.02 Urban credit cooperatives 0.8 0.6 0.2 0.17 0.11 0.03 Rural credit cooperatives 19.3 21.9 22.8 4.33 3.76 3.41 Non-bank financial institutions 33.4 28.5 29.9 7.47 4.88 4.47 Postal savings bank 0.7 0.7 3.2 0.15 0.11 0.48 Foreign banks 6.1 11.9 6.5 1.36 2.04 0.96 Source: Company data, Nomura research
Nomura 44 14 January 2011
Banks | China Lucy Feng
Case studies Rural banking industry analysis and case studies In this section, we analyse the financials and characteristics of 12 rural commercial banks in north-eastern (Shandong), eastern (Anhui, Jiangsu and Shanghai) and southern China (Guangdong) to analyse the trends and development of China’s rural commercial banking sector.
County area economy development under China’s urbanisation The county area economy plays a significant role in China’s national economy. The rural population amounted to 712.9mn at end-2009, accounting for around 53.4% of China’s total population (source: CEIC). In 2009, total GDP attributable to county areas stood at RMB17tn, or 52% of China’s total GDP. The county area economy is a key component of China’s new national economic development strategies, which aim to expand domestic consumption, increase urbanisation and balance regional development, such that county area economic development becomes a key driver of China’s long-term economic growth. We believe growth of the county area economy will result in continuing improvement in the operating environment for county area banking business. With more balanced economic development between urban areas and county areas, we expect the county area banking market to continue expanding – providing China’s banking industry with a significant growth opportunity.
Exhibit 88. GDP breakdown in county areas
(RMBbn) GDP from Tertiary Industries (LHS) 16,000 GDP from Secondary Industries (LHS) 14,000 GDP from Primary Industries (LHS) 31% 12,000 31% 10,000 31% 8,000 32% 32% 51% 6,000 32% 50% 32% 33% 49% 4,000 47% 45% 46% 42% 42% 2,000 26% 25% 23% 22% 21% 20% 19% 18% 0 2001 2002 2003 2004 2005 2006 2007 2008
Source: National Bureau of Statistics of China (NBSC)
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Exhibit 89. China GDP breakdown
(RMBbn) County Area GDP (LHS) (%) 35,000 National GDP (LHS) 50 30,000 % of County Area GDP in national GDP (RHS) 49 25,000 48 20,000 47 15,000 46 10,000 5,000 45 0 44 (in billions of billions (in RMB, except RMB, percentages) 2001 2002 2003 2004 2005 2006 2007 2008
Source: CEIC, China Marketing Research Co., Ltd
The Chinese government embarked on the urbanisation of China in 1949, when only 10.6% of its total population lived in urban areas. Sixty years later, its urbanisation ratio had risen to 46.6% (source: CEIC). China’s urbanisation process has accelerated since 1995, with more than 16mn of the rural population being urbanised every year, on average. We expect this trend to continue over the next 2-3 decades, with the urbanisation ratio reaching 58.6% by 2020 and 69.0% by 2030. We believe that the urbanisation trend will create demand for financial services on both the consumer and corporate levels. Additionally, labour in rural areas will undergo a gradual shift to the non-agriculture economy. In county-level areas there will likely emerge a large number of small cities; industry structure upgrading and urbanisation will likely accelerate the development of the county-level economy. We see opportunities for financial companies that are well positioned to service this population and development trend.
Exhibit 90. China’s urbanisation ratio Exhibit 91. Number of people being urbanised
(%) (Million) 50 20 Forecast 45 40 15 35
30 10 25
20 5 15
10 0 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029
Source: CEIC, Nomura research Source: CEIC, Nomura research estimates
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China rural commercial banks In this section of our report, we have selected 12 rapid-growing rural commercial banks that are located in the southern, eastern and northern part of China to analyze industry trends and development. For the 12 rural commercial banks, net profit grew by 3-20% y-y in 2009. Guangdong province enjoys the highest growth rate (20.4% y-y), followed by Jiangsu province (7.7%) in eastern China (source: CEIC).
We note that interest income is the key driver of the growth of rural commercial banks’ net profit. For the 12 rural commercial banks we examined, interest income represents 80-98% of total operating income.
Exhibit 92. Summary of 12 sample rural commercial banks
Year of Rural Commercial Banks establishment Area Province/City Jilin Jiutai Rural Commercial Bank Dec-08 North Eastern Jilin (吉林九台农村商业银行) Hefei Science & Technology Rural Commercial Bank Feb-07 Eastern Anhui (合肥科技农村商业银行) Zhangjiagang Rural Commercial Bank Nov-01 Eastern Jiangsu (张家港农村商业银行) Shanghai Rural Commercial Bank Aug-05 Eastern Shanghai (上海农商银行) Jiangsu Xizhou Rural Commercial Bank Jun-05 Eastern Jiangsu (江苏锡州农村商业银行) Taicang Rural Commercial Bank Jan-05 Eastern Jiangsu (太仓农村商业银行) Jiangsu Changshu Rural Commercial Bank Nov-01 Eastern Jiangsu (江苏常熟农村商业银行) Jiangsu Wujiang Rural Commercial Bank Aug-04 Eastern Jiangsu (江苏吴江农村商业银行) Jiangsu Jiangyin Rural Commercial Bank 2001 Eastern Jiangsu (江苏江阴农村商业银行) Zhuhai Rural Credit Cooperatives 1952 Southern Guangdong (珠海市农村信用合作联社) Guangdong Rural Credit Cooperatives Aug-05 Southern Guangdong (广东农村信用社) Shunde Rural Commercial Bank Dec-09 Southern Guangdong (顺德农村商业银行)
Source: Data from respective banks, and Nomura research
Accompanied by the fast growth rate, bad loans declined at 60-240bps y-y, while asset quality continued to improve. The 12 banks had NPL ratios of 1-2% by end-2009. We note that around 50% of the total loans were to manufacturing industries, followed by wholesale and retail, and public facilitation. Most of these rural commercial banks position themselves as SME business service providers. This is, in our opinion, in line with China’s urbanisation trend, where both individuals and small corporations are in great need of capital to upgrade living and production quality. For the 12 rural commercial banks we examined, gross loans grew by 14-46% y-y in 2009, according to our analysis of their financial statements.
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Exhibit 93. Breakdown of China rural commercial Exhibit 94. Breakdown of China rural commercial bank loans (2009) bank loans by loan types (2009)
Agriculture Manufacturing, loan Others, 38% 38% 4% SME loans 16%
Real estate, 9% wholesale & Water and retail, 9% public facility, Other loans 6% 80%
Source: CEIC, Company data, and Nomura research Source: CEIC
Exhibit 95. Rural commercial banks – NPAT and loan growth rate (2009) NPAT y-y growth rate Gross loan y-y growth rate Rural Commercial Banks (%) (%) Jilin Jiutai Rural Commercial Bank (9.80) 46.3 (吉林九台农村商业银行) Hefei Science & Technology Rural Commercial 16.80 25.6 Bank (合肥科技农村商业银行) Zhangjiagang Rural Commercial Bank 3.50 35.1 (张家港农村商业银行) Shanghai Rural Commercial Bank (46.00) 27.5 (上海农商银行) Jiangsu Xizhou Rural Commercial Bank 8.60 42.2 (江苏锡州农村商业银行) Taicang Rural Commercial Bank 9.10 30.1 (太仓农村商业银行) Jiangsu Changshu Rural Commercial Bank 7.70 19.7 (江苏常熟农村商业银行) Jiangsu Wujiang Rural Commercial Bank (0.10) 24.5 (江苏吴江农村商业银行) Jiangsu Jiangyin Rural Commercial Bank 5.20 27.9 (江苏江阴农村商业银行) Zhuhai Rural Credit Cooperatives 20.40 16.0 (珠海市农村信用合作联社) Guangdong Rural Credit Cooperatives 7.20 13.8 (广东农村信用社) Shunde Rural Commercial Bank 20.40 24.6 (顺德农村商业银行)
Source: Data from respective banks, and Nomura research
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Exhibit 96. Loan yield comparison (2009)
(%) 7 6.30% 6.20% 6.00% 6 5.50% 5.63% 5.16% 4.89% 5.03% 4.91% 4.58% 5 4.12% 4 3 2 1 0 Citic ABC CCB BOC CMB ICBC HRCB rural bank Jiangsu Minsheng SH rural Jiangsu Changshu commercial commercial Xizhou rural Source: Data from respective banks, and Nomura research
Exhibit 97. Breakdown of population (2009, mn) Exhibit 98. Breakdown of land (2009, mn)
Urban population Rural population 120 20,000 Agriculture Non-agriculture 18,000 100 16,000 80 14,000 12,000 60 10,000 8,000 40 6,000 20 4,000 2,000 0 0 Anhui Anhui Jiangsu Jiangsu Shanghai Shanghai Shandong Shandong Guangdong Guangdong
Source: CEIC, Nomura research Source: CEIC, Nomura research
Our study suggests that rural commercial banks have a relatively high loan yield compared with peer large urban banks. The average loan yield for four sample rural banks (Hefei Science & Technology Rural Commercial Bank, Shanghai Rural Commercial Bank, Jiangsu Xizhou Rural Commercial Bank and Jiangsu Changshu Rural Commercial Bank) is 6%, 1.12 percentage points higher than the average listed China banks, based on our calculations.
In 2009, T1 CAR and CAR ratios for these 12 banks ranged from 9.35% to 15.55% and 10.21% to 17.33%, respectively. We note that unlike the big national commercial banks whose T1 CAR and CAR ratios are similar, or in a narrow range (eg, T1 CAR ranges from 8.2-9.8%, CAR ranges from 10.2-13.6%), capital adequacy for rural commercial banks is spread widely. We believe this is because capital-raising and use- of-capital status varies depending on the local economy.
We think these rural commercial banks are able to charge a premium on individual and corporate loans, as they provide various loan products tailored specifically to local farmers and SMEs. For example, “Golden Seed” small loans offered by Changshu Rural Commercial Bank target local farmers and businessmen. Changshu offers loans with amounts ranging from RMB5,000 to RMB0.5mn and a term from three months to two years. However, collateral is not necessary as long as a guarantee is provided by a local resident with stable income.
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Exhibit 99. Loan yields and funding costs – China rural commercial banks Rural Commercial Banks Funding costs Loan yields Jilin Jiutai Rural Commercial Bank 25bps above 8.7%-10.0% (吉林九台农村商业银行) benchmark rate * 8% for farmers' loan only with amount limit of RMB3-4K Hefei Science & Technology Rural Commercial Bank 1.56% 5.63% (合肥科技农村商业银行) Zhangjiagang Rural Commercial Bank 1.47% (corporate rate) 7.09% (corporate rate) (张家港农村商业银行) 2.30% (individual rate) 5.89% (individual rate) Shanghai Rural Commercial Bank 1.7% 6.2% (上海农商银行) Jiangsu Xizhou Rural Commercial Bank 1.4% 6.3% (江苏锡州农村商业银行) Taicang Rural Commercial Bank na na (太仓农村商业银行) Jiangsu Changshu Rural Commercial Bank 1.9% 5.7% (江苏常熟农村商业银行) Jiangsu Wujiang Rural Commercial Bank na na (江苏吴江农村商业银行) Jiangsu Jiangyin Rural Commercial Bank na na (江苏江阴农村商业银行) Zhuhai Rural Credit Cooperatives na na (珠海市农村信用合作联社) Guangdong Rural Credit Cooperatives na na (广东农村信用社) Shunde Rural Commercial Bank na na (顺德农村商业银行)
Source: Data from respective banks, and Nomura research
Key provinces overview
Jiangsu province Jiangsu province lies at the centre of China’s east coast. It borders Shandong to the north, Anhui to the west, and Zhejiang and Shanghai to the south. Historically, Jiangsu had much stronger light industry, such as its textile and food industries. However, after 1993, the growth of the heavy industry sector, including chemicals and construction materials, accelerated and overtook that of the light industry sector.
In 2009, Jiangsu recorded GDP of RMB3,445.7bn, up 12.4% y-y, making it the second-largest (in terms of GDP, after Zhejiang) among all the provinces in China. Jiangsu also has the highest population density among all the provinces in China (source: CEIC).
Over the past 10 years, Jiangsu province has experienced an above-national-average urbanisation rate. The number of Jiangsu’s big cities has risen rapidly. Nanjing, Xuzhou, Wuxi, Suzhou and Changzhou are the major big cities in the province. In addition, there are 13 medium-large cities and 46 small cities. In our view this trend will continue to accelerate over the next 10 years, given that Jiangsu still has 55% rural population at the moment. Industrial activities (eg, manufacturing) contribute 47% of Jiangsu’s total GDP, the second-highest (the first being Shandong) among all the provinces we examined. Major GDP contributors also include the wholesale and retail (10%), real estate (6%) and construction (6%) industries. The banking and insurance sector accounts for 5% of Jiangsu’s total GDP. Penetration of the banking industry is relatively high in the province, as it accounts for 10% of the country’s total market share in terms of assets. With 5.6% of China’s overall population, Jiangsu’s banking industry accounts for 10% of the country’s banking market share. By 1Q10, Jiangsu’s total loans outstanding amounted to RMB4.2tn, accounting for 10% of the country’s total loans, with an increase in market share of 0.5% compared with 2009. According to analysis conducted by the Jiangsu Banking Association, development of Jiangsu’s banking industry has exhibited the following three trends in recent years: 1) the proportion of manufacturing loans has
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been increasing rapidly (manufacturing loans represented 27.9% of total loans in the province in 1Q10); 2) the proportion of SME loans is growing significantly (SME loans represented 65.6% of total loans); 3) loans to tertiary industry are increasing.
Exhibit 100. Breakdown of GDP by primary, Exhibit 101. Breakdown of GDP by industries – secondary and tertiary industries Jiangsu (2009)
(RMBbn) Primary industry Secondary industry Banking & Real estate 4,000 insurance Tertiary Industry 6% 5% Others 3,500 Wholesale 15% Primary & retail industry 3,000 39.6% trade 7% 10% 2,500 38.1% 37.4% 2,000 Transport, storage & 1,500 53.9% 55.0% post 1,000 55.6% 4% Secondary: 500 Secondary industry: 6.9% 6.6% industry 7.1% construction 0 47% 6% 2007 2008 2009
Source: CEIC, Nomura research Source: CEIC, Nomura research
Exhibit 102. Overview of Jiangsu economy (2009) Population 74.74mn Land area 10.26 square km Total GDP RMB3,445.73bn GDP per capita RMB4,608 Average annual income RMB20,000 Average annual income of farmers RMB8,000 Urban population in % 45 Rural population in % 55 Total loans market share in China (%) 10 Source: CEIC, Nomura research
Anhui province Anhui province is in the southeast of China, covering a total area of 139,600 sq km, accounting for 1.45% of the country’s land. Benefiting from a mild climate, Anhui province is rich in agricultural resources and products, and possesses 42.7bn sqm of farmland, 41.3bn sqm of forest land and 5.3bn sqm of aquatic farms. Anhui’s agricultural products are well known at home and abroad (source: Caixin) Compared with its more successful neighbours in the east, Zhejiang and Jiangsu, Anhui is behind in terms of economic development, with a GDP per capita around one- third the level of those two provinces. There is great regional disparity as well, and most of the wealth in the province is concentrated in industrial regions close to the Yangtze River, such as Hefei, Wuhu and Ma’anshan (source: Caixin) With an urban population accounting for only 27.8% of Anhui’s total population, we believe there is potential for economic growth alongside the region’s accelerated urbanisation trend. Comparatively, contributors to Anhui’s GDP are less diversified (with over 55% contributed by industrial and primary industries). The financial industry represents around 4% of the province’s total GDP. By end-2009, total loans in Anhui province amounted to RMB934.9bn, representing 1.37% of China’s total loans in 2009. The Anhui government has been supportive of banking industry development and emphasized the important role that banks play in facilitating economic development. During 2009, 7,966 projects totalling RMB336bn were launched by banks to county-level SMEs/farmers to facilitate county development. Half of the capital was directly invested to facilitate agriculture development (eg,
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farming technology), together with the relevant support of agriculture-related business (eg, trading in agriculture products).
Exhibit 103. Breakdown of GDP by primary, Exhibit 104. Breakdown of GDP by industries – secondary and tertiary industries Anhui (2009)
(RMBbn) Tertiary Industry Real estate 1,200 Banking & 5% Others Secondary Industry insurance 16% Wholesale 1,000 Primary Industry 4% & retail 36.4% Trade Primary 800 industry 37.4% 7% 15% 39.0% 600 Transport, 48.7% storage & 400 46.6% post 44.7% 5% 200 Secondary industry: Secondary: 16.3% 16.0% 14.9% 0 construction industry 2007 2008 2009 8% 40%
Source: CEIC, Nomura research Source: CEIC, Nomura research
Exhibit 105. Overview of Anhui economy (2009) Population 61.31mn Land area 14,012.57 Ha Th Total GDP RMB1,006.28bn GDP per capita RMB16,413 Average annual income RMB13,984 Average annual income of farmers RMB7,615 Urban population in % 27.8 Rural population in % 72.2 Total loans market share in China (%) 1.37 Source: CEIC, Nomura research
Shanghai Shanghai is situated on the banks of the Yangtze River Delta in eastern China. It is the largest city in China and the eighth-largest city in the world, and is regarded as the centre of finance and trade in China. Shanghai has a population of 18.7mn, including a transient population of 2mn. In 2009, Shanghai’s GDP reached RMB1,505bn. Shanghai’s links to both the Chinese interior and the central government are stronger than those of other areas, and a stronger base in manufacturing and technology. Shanghai has increased its role in finance, banking, and as a major destination for corporate headquarters, fuelling demand for a highly educated and modernized workforce. Shanghai recorded double-digit percentage GDP growth for 15 consecutive years from 1992 (source: CEIC). According to the Shanghai statistics authority, in 2009, the annual income per citizen was RMB26,675 and annual income per rural resident was RMB11,385. The average consumption per citizen amounted to RMB19,398 and the average annual consumption for each rural citizen was RMB9,115. Compared with other areas/provinces we examined, Shanghai had the highest urbanisation rate of 86% as at end-2009. Industrial activities contributed 36% of total GDP (as opposed to an average of 46% of the other four provinces), while the contributions from banking and insurance, and real estate were 12% and 8%, respectively. We expect the tertiary industry to play a more important role in Shanghai’s economic growth.
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Exhibit 106. Breakdown of GDP by primary, Exhibit 107. Breakdown of GDP by industries – secondary and tertiary industries Shanghai (2009)
(RMBbn) Tertiary Industry Primary 1,600 Secondary Industry Industry Primary Industry Others 1% Secondary: 1,400 20% industry 36% 1,200 59.4% Real estate 1,000 53.7% 8% 52.6% Secondary 800 industry: 600 construction Banking & 4% 400 46.6% 45.5% 39.9% insurance 12% Transport, 200 Wholesale storage & 0.8% 0.8% 0.8% 0 & retail post 4% 2007 2008 2009 trade 15% Source: CEIC, Nomura research Source: CEIC, Nomura research
Exhibit 108. Overview of Shanghai economy (2009) Population 18.7mn Land area 17,981 Ha Th Total GDP RMB1,505bn GDP per capita RMB80,481 Average annual income RMB26,690 Average annual income of farmers RMB11,385 Source: CEIC, Nomura research
Guangdong province Guangdong province is in southern China, bordering the special administrative regions of Hong Kong and Macau. Guangdong province covers an area of over 180,000 sq km and has population of 96.38mn. It is also the second largest economy of a sub-national entity in terms of GDP (RMB3,948bn in 2009) in all of Asia (only after Korea), according to a report published by Standard Chartered Bank. In 2009, Guangdong's primary, secondary, and tertiary industries were worth RMB201bn, RMB1.93tn, and RMB1.78tn, respectively. Its per capita GDP reached RMB40,748. Guangdong contributes approximately 12% of the total national economic output (source: CEIC).
Guangdong has played a pioneering role in China’s economic reforms ever since the country’s implementation of opening policies in the late 1970s. Three of China’s Special Economic Zones, namely, Shenzhen, Zhuhai and Shantou, are located in Guangdong’s coastal areas. Guangdong’s economy is based on manufacturing and exports. The nine pillar industries in Guangdong include three new leading industries – electronic information, electric machinery and special purpose equipment, and petroleum chemicals; three traditional industries – textile and garment, food and beverage, and construction materials; and three potential leading industries – paper making, pharmaceuticals, and automobiles (source: Caixin).
Guangdong’s GDP is balanced between secondary and tertiary industry, with the contributions accounting for 46% and 49%, respectively. Primary industry only contributes around 5% of total GDP. Guangdong has a strong wholesale and retail industry. It contributes roughly 10% of overall provincial GDP. The banking and insurance industry is less developed and contributes 6% of GDP (source: CEIC).
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Exhibit 109. Breakdown of GDP by primary, Exhibit 110. Breakdown of GDP by industries – secondary and tertiary industries Guangdong (2009)
(RMBbn) Tertiary Industry Banking and Real estate Others 4,500 Secondary Industry insurance 6% 20% 4,000 Primary Industry 6% Wholesale Primary 3,500 & retail industry trade 3,000 45.7% 5% 42.9% 10% 2,500 43.3% Transport, 2,000 storage & post 1,500 51.6% 49.2% 4% 1,000 51.3% Secondary: 500 Secondary industry: 5.5% 5.5% 5.1% construction industry 0 3% 46% 2007 2008 2009
Source: CEIC, Nomura research Source: CEIC, Nomura research
Exhibit 111. Overview of Guangdong economy (2009) Population 96.38mn Land area 17,981 Ha Th Total GDP RMB3,948.26bn GDP per capita RMB40,748 Average annual income RMB24,970 Average annual income of farmers RMB4,202 Urban population in % 31 Rural population in % 69 Source: CEIC, Nomura research
Shandong province Shandong province is located on the eastern coast of China, in the lower Huanghe River valley. The province has an area of more than 150,000sqkm and a population of 94.7mn, of which 52% live in the rural areas and 48% in the cities (source: CEIC). In 2009, Shandong’s GDP reached RMB3,390bn, ranking it third among all provinces in China. Primary, secondary and tertiary industries accounted for about 10%, 55%, and 35%, respectively, of overall GDP. The major industries of Shandong province are agriculture, high-tech, construction and transportation (source: CEIC).
By end-1H10, total assets of banks in Shandong amounted to RMB4.73tn, of which 45.7% were owned by state-owned commercial banks, 14.9% by joint-stock commercial banks and 9% related to city commercial banks. Half of Shandong’s GDP came from industrial activities, followed by primary industry (10%) and wholesale and retail industry (9%). Only about 6% of total GDP was generated from banking and insurance activities (source: CEIC).
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Exhibit 112. Breakdown of GDP by primary, Exhibit 113. Breakdown of GDP by industries – secondary and tertiary industries Shandong (2009)
(RMBbn) Tertiary Industry Banking and Real estate Others Wholesale 4,000 Secondary Industry insurance 4% 13% & retail Primary Industry 3% 3,500 Trade Primary 3,000 9% 34.7% industry 33.4% 2,500 Transport, 10% 33.4% storage & 2,000 post 1,500 55.8% 5% 56.9% 57.0% 1,000 Secondary industry: 500 construction Secondary: 9.7% 9.7% 9.5% 6% 0 industry 2007 2008 2009 50%
Source: CEIC, Nomura research Source: CEIC, Nomura research
Exhibit 114. Overview of Shandong economy (2009) Population 94.7mn Land area 15,712 Ha Th Total GDP RMB3,389.67bn GDP per capita RMB35, 794 Average annual income RMB14,265 Average annual income of farmers RMB4,985 Urban population in % 48 Rural population in % 52 Source: CEIC, Nomura research
Jiangsu Zhangjiagang Rural Commercial Bank
Company background Zhangjiagang Rural Commercial Bank, founded in 2001, was the first shareholding commercial bank that successfully emerged from the combination of local rural credit cooperatives in China. It is also among the top 10 rural commercial banks in China. With outstanding asset quality (NPL ratio of 0.95% by end 2009) and a history of no government-sponsored bad debt restructuring, the bank is considered by many in the industry as the next rural commercial bank most ready to go public after Agricultural Bank of China (source: Huaxia Time Report (15 Sep 2007). The bank has entered a stock-into-market tutorship period for getting listed.
Operational highlights The bank’s main lines of business include loans, interbank deposits/lending and bond services. These three services generated total income of RMB1.7bn during 2009. Ninety percent of the loans provided were for corporate clients, of which 64% were for the manufacturing industry, 15% for business services and 9% for public facilitation and construction industries (source: company data, financial statements). The micro loans (Sannong) provided by Zhangjiagang Rural Commercial Bank constituted 99% of total micro loans provided to farmers within the city, and 83% of the bank’s loan book by end-2009. The top five priorities that the bank facilitates are organic rice, livestock, changjiang fisheries, flowering and fruits industries (source: company data, financial statements).
Financial highlights As at the end of 2009, the bank had total outstanding deposits and a loan balance of RMB26.2bn and RMB18bn, representing increases of 27% y-y and 35% y-y, respectively. Total NPLs amounted to RMB170mn, representing 0.95% of the total
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outstanding loan balance and a decrease of 19.3% y-y. The loan loss coverage ratio was 238.47%, an increase of 72.5%. The bank achieved an increase in net earnings of 3.7% y-y by achieving net earnings of RMB519mn.
Management / shareholding structure The bank has one operating centre, 34 branches and 51 sub-branches, all of which are located in Zhangjiagang city. By the end of 2009, there were 865 total employees. In total, there were 2,289 shareholders, of which 13 were legal entities and the rest individual investors (source: company data, financial statements). Zhangjiagang’s state-owned asset management company, Jiangsu Guotai International Co. Ltd and Jiangsu Shagang Group were the top three shareholders, holding 9%, 9% and 5%, respectively.
Exhibit 115. Jiangsu Zhangjiagang Rural Commercial Bank — financial statements P&L (RMBmn) 2007 2008 2009 2008 y-y % chg 2009 y-y % chg Interest income 1,336 1,591 1,608 19.1 1.1 Interest expense (566) (699) (711) 23.5 1.7 Net interest income (NII) 770 893 898 16.0 0.6 Operating income 1,351 1,621 1,630 20.0 0.6 Operating expenses (800) (1,051) (1,104) 31.3 5.1 Pre-provision profits 543 665 654 22.5 (1.7) Provisions (19) (74) (56) 282.9 (24.6) Pre-tax profits 523 591 598 12.9 1.2 Taxes (56) (91) (79) 62.8 (12.8) Net profit 468 500 519 7.0 3.7 Minority interest - (1) 0 na (104.8) PROFITS attributable to shareholders 468 501 519 7.1 3.5
Balance sheet items (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Total assets 24,543 26,824 32,518 9.3 21.2 Gross loans 11,362 13,327 18,005 17.3 35.1 Non performing loans 128 212 171 65.0 -19.3 Loan loss reserves 288 352 408 22.1 16.0 Total deposits 18,053 20,596 26,225 14.1 27.3 Shareholders’ Funds (Equity) 2,457 2,829 3,206 15.1 13.3
Per share data (RMB) paid-up capital (mn) 542 542 542 (0.1) 0.1 BVPS 4.53 5.22 5.91 15.2 13.2 EPS 1.00 0.92 0.96 (8.0) 4.3 PPOPP/sh 1.00 1.09 1.10 9.0 1.1
Ratios (%) 2007 2008 2009 y-y % chg y-y % chg 1. CIR 59.27 64.83 67.74 5.6pct 2.9pct 2. Effective tax rate 10.62 15.32 13.20 4.7pct -2.1pct 3. ROA 1.91 1.25 1.75 -0.7pct 0.5pct 4. ROE 19.05 18.97 17.20 -0.1pct -1.8pct 5. Customer LDR 62.94 64.71 68.66 1.8pct 3.9pct 6. NPL ratio 1.13 1.59 0.95 46bps -64bps 7. Loan loss coverage 224.31 165.93 238.47 -58.4pct 72.5pct 12. Tier 1 CAR 12.88 14.43 13.20 1.6pct -1.2pct 13. CAR 12.88 14.67 13.51 1.8pct -1.2pct Source: Company data, Nomura research
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Exhibit 116. Breakdown of loans by types (2009)
Others, 31%
Manufacturing, Lease and 44% business service, 3%
Construction , 5%
Water supply, Trading and environment and services, 10% public facility, 6%
Source: Company data, Nomura research
Exhibit 117. Top ten borrowers (by outstanding loan amount)
1. Zhangjiagang Jiyanghu Development Company (张家港市暨阳湖开发开展有限公司 )
2. Zhangjiagang City Investment Development Company (张家港市城市投资发展有限公司 )
3. Zhangjiagang Jinmao Investment Development Company (张家港市金茂投资发展有限 )
4. Nantong Tongzhou Land Reserve Center (南通市通州区土地储备中心 )
5. Zhangjiagang Chemical Machinery Co. Ltd (张家港化工机械股份有限公司 )
6. Zhangjiagang Radio and Television Information Network Co. Ltd (张家港广电信息网络有限公司 )
7. Jiangsu Suhua Group Co. Ltd (江苏苏化集团张家港有限公司 )
8. Zhangjiagang Gas Chemical Equipment Co Ltd (张家港圣汇气体化工装备有限公司 )
9. Zhangjiagang Wuyou Ship Recycling Co. Ltd (张家港市五友拆船再生利用有限公司 )
10. Suzhou Shenglong Optoelectronics Technology Co. Ltd (苏州盛隆光电科技有限公司)
Source: Company data, Nomura research
Jiangsu Xizhou Rural Commercial Bank
Company background Founded in 2005, Jiangsu Xizhou Rural Commercial Bank is mainly focused on providing facilitation of county agriculture and industrial development to SMEs in Xizhou City.
Operational highlights The bank’s main lines of business include loans, interbank deposits/lending and bond services. These three services generated total income of RMB1.5bn during 2009 (source: company data, financial statements). Lending business alone generated profits of RMB1.1bn, representing 73% of total income. Of the banks loans, 66% were for the manufacturing industry, 15% for leasing and business services and 4% for public facilitation management. Other loan borrowing industries also include wholesale and retail business and water supply business. Short-term loans (term less than one year) and long-term loans (term more than 1 year) made up 77% and 23% of total loans, respectively.
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Banks | China Lucy Feng
Financial highlights As at the end of 2009, the bank had total outstanding deposits and a loan balance of RMB32bn and RMB23bn, representing increases of 32% y-y and 42% y-y, respectively (source: company data, financial statements). Total NPLs amounted to RMB440mn, representing 1.89% of the total outstanding loan balance and a decrease of 37% y-y. The loan loss coverage ratio was 131.17%, an increase of 75.5%. The bank achieved an increase in net earnings of 8.6% y-y on net earnings of RMB344mn.
Management / shareholding structure The bank has 33 branches and 34 sub-branches, all of which are located in Wuxi city. In total, there were 2,434 shareholders by the end of 2009, of which 247 are legal entities, holding 62% of total equity, and 2,187 individual investors, holding 38% of total equity (source: company data, financial statements). Guolian Trust, Wuxi Xingda Nylon Co. Ltd and Wuxi Wanxin Industrial were the top three shareholders, holding 10%, 8% and 7% of total shares, respectively.
Exhibit 118. Jiangsu Xizhou Rural Commercial Bank – financial statements P&L (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Operating Income 1,135 1,494 1,546 31.7 3.4 Operating Expenses 854 1,092 1,095 27.9 0.3 Pre-tax Profits 281 402 450 43.2 12.0 Taxes (75) (85) (106) 13.7 24.5 Net Profit 206 317 344 53.9 8.6 PROFITS attributable to shareholders 206 317 344 53.9 8.6
Balance Sheet Items (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Total Assets 23,362 28,423 36,598 21.7 28.8 Gross Loans 12,321 16,329 23,223 32.5 42.2 Non performing loans 610 699 439 14.6 (37.2) Loan loss reserves (245) (389) (576) 59.0 48.0 Total deposits 20,557 24,116 32,045 17.3 32.9 Shareholders’ Funds (Equity) 1,066 1,838 2,098 72.5 14.2
Per share data (RMB) paid-up capital (mn) 457 689 702 50.6 2.0 BVPS 2.33 2.672.80 14.6 4.9 EPS 0.45 0.460.49 2.2 6.5
Ratios (%) 2007 2008 2009 y-y % chg y-y % chg 1. CIR 75.26 73.09 70.87 -2.2pct -2.2pct 2. Effective tax rate 26.70 21.20 23.57 -5.5pct 2.4pct 3. ROA 0.88 1.22 1.06 0.3pct -0.2pct 4. ROE 19.31 21.82 17.48 2.5pct -4.3pct 5. Customer LDR 59.94 67.71 72.47 7.8pct 4.8pct 6. NPL ratio 4.98 4.27 1.89 -71bps -238bps 7. Loan loss coverage 40.11 55.67 131.17 15.6pct 75.5pct 12. Tier 1 CAR 8.55 12.28 10.53 3.7pct -1.8pct 13. CAR 8.87 12.96 12.22 4.1pct -0.7pct Source: Company data, Nomura research
Nomura 58 14 January 2011
Banks | China Lucy Feng
Exhibit 119. Breakdown of loans by types (2009)
Breakdown of outstanding loan borrowers by industry Leasing and business service 16% Public facilitation and social service 5%
Wholesale and Manufactoring retail 71% 5% Water supply, environment facilitation 3%
Source: Company data, Nomura research
Exhibit 120. Top ten shareholders (2009)
1. Guolian Trust Corporation Limited (国联信托股份有限公司)
2. Wuxi Xingda Nylon Co. Ltd (无锡市兴达尼龙有限公司)
3. Wuxi Wanxin Machinery Factory (无锡万新机械厂)
4. Wuxi Construction Development Investment Company (无锡市建设发展投资公司)
5. Jiangsu Red bean International Development Co Ltd (江苏红豆国际发展有限公司)
6. Wuxi Shenwei Chemical Co. Ltd (无锡神伟化工有限公司)
7. Wuxi Qianzhou Printing Equipment Co. Ltd (无锡市前洲印染设备有限公司)
8. Wuxi Yanda Metal Materials Co. Ltd (无锡燕达金属材料有限公司)
9. Wuxi Silver Plate Co. Ltd (无锡市银光镀锡薄板有限公司)
10. Wuxi Xinhongtai Electric Co. Ltd (无锡新宏泰电器有限责任公司)
Source: Company data, Nomura research
Jiangsu Changshu Rural Commercial Bank
Company background Founded in 2001, Jiangsu Changshu Rural Commercial Bank is the first rural commercial bank that a signed strategic agreement with a large-cap listed bank in China. In 2008, Bank of Communication invested RMB380mn in exchange for 10% of its shares and became its biggest shareholder. With total assets of RMB40bn, it is ranked as the no. 1 China rural commercial bank on a county level (by asset size) and one of the top 50 banks in China (source: company data, financial statements).
Operational highlights The bank’s main lines of business include loans, interbank deposits/lending and bond services. These three services generated total income of RMB1.6bn during 2009. Loan business alone generated profits of RMB1.1bn, representing 69% of total income. Included in all the loans provided, 43% are from manufacturing industry, 7% from wholesale and retail business, 5% from leasing and business services and 4% from real estate and construction (source: company data, financial statements).
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Banks | China Lucy Feng
Financial highlights As at the end of 2009, the bank had total outstanding deposits and a loan balance of RMB35bn and RMB22bn, representing increases of 23% y-y and 20% y-y, respectively. Total NPLs amounted to RMB211mn, representing 0.98% of the total outstanding loan balance and a decrease of 36% y-y. The bank achieved an increase in net earnings of 7.7% y-y on net earnings of RMB481mn (source: company data, financial statements).
Management / shareholding structure The bank has 33 branches and 34 sub-branches, all of which are located in Wuxi city. In total, there were 3,103 shareholders by the end of 2009, of which 22 were legal entities, holding 29% of total equity, and 3,081 individual investors, holding 71% of total equity. Bank of Communications, with a shareholding of 10%, ranked the largest shareholder, followed by Jiangsu Lingfeng Textile Group, Changshu Suhua Trading Group and Shangchu Fengfan Electronic Equipment Co. Ltd, which held 1.26% stakes each.
Exhibit 121. Jiangsu Changshu Rural Commercial Bank – financial statements P&L (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Operating Income 698 942 975 34.9 3.5 Operating Expenses (288) (437) (410) 51.7 -6.3 Pre-tax Profits 410 505 565 23.1 12.0 Taxes (62) (58) (85) (5.7) 44.5 Net Profit 348 446 481 28.3 7.7 PROFITS attributable to shareholders 348 446 481 28.3 7.7
Balance Sheet Items (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Total Assets 30,187 35,703 40,371 18.3 13.1 Gross Loans 15,096 18,184 21,759 20.5 19.7 Non performing loans 208 333 211 59.7 (36.5) Loan loss reserves na na (429) na na Total deposits 24,357 28,456 35,002 16.8 23.0 Shareholders’ Funds (Equity) 1,869 2,333 2,593 24.8 11.2
Per share data (RMB) paid-up capital (mn) 576 576 576 0.0 0.0 BVPS 3.24 3.994.44 23.1 11.3 EPS 0.67 0.780.84 16.4 7.7
Ratios (%) 2007 2008 2009 y-y % chg y-y % chg 1. CIR 41.29 46.42 42.03 5.1pct -4.4pct 2. Effective tax rate 15.13 11.59 14.95 -3.5pct 3.4pct 3. ROA 1.15 1.35 1.26 0.2pct -0.1pct 4. ROE 18.62 21.25 19.52 2.6pct -1.7pct 5. Customer LDR 61.98 63.90 62.16 1.9pct -1.7pct 6. NPL ratio 1.38 1.83 0.98 45bps -85bps 7. Loan loss coverage na na 202.70 na na 12. Tier 1 CAR 12.66 12.79 11.02 0.1pct -1.8pct 13. CAR 13.81 14.78 11.55 1.0pct -3.2pct Source: Company data, Nomura research
Nomura 60 14 January 2011
Banks | China Lucy Feng
Shanghai Rural Commercial Bank
Company background Shanghai Rural Commercial Bank was founded in 2005. It was preceded by 234 rural credit cooperatives in Shanghai rural areas. In 2008, Australia and New Zealand Banking Group became its strategic investor, holding 19.9% of its shares (source: company data, financial statements).
Operational highlights The bank’s main lines of business include loan, interbank deposits/lending and bond services. These three services generated total income of RMB7.0bn during 2009. The loan business alone generated profits of RMB5.8bn, representing 71% of total income. Included in all the loans provided, 18% of loans were to the real estate and mortgage industry, 16% were to the manufacturing industry, 14% were to leasing and business service companies and 4% were to wholesale and retail businesses (source: company data, financial statements).
Total outstanding deposits in 2009 amounted to RMB179bn, which ranked the bank as no.9 with a market share of 4.85% in the Shanghai deposit business; outstanding loans amounted to RMB118bn, ranking the bank No. 7 with a market share of 5.21% in Shanghai (source: company data, financial statements).
Financial highlights During 2009, the bank’s total outstanding deposits and loan balance increased by 21% y-y and 27% y-y, respectively. Total NPL amounted to RMB2.5bn, representing 1.88% of total outstanding loan balance and a decrease of 12% y-y. The bank achieved net earnings of RMB1.9bn in 2009 (source: company data, financial statements).
Management / shareholding structure In addition to a headquarters in Shanghai, the bank has a Pudong Branch, 14 county- level branches and 320 sub-branches in the Shanghai rural area operated by 4,817 employees in total (source: company data, financial statements). Note: 79.24% of its total shares are owned by legal entities, while the rest are owned by individual investors. As of 2009 top shareholders included the Australia and New Zealand Banking Group, which holds 19.9% of shares, and the Shanghai International Group, Shanghai Shengrong Investment Co. Ltd, and Shanghai State-Owned Asset Management Co. Ltd, each of which hold 8.01% of the shares.
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Banks | China Lucy Feng
Exhibit 122. Shanghai Rural Commercial Bank – Financial statements P&L (RMBmn) 2007 2008 2009 2008 y-y % chg 2009 y-y % chg Interest Income 4,774 8,798 8,057 84.3 (8.4) Interest Expense (2,110) (3,474) (3,058) 64.7 (12.0) Net Interest Income (NII) 2,665 5,324 4,999 99.8 (6.1) Non-Interest Income 1,690 25 28 (98.5) 11.2 Dealing gain/loss - FX - (4) 10 na (376.1) Net fee and commission income 72 178 187 148.9 4.7 Gain/(loss) on investment securities 943 (171) (191) (118.2) 11.4 Others 676 22 22 (96.8) 0.7 Operating Income 4,355 5,349 5,027 22.8 (6.0) Operating Expenses (3,677) (2,084) (2,401) (43.3) 15.3 Staff cost (1,556) (1,177) (1,342) (24.4) 14.1 Other G&A (2,122) (907) (1,059) (57.3) 16.8 Pre-provision Profits 678 3,265 2,626 382.0 (19.6) Provisions na (226) (278) na 23.0 Including: loan loss provisions na (221) (258) na 16.8 Non-operating income/expense 45 890 136 1,860.1 (84.7) Pre-tax Profits 723 3,930 2,484 443.5 (36.8) Taxes (352) (279) (515) (20.8) 84.5 Net Profit 371 3,651 1,969 885.1 (46.1) Minority interest 0 0 (2) na na PROFITS attributable to shareholders 371 3,651 1,971 885.1 (46.0)
Balance Sheet Items (RMBmn) 2007 2008 2009 2008 y-y % chg 2009 y-y % chg Total Assets 157,474 170,382 212,250 8.2 24.6 Gross Loans 79,438 93,130 118,778 17.2 27.5 Non performing loans 1,093 2,877 2,543 163.2 (11.6) Loan loss reserves (1,399) (1,929) (2,198) 37.9 13.9 Total deposits 126,616 147,080 179,234 16.2 21.9 Shareholders’ Funds (Equity) 11,159 11,217 13,069 0.5 16.5
Per share data (RMB) Paid-up capital (mn) 3,746 3,746 3,746 0.0 0.0 BVPS 2.98 3.11 3.48 4.4 11.9 EPS 0.12 0.20 0.53 66.7 165.0 DPS na 0.08 0.09 na 12.5 PPOPP/sh 0.18 0.87 0.70 382.0 (19.6)
Ratios (%) 2007 2008 2009 2008 y-y % chg 2009 y-y % chg 1. CIR 38.27 35.95 43.74 -2.3pct 7.8pct 2. Effective tax rate 48.74 7.10 20.72 -41.6pct 13.6pct 3. ROA 0.24 2.23 1.03 2.0pct -1.2pct 4. ROE 3.32 32.63 16.23 29.3pct -16.4pct 5. Customer LDR 62.7 63.3 66.3 0.6pct 3.0pct 6. NPL ratio 1.4 3.1 2.1 171bps -95bps 7. Loan loss coverage 127.94 67.05 86.43 -60.9pct 19.4pct 8. NIM na 5.46 4.47 na -99bps 9. Credit costs na 0.26 0.24 na -1bps 10. Non interest income as % total income 38.81 0.47 0.56 -38.3pct 0.1pct 11. Fee income as % total income 1.65 3.33 3.71 1.7pct 0.4pct 12. Tier 1 CAR 9.16 11.80 11.95 2.6pct 0.2pct 13. CAR 9.65 12.02 10.21 2.4pct -1.8pct Source: Company data, Nomura research
Nomura 62 14 January 2011
Banks | China Lucy Feng
Exhibit 123. Breakdown of loans by types (2009)
Breakdown by loan borrower industry
Real estate and Mortgage loan 18% Others 41% Manufactoring 16%
Water supply, Leasing and environment and business service public facilitation 14% 5% wholesale and retail 6%
Source: Company data, Nomura research
Exhibit 124. Top ten shareholders (2009)
1. Australia and New Zealand Banking Group Limited (澳大利亚和新西兰银行集团有限公司)
2. Shanghai International Group (上海国际集团有限公司)
3. Shanghai Shengrong Investment Limited (上海盛融投资有限公司)
4. Shanghai State-owned Assets Operation Co. Ltd (上海国有资产经营有限公司)
5. Shanghai Greenland Group Limited (上海绿地（集团）有限公司)
6. Jinjiang International Group Limited (锦江国际（集团）有限公司)
7. Shanghai International Investment Management Limited (上海市上投投资管理有限公司)
8. Shanghai Shanxin Real Estate & Development (上海山鑫置业有限公司)
9. Orient international (holding) Co. Ltd (东方国际（集团）有限公司)
10. Shanghai Qingpu Asset Management Co. Ltd (上海青浦资产经营有限公司)
Source: Company data, Nomura research
Zhuhai Rural Credit Cooperatives
Company background Founded in 1952, Zhuhai Rural Credit Cooperatives was the earliest founded financial institution in Zhuhai. It is also the biggest agriculture-related loan lender with the most branch outlets, broadest coverage and has the largest number of SMEs clients in Zhuhai City (source: company data, financial statements).
Operational highlights The bank’s main lines of business include loan, inter-bank deposits/lending and bond investment. These three services generate a total income of RMB511mn during 2009. Loan business alone generated profits of RMB410mn, representing 74% of total income. Total outstanding loans consist 69% of short-term loans and 31% medium- to long-term loans. Mortgage loans represent 21% of total outstanding loans.
Financial highlights As at the end of 2009, the bank had total outstanding deposits and a loan balance of RMB13bn and RMB7bn, respectively, representing increases of 20% y-y and 16% y-y, respectively. Total NPLs amounted to RMB757mn, representing 8.81% of the total
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Banks | China Lucy Feng
outstanding loan balance and a decrease of 23.7% y-y. The bank made net earnings of RMB193mn (source: company data, financial statements).
Management / shareholding structure The bank has one operating centre, 12 credit unions and 82 branches, all of which are located in Zhuhai city. By the end of 2009, there were 968 employees working for the bank. Note: 6.42% of its total shares are owned by legal entities while the rest are owned by individual investors (source: company data, financial statements). The top two shareholders are Zhuhai Mingzhi Real estate Co. Ltd and Zhuhai Omec-tech Co Ltd.
Exhibit 125. Zhuhai Rural Credit Cooperatives – financial statements P&L (RMBmn) 2007 2008 2009 2008 y-y % chg 2009 y-y % chg Interest Income 348 541 459 55.3 (15.2) Interest Expense (128) (189) (164) 48.3 (13.6) Net Interest Income (NII) 221 351 295 59.3 (16.1) Non-Interest Income 38 70 82 85.2 16.3 Net fee and commission income 13 22 21 66.0 (2.5) Gain/(loss) on investment securities 25 32 52 29.4 62.6 Others 0 16 8 na (49.8) Operating Income 259 422 377 63.1 (10.7) Operating Expenses (163) (205) (211) 25.5 3.0 Pre-provision Profits 96 217 166 127.3 (23.6) Provisions (40) (113) (117) 180.8 2.9 Non-operating income/expense 35 20 75 (41.3) 267.6 Pre-tax Profits 90 124 125 38.1 0.2 Taxes 0 (4) (32) na 690.2 Net Profit 90 120 93 33.7 (22.7)
Balance Sheet Items (RMBmn) 2007 2008 2009 2008 y-y % chg 2009 y-y % chg Total Assets 11,394 13,062 15,445 14.6 18.2 Gross Loans 5,588 6,525 7,567 16.8 16.0 Non performing loans 1,109 992 757 (10.6) (23.7) NPL ratio (%) 19.85 15.20 10.00 (23.4) (34.2) Loan loss reserves (90) (143) (186) 58.7 29.7 Total deposits 9,200 10,600 12,730 15.2 20.1 Shareholders’ Funds (Equity) 336 486 1,144 44.6 135.5
Per share data (RMB) paid-up capital (mn) 409 409 560 0.0 36.7 BVPS 0.82 1.19 2.04 44.6 72.2 EPS 0.22 0.29 0.17 33.7 (43.5) DPS 0.07 0.08 na 22.0 na PPOPP/sh 0.23 0.30 0.22 30.2 (26.7)
Ratios (%) 2007 2008 2009 2008 y-y % chg 2009 y-y % chg 1. CIR 63.05 48.51 55.93 -14.5pct 7.4pct 2. Effective tax rate 0.00 3.21 25.36 3.2pct 22.1pct 3. ROA 0.79 0.98 0.65 0.2pct -0.3pct 4. ROE 26.80 29.29 11.41 2.5pct -17.9pct 5. Customer LDR 60.74 61.55 59.44 0.8pct -2.1pct 6. NPL ratio 19.85 15.20 10.00 -465bps -520bps 7. Loan loss coverage 8.14 14.44 24.56 6.3pct 10.1pct 9. Credit costs 0.72 1.87 1.65 115bps -22bps 10. Non interest income as % total income 14.67 16.66 21.70 2.0pct 5.0pct 11. Fee income as % total income 5.02 5.11 5.58 0.1pct 0.5pct 12. Tier 1 CAR na 9.49 19.86 na 10.4pct 13. CAR 5.44 10.31 22.19 4.9pct 11.9pct Source: Company data, Nomura research
Nomura 64 14 January 2011
Banks | China Lucy Feng
Exhibit 126. Breakdown of loan by type (2009)
Farmers loan Rural financial 1% organization loans 2%
Rural industrial and commercial loans Other loans 1% 74% Small amount credit loans to farmers Farmers union 1% Mortgage loans guaranteed loan 21% 0%
Consumption loans 0%
Source: Company data, Nomura research
Exhibit 127. Top ten shareholders (2009)
1. Zhuhai Mingzhi Real Estate Co. Ltd (珠海鸣志房地产有限公司)
2. Zhuhai Omec-tech Co. Ltd (珠海欧美克科技有限公司)
3. Zhuhai Economy special district Mid-Zhuhai Investment Co. Ltd (珠海经济特区中珠置业股份有限 公司)
4-10. Individuals
Source: Company data, Nomura research
Jiangsu Taicang Rural Commercial Bank
Company background Jiangsu Taicang Rural Commercial Bank was founded in 2005. Similar to other rural commercial banks, its predecessor is Taicang Rural Credit Cooperatives.
Operational highlights Interest income, commission income and investment profits are the bank’s three major source of income. In total they generated a net income of RMB448mn during 2009. Loan business alone generated profits of RMB430mn, representing 95% of total income. Corporate loans and individual loans represent 93% and 7% of total outstanding loan balance. The top five corporate borrowers are from manufacturing, business trading, real estate, leasing and business service and transportation and storage industry (source: company data, financial statements).
Financial highlights During 2009, the bank had total outstanding deposits and a loan balance of RMB11bn and RMB8bn respectively, representing increases of 26% y-y and 30% y-y. Total NPLs amounted RMB104mn, representing 1.29% of total outstanding loan balance and a decrease of 9.9% y-y. Loan loss coverage ratio increased by 86.9% y-y to 235.03%. Net earnings increased by 9.1% y-y, amounting to RMB141mn (source: company data, financial statements).
Management / shareholding structure The bank has one operating centre and 26 branches, all located in Taicang. Note: 53% of its total shares are owned by legal entities while the rest are owned by individual investors. Top shareholders include Jiangsu Wuyang Group, Suzhou Guoxin Group and Yalu Group, holding 8.7%, 8.6% and 8.3% of total shares, respectively.
Nomura 65 14 January 2011
Banks | China Lucy Feng
Exhibit 128. Breakdown of loan by types (2009)
Transportation Other corporate and storage, 2% Leasing and loan, 5% business service, 5%
Real estate, 10%
Business trading, 12% Manufacturing, 66%
Source: Company data, Nomura research
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Banks | China Lucy Feng
Exhibit 129. Jiangsu Taicang Rural Commercial Bank (2009) P&L (RMBmn) 2008 2009 y-y % chg Interest Income 569 563 (1.1) Interest Expense (191) (132) (30.6) Net Interest Income (NII) 378 431 13.8 Non-Interest Income 12 22 91.5 Dealing gain/loss - FX 1 3 194.7 Net fee and commission income 8 17 113.1 Others 3 2 (24.2) Operating Income 390 453 16.1 Operating Expenses (149) (181) 21.2 Staff cost (65) (98) 52.2 Other G&A (85) (82) (2.6) Pre-provision Profits 241 272 12.9 Provisions (85) (100) 17.2 Including: loan loss provisions (75) (72) (4.2) Non-operating income/expense 3 (2) (162.0) Pre-tax Profits 158 170 7.7 Taxes (29) (29) 1.5 Net Profit 129 141 9.1
Balance Sheet Items (RMBmn) 2008 2009 y-y % chg Total Assets 9,813 12,275 25.1 Gross Loans 6,241 8,121 30.1 Non performing loans 116 104 (9.9) Loan loss reserves (172) (245) 43.0 Total deposits 8,810 11,063 25.6 Shareholders’ Funds (Equity) 720 842 16.9
Per share data (RMB) paid-up capital (mn) 428 513 19.9 BVPS 1.68 1.64 (2.5) EPS 0.36 0.31 (13.9) DPS na 0.03 na PPOPP/sh 0.37 0.33 (10.2)
Ratios (%) 2008 2009 y-y % chg 1. CIR 38.25 39.93 1.7pct 2. Effective tax rate 18.20 17.15 -1.1pct 3. ROA 1.32 1.28 0.0pct 4. ROE 17.98 18.08 0.1pct 5. Customer LDR 70.84 73.41 2.6pct 6. NPL ratio 1.86 1.29 -57bps 7. Loan loss coverage 148.12 235.03 86.9pct 9. Credit costs 1.20 1.00 -20bps 10. Non interest income as % total income 2.96 4.88 1.9pct 11. Fee income as % total income 2.05 3.77 1.7pct 12. Tier 1 CAR 10.73 11.73 1.0pct 13. CAR 13.73 13.27 -0.5pct Source: Company data, Nomura research
Hefei Science & Technology Rural Commercial Bank
Company background Founded in 2007, Hefei Science & Technology Rural Commercial Bank was the first Rural Commercial Bank established in a capital city in China. It was re-formed from 11 credit unions and credit cooperatives in Hefei.
Nomura 67 14 January 2011
Banks | China Lucy Feng
Operational highlights Loan business, interbank deposit/lending business and commission fees are the three major sources of income for the bank. In total they generated net income of RMB578mn during 2009. Loan business alone generated profits of RMB491mn, representing 85% of total income from principal activities (source: company data, financial statements).
Loans provided to individual citizens and farmers represented the largest portion of all outstanding loans, making up 23% of total outstanding loans. Among the remaining corporate loans, 22% were for borrowers from the financial industry, followed by manufacturing, real estate and wholesale and retail industries. Corporate deposits and individual deposits amounted to RMB12.6bn and RMB4bn, representing 76% and 24% of total deposits balance placed by the end of 2009 (source: company data, financial statements).
Financial highlights By the end of 2009, total outstanding deposits and the loan balance amounted to RMB17bn and RMB10bn, respectively; up 56.1% y-y and 25.6% y-y. Total NPLs amounted to RMB183mn, representing 1.92% of the total outstanding loan balance and a decrease of 23.7% y-y. Net earnings achieved an increase of 16.8% y-y, amounting to RMB117mn. Both total assets and total liabilities rose substantially by 51.0% y-y and 53.2% y-y, due to the increase in both outstanding loans and deposit size (source: company data, financial statements).
Management / shareholding structure The bank has one operating branch, 20 branches and 50 sub-branches, all of which are located in Hefei city. By the end of 2009, 91% of its total shares were owned by legal entities, while the rest were owned by individual investors. The top three shareholders were Hefei Xingtai Trust Co. Ltd, Hefei information Investment Co. Ltd and Hefei Haihe Investment Group, holding 19.7%, 9.9 and 9.9% of total shares.
Exhibit 130. Loan breakdown by industry (2009)
Individual loans, 13%
Financial services, 12%
Others, 57% Manufacturing, 6%
Real estate, 6% Wholesale & retail, 6%
Source: Company data, Nomura research
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Banks | China Lucy Feng
Exhibit 131. Hefei Science & Technology Rural Commercial Bank P&L (RMBmn) 2008 2009 y-y % chg Interest Income 573 571 (0.2) Non-Interest Income 34 83 141.5 Net fee and commission income 3 6 83.9 Gain/(loss) on investment securities 31 77 147.7 Operating Income 607 655 7.9 Operating Expenses (476) (477) 0.3 Operating Profits 131 177 35.2 Non-operating income/expense 0 2 331.1 Pre-tax Profits 132 179 36.2 Taxes (32) (62) 97.8 PROFITS attributable to shareholders 100 117 16.8
Balance Sheet Items (RMBmn) 2008 2009 y-y % chg Total Assets 13,038 19,687 51.0 Gross Loans 7,597 9,540 25.6 Non performing loans 240 183 (23.7) NPL ratio 3.16% 1.92% (39.2) Total deposits 10,646 16,613 56.1 Shareholders’ Funds (Equity) 749 866 15.6
Per share data (RMB) paid-up capital (mn) 533 598 12.0 BVPS 1.40 1.45 3.2 EPS 0.19 0.20 4.2
Ratios (%) 2008 2009 y-y % chg 1. CIR 78.37 72.89 -5.5pct 2. Effective tax rate 23.97 34.82 10.9pct 3. ROA 0.77 0.71 -0.1pct 4. ROE 13.37 14.48 1.1pct 5. Customer LDR 71.36 57.43 -13.9pct 6. NPL ratio 3.16 1.92 -124bps 7. Loan loss coverage 0.00 0.00 0.0pct 8. NIM 5.16 4.07 -109bps 9. Credit costs 0.00 0.00 0bps 10. Non interest income as % total income 5.68 12.71 7.0pct 11. Fee income as % total income 0.55 0.94 0.4pct Source: Company data, Nomura research
Foshan Shunde Rural Commercial Bank
Company background Founded in 2009 and similar to other Chinese rural commercial banks, Foshan Shunde Rural Commercial Bank was reformed from local credit cooperatives in Guangdong province.
Operational highlights Loans provided to the manufacturing industry are the largest portion of outstanding loans, making up 31%, followed by wholesale and retail industry borrowers, water supply & environment and public facility, real estate and leasing and business service industries. Corporate deposits and individual deposits amounted to RMB25.3bn and RMB52.7bn, representing 29.8% and 62.3% of total deposits balance placed by the end of 2009 (source: company data, financial statements).
Financial highlights By the end of 2009, total outstanding deposits and the loan balance amounted to RMB84.7bn and RMB49.7bn, respectively; up 20.3% y-y and 24.6% y-y. Total NPLs
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amounted to RMB1.2bn, representing 2.38% of total outstanding loan balance and a decrease of 40.5% y-y. Net earnings achieved an increase of 20.4% y-y, amounting to RMB954mn. Both total assets and total liabilities rose substantially by 32.4% y-y and 27.7% y-y, due to the increase in both outstanding loans and deposit size (source: company data, financial statements).
Management / shareholding structure The bank has one operating branch and 10 branches, all of which are located in Foshan. By the end of 2009, 40.8% of its total shares are owned by legal entities while the rest are owned by individual investors. Top three shareholders include Foshan Shunde water supply Co Ltd, Midea Group and Guangdong Boyi Construction & design Co. Ltd, owning 8.8%, 6.5% and 4.0% of total shares, respectively.
Exhibit 132. Foshan Shunde Rural Commercial Bank (2009) P&L (RMBmn) 2007 2008 2009 2008 y-y % chg 2009 y-y % chg Operating Income 2,954 3,761 3,465 27.3 (7.9) Operating Expenses (2,403) (2,757) (2,256) 14.7 (18.2) Pre-tax Profits 551 1,004 1,209 82.3 20.4 Taxes (201) (211) (254) 4.6 20.7 PROFITS attributable to shareholders 349 793 954 127.1 20.4
Balance Sheet Items (RMBmn) 2007 2008 2009 2008 y-y % chg 2009 y-y % chg Total Assets 69,996 76,689 101,558 9.6 32.4 Gross Loans 37,284 39,895 49,719 7.0 24.6 Non performing loans 3,501 1,988 1,183 (43.2) (40.5) Loan loss reserves 1,879 2,031 1,771 8.1 (12.8) Total deposits 61,126 70,384 84,688 15.1 20.3 Shareholders’ Funds (Equity) 2,358 3,456 8,068 46.5 133.5
Per share data (RMB) paid-up capital (mn) 864 1,309 1,855 51.5 41.7 BVPS 2.73 2.64 4.35 (3.3) 64.8 EPS 0.40 0.61 0.51 49.8 (15.1)
Ratios (%) 2007 2008 2009 2008 y-y % chg 2009 y-y % chg 1. CIR 81.36 73.31 65.11 -8.0pct -8.2pct 2. Effective tax rate 36.57 20.99 21.04 -15.6pct 0.1pct 3. ROA 0.50 1.08 1.07 0.6pct 0.0pct 4. ROE 14.81 27.28 16.57 12.5pct -10.7pct 5. Customer LDR 61.00 56.68 58.71 -4.3pct 2.0pct 6. NPL ratio 9.39 4.98 2.38 -441bps -260bps 7. Loan loss coverage 53.66 102.14 149.76 48.5pct 47.6pct 12. Tier 1 CAR 5.27 8.13 15.55 2.9pct 7.4pct 13. CAR 6.27 10.86 17.33 4.6pct 6.5pct Source: Company data, Nomura research
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Exhibit 133. Breakdown of loans by industries (2009)
Manufacturing, 31%
Others, 38%
Leasing and Wholesale & business, 2% retail, 14%
Real estate, 7% Water supply & public facilitation, 8%
Source: Company data, Nomura research
Jilin Jiutai Rural Commercial Bank
Company background Jilin Jiutai Rural Commercial Bank, the first rural commercial bank established in Jilin province, was founded in December 2008. The bank’s predecessor was Jiutai Rural Credit Cooperatives, which was established in 1950s, and its main focus is on facilitating the development of agricultural industry in rural areas.
Operational highlights Jilin Jiutai is the largest local commercial bank, with a market share of 51.71% in deposit business and 40.34% in loan business in Jiutai city. Loan business itself contributes 78.89% of the bank’s operating income. Among all the loans made, 87.24% is to local residents for agricultural/fishing production purposes. The bank’s other main profit-generating businesses include bond investments and inter-bank deposits/lending, representing 14.06% and 9.15% of total operating income, respectively (source: company data, financial statements).
Financial highlights As at the end of 2009, the bank had total assets and total debt of RMB5.8bn and RMB5.4bn, respectively. Both deposits and loan size experienced a significant increase of 31.73% y-y to RMB5.1bn and 46.31% y-y to RMB2.5bn. NPLs amounted to RMB2.7mn, representing 1.09% of total outstanding loans. The bank achieved earnings of RMB83mn by the end of 2009, together with a total of RMB119mn operating expenses incurred, leading to a slight drop of 9.8% y-y in earnings (source: company data, financial statements).
Management / shareholding structure There are 36 branch outlets and 14 major departments within the bank. All of the branch outlets are located in Jilin province and 83% of them are in Jiutai city. Both the branch managers and deputy head of each department report to the president. As at the year of 2009, total headcount within the bank was 831, including 33 at top management level. Management puts emphasis on employee’ quality. Half of the employees have education levels of college or above. Jilin Province Trust Co. Ltd and Jilin Jiapeng Highway construction Co. Ltd are the two biggest shareholders of the Bank, holding 10% and 3.33% of total equity (source: company data, financial statements).
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Exhibit 134. Jilin Jiutai Rural Commercial Bank P&L (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Interest Income 249 241 257 (3.1) 6.5 Interest Expense (62) (69) (55) 11.0 (20.2) Net Interest Income (NII) 187 172 202 (7.9) 17.3 Non-Interest Income (24) (25) 34 3.4 (235.6) Net fee and commission income (27) (49) 2 78.1 (103.7) Gain/(loss) on investment securities 3 23 32 693.9 38.5 Operating Income 162 147 236 (9.5) 60.7 Operating Expenses (54) (55) (119) 2.2 117.2 PROFITS attributable to shareholders 109 92 83 (15.1) (9.8)
Balance Sheet Items (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Total Assets 3,286 4,427 5,849 34.7 32.1 Gross Loans 1,265 1,713 2,506 35.4 46.3 Non performing loans 38 34 27 (11.1) (21.4) Loan loss reserves (23) (30) (28) 29.9 (8.5) Total deposits 2,662 3,874 5,104 45.5 31.7 Shareholders’ Funds (Equity) 325 371 400 14.0 7.8
Per share data (RMB) paid-up capital (mn) 301 300 300 (0.4) 0.0 BVPS 1.08 1.24 1.33 14.5 7.8 EPS 0.36 0.31 0.28 (14.8) (9.8)
Ratios (%) 2007 2008 2009 y-y % chg y-y % chg 1. CIR 38.27 35.95 43.74 -2.3pct 7.8pct 2. Effective tax rate 0.00 0.00 24.30 0.0pct 24.3pct 3. ROA 3.31 2.40 1.62 -0.9pct -0.8pct 4. ROE 33.48 26.55 21.62 -6.9pct -4.9pct 5. Customer LDR 47.50 44.21 49.10 -3.3pct 4.9pct 6. NPL ratio 3.03 1.99 1.07 -104bps -92bps 7. Loan loss coverage 60.41 88.28 102.72 27.9pct 14.4pct 9. Credit costs 0.00 0.00 0.33 0bps 33bps 10. Non interest income as % total income (15.03) (17.18) 14.49 -2.2pct 31.7pct 11. Fee income as % total income (16.85) (33.18) 0.76 -16.3pct 33.9pct 13. CAR na 20.34 11.82 na -8.5pct Source: Company data, Nomura research
Jiangsu Jiangyin Rural Commercial Bank
Company background Founded in 2001, Jiangyin Rural Commercial Bank was the first established rural commercial bank in China. The bank positions itself as an SME services provider, aiming to fulfil the funding needs of SMEs by providing them with tailor-made financial products. By the end of 2009, 94% of total loans outstanding and 95% of new loans lent out during 2009 were SME related (source: company data, financial statements).
Operational highlights Jiangyin Rural Commercial Bank had total deposits and a loan balance of RMB35,841mn and RMB25,356mn, respectively, by end-2009. Loans to manufacturing industry were the largest portion of outstanding loans, making up 68%, followed by wholesale and retail industry and the water supply and public facility industry (source: company data, financial statements).
Financial highlights The bank reported an end-2009 net profit of RMB628mn, up by 5.2% y-y. Total assets amounted to RMB41,572mn, up by 29.7% y-y. The bank reported NPLs of RMB403mn by the end of 2007, leading to an NPL ratio of 2.49%. No NPL-related information has
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been released since 2007. The bank reported CAR and T1 CAR ratios of 11.73% and 10.92%, respectively, at the end of 2009 (source: company data, financial statements).
Exhibit 135. Breakdown of loans by types (2009)
Transportation, Agriculture & Electric, gas & Construction storage & post farming public utility 2% 2% 1% 1% Others nancial services 1% 2% Real estate 3% Leasing & business service 5% Water supply & public facility 6% Manufacturing Wholesale & retail 68% 9%
Source: Company data, Nomura research
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Exhibit 136. Jiangsu Jiangyin Rural Commercial Bank P&L (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Interest Income 1,363 1,842 1,666 35.1 (9.5) Interest Expense (419) (506) (437) 20.8 (13.7) Net Interest Income (NII) 944 1,335 1,229 41.4 (7.9) Non-Interest Income 39 26 49 (32.3) 86.7 Dealing gain/loss - FX 5 7 8 51.3 10.0 Net fee and commission income 15 14 24 (9.4) 72.5 Gain/(loss) on investment securities 17 3 16 (81.7) 398.7 Others 2 2 2 17.3 (10.9) Operating Income 983 1,361 1,279 38.5 (6.1) Operating Expenses (227) (293) (362) 29.0 23.7 Staff cost (79) (100) (173) 26.6 72.9 Other G&A (148) (193) (189) 30.3 (1.9) Pre-provision Profits 756 1,069 916 41.4 (14.2) Provisions (41) (299) (120) 628.4 (59.8) Including: loan loss provisions (46) (293) (125) 533.4 (57.2) Non-operating income/expense (6) (6) 12 (11.3) (308.4) Pre-tax Profits 708 764 808 7.8 5.8 Taxes (225) (166) (181) (26.4) 9.2 Net Profit 483 598 627 23.8 4.9 Minority interest 0 1 (1) na (309.0) PROFITS attributable to shareholders 483 597 628 23.7 5.2
Balance Sheet Items (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Total Assets 28,096 32,058 41,572 14.1 29.7 Gross Loans 16,201 19,832 25,356 22.4 27.9 Non performing loans 403 na na na na Loan loss reserves 404 508 588 na na Total deposits 23,623 28,317 35,841 19.9 26.6 Shareholders’ Funds (Equity) 1,558 2,169 2,717 39.3 25.3
Per share data (RMB) paid-up capital (mn) 520 624 687 20.0 10.0 BVPS 2.99 3.48 3.96 16.1 13.8 EPS 0.93 0.87 0.91 (6.3) 4.6
Ratios (%) 2007 2008 2009 y-y % chg y-y % chg 1. CIR (23.09) (21.51) (28.32) 1.6pct -6.8pct 2. Effective tax rate 31.80 21.71 22.40 -10.1pct 0.7pct 3. ROA 1.87 1.99 1.70 0.1pct -0.3pct 4. ROE 36.02 32.06 25.72 -4.0pct -6.3pct 5. Customer LDR 68.58 70.03 70.74 1.5pct 0.7pct 6. NPL ratio 2.49 na na na na 7. Loan loss coverage 100.36 na na na na 9. Credit costs 0.32 1.62 0.55 131bps -107bps 10. Non interest income as % total income 3.97 1.94 3.86 -2.0pct 1.9pct 11. Fee income as % total income 1.53 1.00 1.84 -0.5pct 0.8pct 12. Tier 1 CAR na 12.78 10.92 na -12.8pct 13. CAR 10.75 13.70 11.73 3.0pct -2.0pct Source: Company data, Nomura research
Jiangsu Wujiang Rural Commercial Bank
Company background Founded in August 2004, Wujiang Rural Commercial Bank was one of the pioneers among China’s rural commercial banks. It was re-formed from Wujiang Rural Credit Union, which was founded in the 1950s.
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Operational highlights Jiangsu Wujiang Rural Commercial Bank had total deposits and a loan balance of RMB28,657mn and RMB19,892mn, respectively, by end-2009, for the largest market shares of 25.18% and 21.95%, respectively, in Jiangsu Wujiang City. Loans to the manufacturing industry are the largest portion of all outstanding loans, at 57%, followed by wholesale and retail industry and construction industry (source: company data, financial statements).
Financial highlights The bank reported an end-2009 net profit of RMB369mn, flattish y-y. Total assets amounted to RMB31,558mn, up by 21.8% y-y. The bank reported NPLs of RMB366mn by the end of 2009, leading to an NPL ratio of 1.85%. The bank reported CAR and T1 CAR ratios of 13.24% and 9.35%, respectively, by the end of 2009 (source: company data, financial statements).
Management / shareholding structure Currently there are 28 branches, one headquarters and 26 sub-branches within the bank. All are located in Jiangsu Wujiang City. The total number of employees is 778.
Exhibit 137. Breakdown of loans by types (2009)
Others 10% Personal loan 7% Construction 3% Manufacturing 57% Discounted bill 15%
Wholesale/ retail 4%
Real estate Civil service 2% 2%
Source: Company data, Nomura research
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Exhibit 138. Jiangsu Wujiang Rural Commercial Bank P&L (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Interest Income 1,177 1,436 1,369 22.0 (4.7) Interest Expense (306) (448) (422) 46.6 (5.9) Net Interest Income (NII) 872 988 947 13.3 (4.1) Non-Interest Income 26 30 43 12.9 43.8 Dealing gain/loss - FX 7 7 6 (0.2) (15.6) Net fee and commission income 12 13 18 14.3 31.4 Gain/(loss) on investment securities 3 5 15 64.3 184.8 Others 4 4 4 (6.6) 8.0 Operating Income 898 1,017 990 13.3 (2.7) Operating Expenses (372) (384) (425) 3.1 10.8 Staff cost na na na na na Other G&A na na na na na Pre-provision Profits 526 633 565 20.5 (10.9) Provisions 10 (227)(114) (2,298.8) (49.6) Including: loan loss provisions na na na na na Non-operating income/expense 26 61 29 133.9 (52.5) Pre-tax Profits 562 467 479 (16.8) 2.5 Taxes (230) (98)(110) (57.5) 12.8 Net Profit 332 370 369 11.5 (0.2) Minority interest (0) 0 0 na 249.6 PROFITS attributable to shareholders 331 370 369 11.6 (0.1)
Balance Sheet Items (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Total Assets 21,219 25,907 31,558 22.1 21.8 Gross Loans 13,448 15,983 19,892 18.8 24.5 Non performing loans 258 403 366 56.2 -9.1 Loan loss reserves 242 465 573 92.3 23.3 Total deposits 19,329 23,308 28,657 20.6 22.9 Shareholders’ Funds (Equity) 1,340 1,658 1,977 23.7 19.2
Per share data (RMB) paid-up capital (mn) 430 559 559 30.0 0.0 BVPS 3.12 2.97 3.54 (4.8)19.2 EPS 0.60 0.66 0.65 10.0(1.5)
Ratios (%) 2007 2008 2009 y-y % chg y-y % chg 1. CIR (41.46) (37.74) (42.96) 3.7pct -5.2pct 2. Effective tax rate 40.99 20.93 23.04 -20.1pct 2.1pct 3. ROA 1.56 1.57 1.28 0.0pct -0.3pct 4. ROE 24.73 24.66 20.32 -0.1pct -4.3pct 5. Customer LDR 69.58 68.57 69.41 -1.0pct 0.8pct 6. NPL ratio 1.92 2.52 1.85 60.3pct -67.1pct 7. Loan loss coverage 93.67 115.34 156.49 21.7pct 41.2pct 9. Credit costs na na na na na 10. Non interest income as % total income 2.93 2.92 4.32 0.0pct 1.4pct 11. Fee income as % total income 1.31 1.32 1.79 0.0pct 0.5pct 12. Tier 1 CAR na 9.90 9.35 na -0.6pct 13. CAR 10.23 14.01 13.24 3.8pct -0.8pct Source: Company data, Nomura research
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Guangdong Rural Credit Union
Company background Guangdong Rural Credit Union was founded in August 2005. Its predecessors were four city-level rural credit unions and 95 county level unions.
Operational and financial highlights The bank reported a net profit of RMB5.84bn by the end of 2009. Total assets amounted to RMB932.3bn, up by 21.6% y-y. Currently, the bank has the most operating units with the widest coverage within Guangdong province. There are 5,622 branches and sub-branches, with a total staff of 59,000 (source: company data, financial statements).
Exhibit 139. Guangdong Rural Credit Union - financial statements
2008 2009 P&L (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Interest Income 19,435 24,568 23,584 26.4 -4.0 Operating Income 24,571 32,209 30,465 31.1 -5.4 Net Profit 3,661 4,861 5,840 32.8 20.1
2008 2009 Balance Sheet Items (RMBmn) 2007 2008 2009 y-y % chg y-y % chg Total Assets 695,316 845,542 932,312 -5.0 21.6 Gross Loans 333,391 379,390 458,958 16.4 13.8 Total deposits 542,425 635,206 745,503 13.3 17.1 Shareholders’ Funds (Equity) 21,631 41,129 551,566 50.9 90.1
2008 2009 Ratios (%) 2007 2008 2009 y-y % chg y-y % chg 3. ROA 0.51 0.63 0.66 0.3pct 0.1pct 4. ROE 20.36 15.49 1.97 8.2pct -4.9pct 5. Customer LDR 61.46 59.73 61.56 1.7pct -1.7pct Source: Company data, Nomura research
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Appendix
Exhibit 140. Adjustments in Reserve Requirement Ratio (RRR) # Time Date Before adjustment (%) After adjustment (%) Change (%) 37 Dec 20, 2010 Big banks 18.5 19.0 0.5 Small and medium banks 16.0 16.5 0.5 36 Nov 29, 2010 Big banks 18.0 18.5 0.5 Small and medium banks 15.5 16.0 0.5 35 Nov 16, 2010 Big banks 17.5 18.0 0.5 Small and medium banks 15.0 15.5 0.5 34 Oct 11, 2010 Big banks 17.0 17.5 0.5 Small and medium banks 15.0 15.0 0.0 (See Note 2) 33 May 2, 2010 Big banks 16.5 17.0 0.5 Small and medium banks 14.5 15.0 0.5 32 Feb 12, 2010 Big banks 16.0 16.5 0.5 Small and medium banks 14.0 14.5 0.5 31 Jan 12, 2010 Big banks 15.5 16.0 0.5 Small and medium banks 13.5 14.0 0.5 30 Dec 22, 2008 Big banks 16.0 15.5 -0.5 Small and medium banks 14.0 13.5 -0.5 29 Nov 26, 2008 Big banks 17.0 16.0 -1.0 Small and medium banks 16.0 14.0 -2.0 28 Oct 8, 2008 Big banks 17.5 17.0 -0.5 Small and medium banks 16.5 16.0 27 Sep 15, 2008 Big banks 17.5 17.5 0.0 Small and medium banks 17.5 16.5 -1.0 26 Jun 7, 2008 All banks 17.0 17.5 0.5 All banks 16.5 17.0 0.5 25 May 12, 2008 All banks 16.0 16.5 0.5 24 Apr 16, 2008 All banks 15.5 16.0 0.5 23 Mar 18, 2008 All banks 15.0 15.5 0.5 22 Jan 16, 2008 All banks 14.5 15.0 0.5 21 Dec 8, 2007 All banks 13.5 14.5 1.0 20 Nov 10, 2007 All banks 13.0 13.5 0.5 19 Oct 13, 2007 All banks 12.5 13.0 0.5 18 Sep 6, 2007 All banks 12.0 12.5 0.5 17 Jul 30, 2007 All banks 11.5 12.0 0.5 16 May 18, 2007 All banks 11.0 11.5 0.5 15 Apr 29, 2007 All banks 10.5 11.0 0.5 14 Apr 5, 2007 All banks 10.0 10.5 0.5 13 Feb 16, 2007 All banks 9.5 10.0 0.5 12 Jan 5, 2007 All banks 9.0 9.5 0.5 11 Nov 15, 2006 All banks 8.5 9.0 0.5 10 Aug 15, 2006 All banks 8.0 8.5 0.5 9 Jul 5, 2006 All banks 7.5 8.0 0.5 8 Apr 25, 2004 All banks 7.0 7.5 0.5 7 Sep 21, 2003 All banks 6.0 7.0 1.0 6 Nov 21, 1999 All banks 8.0 6.0 -2.0 5 Mar 21, 2998 All banks 13.0 8.0 -5.0 4 Sep-88 All banks 12.0 13.0 1.0 3 1987 All banks 10.0 12.0 2.0 2 1985 All banks RRR is set to 10% for all banks by PBoC 1 1984 All banks RRR is set according to loan categories by PBoC: corporate loans 20%, rural loans 25%, savings loans 40% Note 1: Big banks refer to ICBC (1398.HK), ABC, BOC (3988.HK), CCB (0939.HK), BCOM (3328.HK) and the Postal Deposit Bank, with small and medium banks the rest. Note 2: 50bps hike for ICBC, ABC, CCB, BOC, CMB and Minsheng from 15 Oct 10 to 14 Dec 10. (2 months) This special RRR hike is extended for ICBC, ABC, CCB and Minsheng for another 3 months to 15 Mar 2011. Source: PBoC, Nomura research
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PBoC benchmark rate
Exhibit 141. PBoC benchmark rate
Effective date 12/7/98 6/10/99 2/21/02 10/29/04 4/28/06 8/19/06 3/18/07 5/19/07 7/21/07 8/22/07 9/15/07 12/21/07 9/16/08 10/15/08 10/30/08 11/27/08 12/23/08 10/20/10 12/26/10 Lending rate (%) -6 months 6.12 5.58 5.04 5.22 5.40 5.58 5.67 5.85 6.03 6.21 6.48 6.57 6.21 6.12 6.03 5.04 4.86 5.10 5.35 -6- 12 months 6.39 5.85 5.31 5.58 5.85 6.12 6.39 6.57 6.84 7.02 7.29 7.47 7.20 6.93 6.66 5.58 5.31 5.56 5.81 -1-3 yrs 6.66 5.94 5.49 5.76 6.03 6.30 6.57 6.75 7.02 7.20 7.47 7.56 7.29 7.02 6.75 5.67 5.40 5.60 5.85 -3-5 yrs 7.20 6.03 5.58 5.85 6.12 6.48 6.75 6.93 7.20 7.38 7.65 7.74 7.56 7.29 7.02 5.94 5.76 5.96 6.22 -> 5 yrs 7.56 6.21 5.76 6.12 6.39 6.84 7.11 7.20 7.38 7.56 7.83 7.83 7.74 7.47 7.20 6.12 5.94 6.14 6.40
Deposit rate (%) Demand 1.44 0.99 0.72 0.72 0.72 0.72 0.72 0.72 0.81 0.81 0.81 0.72 0.72 0.72 0.72 0.36 0.36 0.36 0.36 Time -3 months 2.79 1.98 1.71 1.71 1.71 1.80 1.98 2.07 2.34 2.61 2.88 3.33 3.15 3.15 2.88 1.98 1.71 1.91 2.25 -6 months 3.33 2.16 1.89 2.07 2.07 2.25 2.43 2.61 2.88 3.15 3.42 3.78 3.51 3.51 3.24 2.25 1.98 2.20 2.50 -1 yr 3.78 2.25 1.98 2.25 2.25 2.52 2.79 3.06 3.33 3.60 3.87 4.14 3.87 3.87 3.60 2.52 2.25 2.50 2.75 -2 yrs 3.96 2.43 2.25 2.70 2.70 3.06 3.33 3.69 3.96 4.23 4.50 4.68 4.41 4.41 4.14 3.06 2.79 3.25 3.55 -3 yrs 4.14 2.70 2.52 3.24 3.24 3.69 3.96 4.41 4.68 4.95 5.22 5.40 5.13 5.13 4.77 3.60 3.33 3.85 4.15 -5 yrs 4.50 2.88 2.79 3.60 3.60 4.14 4.41 4.95 5.22 5.49 5.76 5.85 5.58 5.58 5.13 3.87 3.60 4.20 4.55
Chg. In 1-yr -54bps -54bps -54bps 27bps 27bps 27bps 27bps 18bps 27bps 18bps 27bps 18bps -27bps -27bps -27bps -108bps -27bps 25bps 25bps lending rate Chg. In 1-yr -99bps -153bps -27bps 27bps 0bps 27bps 27bps 27bps 27bps 27bps 27bps 27bps -27bps 0bps -27bps -108bps -27bps 25bps 25bps deposit rate
Source: PBoC, Nomura research
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Breakdown data by banks
Exhibit 142. Deposit breakdown by type
Balance (RMBmn) As % of total 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 ABC Demand deposits na na na na 3,009,808 3,268,014 4,161,076 na na na na 56.9 53.6 55.5 -Corporate deposits na na na na 1,646,261 1,639,201 2,168,775 na na na na 31.1 26.9 28.9 -Personal deposits na na na na 1,363,547 1,628,813 1,992,301 na na na na 25.8 26.7 26.6 Time deposit na na na na 2,082,471 2,632,778 3,116,749 na na na na 39.4 43.2 41.6 -Corporate deposits na na na na 464,581 524,673 743,589 na na na na 8.8 8.6 9.9 -Personal deposits na na na na 1,617,890 2,108,105 2,373,160 na na na na 30.6 34.6 31.7 Other Deposits na na na na 184,367 187,267 129,525 na na na na 3.5 3.1 1.7 Overseas Deposit na na na na 10,548 9,369 90,268 na na na na 0.2 0.2 1.2 Total na nana na 5,287,194 6,097,428 7,497,618 na na na na 100.0 100.0 100.0
ICBC Demand deposit 2,307,995 2,525,043 2,781,643 3,073,648 3,537,398 3,990,043 4,970,896 49.0 48.8 48.5 48.6 51.3 48.5 50.9 -Corporate deposits 1,532,662 1,654,146 1,778,145 1,974,737 2,362,830 2,558,060 3,162,661 32.6 32.0 31.0 31.2 34.3 31.1 32.4 -Personal deposits 775,333 870,897 1,003,498 1,098,911 1,174,568 1,431,983 1,808,235 16.5 16.8 17.5 17.4 17.0 17.4 18.5 Time deposit 2,287,130 2,518,675 2,808,364 3,054,255 3,109,359 3,959,172 4,478,026 48.6 48.7 49.0 48.3 45.1 48.1 45.8 -Corporate deposits 481,565 579,338 705,564 858,741 1,039,853 1,380,907 1,625,829 10.2 11.2 12.3 13.6 15.1 16.8 16.6 -Personal deposits 1,805,565 1,939,337 2,102,800 2,195,514 2,069,506 2,578,265 2,852,197 38.4 37.5 36.7 34.7 30.0 31.4 29.2 Other deposits 70,986 68,542 77,939 93,679 114,949 116,009 136,715 1.5 1.3 1.4 1.5 1.7 1.4 1.4 Overseas deposit 40,750 64,022 68,920 104,808 136,707 158,222 185,640 0.9 1.2 1.2 1.7 2.0 1.9 1.9 Total 4,706,861 5,176,282 5,736,866 6,326,390 6,898,413 8,223,446 9,771,277 100.0 100.0 100.0 100.0 100.0100.0 100.0
CCB Demand deposit na 2,022,330 2,183,091 2,609,117 3,081,357 3,363,359 4,395,503 na 57.9 54.5 55.3 57.8 52.8 54.9 -Corporate deposits na 1,389,028 1,474,483 1,778,715 2,084,193 2,229,910 2,960,155 na 39.8 36.8 37.7 39.1 35.0 37.0 -Personal deposits na 633,302 708,608 830,402 997,164 1,133,449 1,435,348 na 18.1 17.7 17.6 18.7 17.8 17.9 Time deposit 3,194,120 1,458,480 1,808,377 2,064,609 2,180,269 2,941,434 3,492,733 100.0 41.8 45.1 43.7 40.9 46.1 43.7 -Corporate deposits 1,703,210 444,482 619,564 687,569 861,112 1,107,136 1,343,354 53.3 12.7 15.5 14.6 16.2 17.4 16.8 -Personal deposits 1,490,910 1,013,998 1,188,813 1,377,040 1,319,157 1,834,298 2,149,379 46.7 29.0 29.7 29.2 24.8 28.8 26.9 Overseas deposit na 10,311 14,578 47,530 67,881 71,122 113,087 na 0.3 0.4 1.0 1.3 1.1 1.4 Total 3,194,120 3,491,121 4,006,046 4,721,256 5,329,507 6,375,915 8,001,323 100.0 100.0 100.0 100.0 100.0100.0 100.0
BOC Demand deposit 1,287,428 1,473,676 1,504,720 1,750,236 1,985,442 2,276,439 3,142,569 42.4 44.1 40.7 42.8 45.1 44.6 50.3 -Corporate deposits 679,524 776,648 836,763 979,653 1,174,722 1,375,251 1,948,036 22.4 23.3 22.6 23.9 26.7 27.0 31.2 -Personal deposits 607,904 697,028 667,957 770,583 810,720 901,188 1,194,533 20.0 20.9 18.1 18.8 18.4 17.7 19.1 Time deposit 1,657,117 1,757,711 2,066,352 2,195,032 2,239,996 2,609,219 3,110,839 54.6 52.7 55.9 53.7 50.9 51.1 49.8 -Corporate deposits 332,606 406,019 511,983 549,118 694,995 786,896 1,125,487 11.0 12.2 13.8 13.4 15.8 15.4 18.0 -Personal deposits 1,324,511 1,351,692 1,554,369 1,645,914 1,545,001 1,822,323 1,985,352 43.7 40.5 42.0 40.2 35.1 35.7 31.8 Other deposits 88,819 107,061 128,392 145,850 174,673 216,453 367,144 2.9 3.2 3.5 3.6 4.0 4.2 5.9 Total 3,033,364 3,338,448 3,699,464 4,091,118 4,400,111 5,102,111 6,620,552 100.0 100.0 100.0 100.0 100.0100.0 105.9
BCOM Demand deposit na 529,017 569,985 643,360 927,085 902,529 1,178,932 na 54.8 51.7 51.2 59.6 48.4 49.7 -Corporate deposits na 385,556 407,228 457,839 699,289 655,101 865,097 na 40.0 37.0 36.4 45.0 35.1 36.5 -Personal deposits na 143,461 162,757 185,521 227,796 247,428 313,835 na 14.9 14.8 14.8 14.6 13.3 13.2 Time deposit na 416,667 508,468 600,958 614,401 953,242 1,186,100 na 43.2 46.1 47.8 39.5 51.1 50.0 -Corporate deposits na 191,227 235,507 297,880 300,751 525,106 693,745 na 19.8 21.4 23.7 19.3 28.1 29.2 -Personal deposits na 225,440 272,961 303,078 313,650 428,136 492,355 na 23.4 24.8 24.1 20.2 22.9 20.8 Other deposits na 18,815 23,544 12,134 14,113 10,044 7,023 na 2.0 2.1 1.0 0.9 0.5 0.3 Total na 964,499 1,101,997 1,256,452 1,555,599 1,865,815 2,372,055 na 100.0 100.0 100.0 100.0100.0 100.0
CMB Demand deposit 240,758 294,985 337,796 409,684 541,648 641,442 880,517 59.2 57.5 53.2 52.9 57.4 51.3 54.8 -Corporate deposits 164,095 198,152 219,230 257,235 350,951 373,222 520,734 40.3 38.7 34.6 33.2 37.2 29.8 32.4 -Personal deposits 76,663 96,833 118,566 152,449 190,697 268,220 359,783 18.8 18.9 18.7 19.7 20.2 21.4 22.4 Time deposit 166,128 217,601 296,608 364,073 401,886 609,206 727,629 40.8 42.5 46.8 47.1 42.6 48.7 45.2 -Corporate deposits 86,614 116,546 159,245 204,563 266,050 352,499 448,391 21.3 22.7 25.1 26.4 28.2 28.2 27.9 -Personal deposits 79,514 101,055 137,363 159,510 135,836 256,707 279,238 19.5 19.7 21.7 20.6 14.4 20.5 17.4 Total 406,886 512,586 634,404 773,757 943,534 1,250,648 1,608,146 100.0 100.0 100.0 100.0 100.0100.0 100.0
Nomura 80 14 January 2011
Banks | China Lucy Feng
Balance(RMBmn) As % of total 2003 20042005 20062007 2008 2009 2003 2004 2005 2006 20072008 2009 CITIC Bank Demand deposit 165,654 185,917 243,043 287,024 404,974 424,480 648,391 48.0 42.7 45.8 46.4 51.4 44.9 48.3 -Corporate deposits 159,876 179,106 232,933 260,971 338,074 384,024 581,483 46.3 41.2 43.9 42.2 42.9 40.6 43.3 -Personal deposits 5,778 6,811 10,110 26,053 66,900 40,456 66,908 1.7 1.6 1.9 4.2 8.5 4.3 5.0 Time deposit 179,702 249,103 287,530 331,388 382,237 521,355 693,536 52.0 57.3 54.2 53.6 48.6 55.1 51.7 -Corporate deposits 153,176 208,140 226,388 251,580 301,931 389,675 516,369 44.4 47.8 42.7 40.7 38.4 41.2 38.5 -Personal deposits 26,526 40,963 61,142 79,808 80,306 131,680 177,167 7.7 9.4 11.5 12.9 10.2 13.9 13.2 Total 345,356 435,020 530,573 618,412 787,211 945,835 1,341,927 100.0 100.0 100.0 100.0 100.0100.0 100.0
Minsheng Bank Demand deposit 117,486 154,691 185,634 244,821 294,191 329,196 548,316 42.8 45.6 44.4 42.0 43.8 41.9 48.6 -Corporate deposits 117,486 138,590 160,238 214,216 264,006 295,597 497,422 42.8 40.9 38.3 36.7 39.3 37.6 44.1 -Personal deposits 16,101 25,396 30,605 30,185 33,599 50,894 0.0 4.7 6.1 5.2 4.5 4.3 4.5 Time deposit 156,619 184,195 232,092 337,746 375,987 454,944 578,356 57.0 54.3 55.5 57.9 56.0 57.9 51.3 -Corporate deposits 131,120 156,865 183,548 273,681 298,638 352,275 435,146 47.7 46.3 43.9 46.9 44.5 44.8 38.6 -Personal deposits 25,499 27,330 48,545 64,065 77,349 102,669 143,210 9.3 8.1 11.6 11.0 11.5 13.1 12.7 Other deposits 711 85 152 748 1,041 1,646 1,266 0.3 0.0 0.0 0.1 0.2 0.2 0.1 Total 274,816 338,970 417,879 583,315 671,219 785,786 1,127,938 100.0 100.0 100.0 100.0 100.0100.0 100.0 Source: Banks Annual reports, Nomura research
Nomura 81 14 January 2011
Banks | China Lucy Feng
Exhibit 143. Loan breakdown by geography
Balance (RMBmn) As % of total 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 ABC Head Office na na na na 107,636 140,987 121,899 na na na na 3.1 4.5 2.9 Yangtze River Delta na na na na 838,870 896,746 1,147,735 na na na na 24.1 28.9 27.7 Pearl River Delta na na na na 463,114 448,109 613,918 na na na na 13.3 14.5 14.8 Bohai Rim na na na na 577,176 504,630 705,560 na na na na 16.6 16.3 17.0 Central China na na na na 515,191 341,843 488,156 na na na na 14.8 11.0 11.8 Northeastern China na na na na 205,351 90,408 131,358 na na na na 5.9 2.9 3.2 Western China na na na na 749,131 658,202 901,637 na na na na 21.6 21.2 21.8 Overseas na na na na 17,705 19,234 27,924 na na na na 0.5 0.6 0.7 Total na na na na 3,474,174 3,100,159 4,138,187 na na na na 100.0 100.0 100.0
ICBC Head Office 121,317 140,324 263,117 259,289 172,490 124,156 104,203 3.6 3.8 8.0 7.1 4.2 2.7 1.8 Yangtze River Delta 687,872 757,085 791,990 907,125 1,040,412 1,137,693 1,388,853 20.2 20.4 24.1 25.0 25.5 24.9 24.2 Pearl River Delta 475,848 509,229 453,773 513,514 611,726 667,171 844,690 14.0 13.7 13.8 14.1 15.0 14.6 14.7 Bohai Rim 586,009 628,580 574,513 640,213 730,965 838,494 1,076,820 17.2 17.0 17.5 17.6 17.9 18.3 18.8 Central China 524,733 580,275 424,628 467,142 526,306 606,368 777,925 15.4 15.7 12.9 12.9 12.9 13.3 13.6 Northeastern China 377,969 399,326 193,000 198,427 224,675 281,252 349,926 11.1 10.8 5.9 5.5 5.5 6.2 6.1 Western China 552,112 593,686 484,134 533,444 612,635 732,625 952,011 16.2 16.0 14.7 14.7 15.0 16.0 16.6 Overseas 76,417 99,243 104,398 112,017 154,020 184,235 234,198 2.2 2.7 3.2 3.1 3.8 4.0 4.1 Total 3,402,277 3,707,748 3,289,553 3,631,171 4,073,229 4,571,994 5,728,626 100.0 100.0 100.0 100.0 100.0 100.0 100.0
CCB Yangtze River Delta 465,270 547,351 608,384 714,373 816,085 922,104 1,136,447 23.3 24.6 24.7 24.9 24.9 24.3 23.6 Pearl River Delta 276,470 288,515 328,399 399,229 473,478 544,999 728,639 13.8 13.0 13.4 13.9 14.5 14.4 15.1 Bohai Rim 407,694 457,796 494,216 549,755 602,943 691,638 859,885 20.4 20.6 20.1 19.1 18.4 18.2 17.8 Central 304,833 362,218 405,956 463,670 519,388 607,335 782,763 15.3 16.3 16.5 16.1 15.9 16.0 16.2 Western 330,957 357,460 398,664 469,428 530,805 635,905 819,337 16.6 16.0 16.2 16.3 16.2 16.8 17.0 Northeastern 120,941 136,689 152,762 177,771 199,106 233,468 299,385 6.1 6.1 6.2 6.2 6.1 6.2 6.2 Head Office 60,461 43,940 35,421 28,188 29,583 39,027 41,679 3.0 2.0 1.4 1.0 0.9 1.0 0.9 Overseas 31,128 33,457 34,596 71,195 100,769 119,467 151,638 1.6 1.5 1.4 2.5 3.1 3.1 3.1 Total 1,997,754 2,227,426 2,458,398 2,873,609 3,272,157 3,793,943 4,819,773 100.0 100.0 100.0 100.0 100.0 100.0 100.0
BOC Northern China 355,279 314,843 322,451 348,596 387,527 459,249 709,698 16.4 14.7 14.4 14.3 13.6 13.9 14.5 Northeastern China 139,263 128,600 131,649 136,119 146,106 165,279 279,162 6.4 6.0 5.9 5.6 5.1 5.0 5.7 Eastern China 621,900 679,773 719,759 819,434 965,810 1,088,512 1,673,645 28.8 31.7 32.2 33.7 33.9 33.0 34.1 Central and Southern 453,863 433,860 444,869 485,285 587,995 669,521 1,065,836 21.0 20.2 19.9 20.0 20.6 20.3 21.7 China Western China 179,766 178,452 181,414 198,900 228,267 280,243 437,372 8.3 8.3 8.1 8.2 8.0 8.5 8.9 Overseas 410,829 412,160 435,123 443,685 534,856 633,342 744,645 19.0 19.2 19.5 18.2 18.8 19.2 15.2 Total 2,160,900 2,147,688 2,235,265 2,432,019 2,850,561 3,296,146 4,910,358 100.0 100.0 100.0 100.0 100.0 100.0 100.0
BCOM Northern China na 105,139 129,729 164,116 209,844 257,720 332,812 na 16.4 16.8 17.7 19.0 19.4 18.1 Northeastern China na 50,423 53,962 58,739 64,102 73,961 90,882 na 7.9 7.0 6.4 5.8 5.6 4.9 Eastern China na 260,251 320,533 369,300 440,670 530,674 750,489 na 40.7 41.6 39.9 39.9 39.9 40.8 Central and Southern na 126,306 148,064 182,059 222,589 252,763 360,322 na 19.7 19.2 19.7 20.2 19.0 19.6 China Western China na 60,213 71,027 81,658 93,660 111,579 172,251 na 9.4 9.2 8.8 8.5 8.4 9.4 Head Office na na na 12,056 9,110 28,049 31,797 na na na 1.3 0.8 2.1 1.7 Overseas na 36,452 46,225 56,897 64,515 73,844 100,761 na 5.7 6.0 6.2 5.8 5.6 5.5 Total na 640,058 771,374 924,825 1,104,490 1,328,590 1,839,314 na 100.0 100.0 100.0 100.0 100.0 100.0
CMB Eastern China 101,614 120,718 145,287 212,829 275,956 356,013 480,121 33.0 32.3 30.8 37.6 41.0 40.7 40.5 Southern and Central 97,435 132,642 192,617 177,092 197,324 230,494 306,335 31.7 35.5 40.8 31.3 29.3 China* 26.4 25.8 Northern China 66,755 73,816 82,656 108,986 121,474 147,035 204,105 21.7 19.7 17.5 19.3 18.0 16.8 17.2 Western China 40,963 45,130 49,085 63,327 71,898 93,323 126,600 13.3 12.1 10.4 11.2 10.7 10.7 10.7 Others 713 1,711 2,540 3,468 6,515 6,683 12,362 0.2 0.5 0.5 0.6 1.0 0.8 1.0 Total 307,480 374,017 472,185 565,702 673,167 874,362 1,185,822 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Nomura 82 14 January 2011
Banks | China Lucy Feng
Balance (RMBmn) As % of total 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 CITIC Bank Yangtze River Delta 70,051 91,672 120,026 146,784 182,058 205,670 284,055 27.2 29.9 32.4 31.7 31.7 30.9 26.7 Pearl River Delta 46,780 49,491 52,885 68,230 90,358 100,366 145,222 18.2 16.1 14.3 14.7 15.7 15.1 13.6 Bohai Rim* 89,770 100,195 115,706 138,310 167,329 188,308 293,907 34.9 32.6 31.2 29.9 29.1 28.3 27.6 Central China 21,396 27,477 36,255 46,704 60,410 74,566 133,009 8.3 9.0 9.8 10.1 10.5 11.2 12.5 Northeastern China 7,961 9,880 13,207 19,141 19,065 23,536 34,965 3.1 3.2 3.6 4.1 3.3 3.5 3.3 Western China 21,075 27,943 32,029 43,820 55,780 72,068 113,499 8.2 9.1 8.7 9.5 9.7 10.8 10.7 Hong Kong 280 221 152 178 208 410 60,992 0.1 0.1 0.0 0.0 0.0 0.1 5.7 Total 257,313 306,879 370,260 463,167 575,208 664,924 1,065,649 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Minsheng Northern China na na na 159,511 174,754 191,011 276,820 na na na 33.8 31.5 29.0 Eastern China na na na 150,157 186,760 236,412 319,054 na na na 31.8 33.7 35.9 Southern China na na na 81,462 92,202 95,388 95,762 na na na 17.3 16.6 14.5 Other regions na na na 80,958 101,243 135,549 191,343 na na na 17.1 18.2 20.6 Total na na na 472,088 554,959 658,360 882,979 na na na 100.0 100.0 100.0 * Including head office Source: Banks Annual reports, Nomura research
Nomura 83 14 January 2011
Banks | China Lucy Feng
Exhibit 144. Corporate loans breakdown by Legal form of borrower
Corporate loans breakdown by legal form of borrowers (RMBmn) As % of total corporate loans 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 ICBC State-wholly-owned enterprises 1,189,813 1,193,530 595,685 648,883 740,241 na na 42.1 41.2 25.1 24.7 24.2 na na State-controlled enterprises 396,959 424,622 633,459 672,586 719,205 na na 14.0 14.7 26.7 25.6 23.5 na na State-invested enterprises 77,933 80,522 68,654 73,943 72,506 na na 2.8 2.8 2.9 2.8 2.4 na na Joint-stock enterprises 284,344 306,738 289,616 348,304 416,676 na na 10.1 10.6 12.2 13.2 13.6 na na Private enterprises 257,913 258,363 272,538 354,173 458,849 na na 9.1 8.9 11.5 13.5 15.0 na na Foreign invested & foreign JV 227,873 235,418 229,133 257,437 293,820 na na 8.1 8.1 9.7 9.8 9.6 na na enterprises Others 393,388 396,144 280,326 275,590 356,220 na na 13.9 13.7 11.8 10.5 11.7 na na Total corporate loans 2,828,223 2,895,337 2,369,411 2,630,916 3,057,517 na na 100.0 100.0 100.0 100.0 100.0 na na
CCB State-owned enterprises 796,504 838,864 844,404 961,253 1,088,893 1,330,604 na 51.8 50.6 46.7 45.5 44.8 47.7 na Joint-stock enterprises 328,188 350,150 374,427 391,587 416,011 395,320 na 21.3 21.1 20.7 18.5 17.1 14.2 na Private enterprises 118,993 152,490 214,509 325,810 417,631 532,232 na 7.7 9.2 11.9 15.4 17.2 19.1 na Foreign invested enterprises 126,634 147,863 183,486 224,851 263,387 289,736 na 8.2 8.9 10.1 10.6 10.8 10.4 na Collectively-controlled enterprises 49,358 44,278 42,963 45,888 37,636 42,305 na 3.2 2.7 2.4 2.2 1.5 1.5 na Joint-owned enterprises 11,303 14,204 18,698 18,308 17,832 15,936 na 0.7 0.9 1.0 0.9 0.7 0.6 na Others 107,822 109,611 131,349 145,054 187,137 184,498 na 7.0 6.6 7.3 6.97.7 6.6 na Total corporate loans 1,538,802 1,657,460 1,809,836 2,112,751 2,428,527 2,790,631 na 100.0 100.0 100.0 100.0 100.0 100.0 na
BCOM State-owned enterprises 184,455 178,533 198,276 240,214 287,406 338,387 na 41.5 36.8 34.6 35.1 33.7 34.0 na Collectively owned enterprises 20,964 11,484 11,022 13,456 10,110 7,459 na 4.7 2.4 1.9 2.0 1.2 0.7 na Private unlimited companies 19,740 26,429 35,987 47,733 58,099 56,782 na 4.4 5.4 6.3 7.0 6.8 5.7 na Private limited companies 100,326 132,148 163,673 204,038 283,080 337,754 na 22.6 27.2 28.5 29.8 33.2 33.9 na Joint stock companies 48,793 56,894 63,723 64,937 89,930 117,741 na 11.0 11.7 11.1 9.5 10.6 11.8 na Foreign invested enterprises 56,790 66,677 78,339 83,408 110,805 124,496 na 12.8 13.7 13.7 12.2 13.0 12.5 na Others 12,967 13,252 22,34731,226 12,329 13,498 na 2.9 2.7 3.9 4.61.4 1.4 na Total corporate loans 444,035 485,417 573,367 685,012 851,759 996,117 na 100.0 100.0 100.0 100.0 100.0 100.0 na
CMB State-owned enterprises 84,996 98,632 111,779 142,804 179,192 198,739 231,771 41.1 39.0 37.9 39.7 40.2 36.4 33.0 Joint-stock enterprises 34,527 41,666 48,576 42,642 56,619 64,244 71,668 16.7 16.5 16.5 11.8 12.7 11.8 10.2 Other limited liability enterprises 38,611 47,370 47,619 72,608 77,186 101,029 163,030 18.7 18.7 16.1 20.2 17.3 18.5 23.2 Foreign-invested enterprises 27,264 37,244 43,418 52,391 69,522 90,235 101,138 13.2 14.7 14.7 14.6 15.6 16.5 14.4 Others 21,175 28,048 43,803 49,438 63,346 91,714 133,789 10.3 11.1 14.8 13.7 14.2 16.8 19.1 Total corporate loans 206,573 252,960 295,195 359,883 445,865 545,961 701,396 100.0 100.0 100.0 100.0 100.0 100.0 100.0
CITIC Bank State-owned enterprises 64,826 84,252 100,738 131,954 165,218 186,987 na 33.3 32.9 35.7 35.7 35.5 35.0 na Joint-stock enterprises 83,086 119,369 130,157 166,490 207,396 229,692 na 42.7 46.6 46.1 45.1 44.6 43.0 na Private enterprises 8,398 11,662 13,636 18,162 27,673 37,123 na 4.3 4.5 4.8 4.9 5.9 7.0 na Foreign-invested enterprises 22,156 27,171 27,040 39,048 55,100 67,820 na 11.4 10.6 9.6 10.6 11.8 12.7 na Collectively-controlled enterprises 7,730 6,386 4,480 5,721 5,847 5,479 na 4.0 2.5 1.6 1.5 1.3 1.0 na Others 8,321 7,582 6,2247,781 4,286 6,521 na 4.3 3.0 2.2 2.10.9 1.2 na Total corporate loans 194,517 256,422 282,275 369,156 465,520 533,622 na 100.0 100.0 100.0 100.0 100.0 100.0 na Note: ABC, BOC and Minsheng data not available. Source: Banks Annual reports, Nomura research
Nomura 84 14 January 2011
Banks | China Lucy Feng
Exhibit 145. Gross loans breakdown by business line
Gross loans breakdown by business line (RMBmn) As % of total loans 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 ABC Corporate loans - Total Manufacturing na na na na 945,753 763,257 886,729 na na na na 27.2% 24.6% 21.4 - Mining na na na na 67,119 66,173 93,340 na na na na 1.9% 2.1% 2.3 - Transportation and logistics na na na na 159,151 200,129 303,520 na na na na 4.6% 6.5% 7.3 - Power generation and supplies na na na na 341,501 382,845 411,410 na na na na 9.8% 12.3% 9.9 - Retail, wholesale and catering na na na na 306,353 165,247 227,546 na na na na 8.8% 5.3% 5.5 - leasing, commercial and servicing na na na na 111,004 64,288 144,755 na na na na 3.2% 2.1% 3.5 - Information system, computer services and software na na na na 30,751 37,998 28,199 na na na na 0.9% 1.2% 0.7 - Property development na na na na 347,185 336,037 427,253 na na na na 10.0% 10.8% 10.3 - Water, environment, public utility management na na na na 77,230 90,973 155,365 na na na na 2.2% 2.9% 3.8 - Construction na na na na 81,433 82,453 99,700 na na na na 2.3% 2.7% 2.4 - Others na na na na 293,677 169,897 190,874 na na na na 8.5% 5.5% 4.6 Total corporate loans na na na na 2,761,157 2,359,297 2,968,691 na na na na 79.5% 76.1% 71.7 Personal loans - Personal property mortgage loans na na na na 298,858 319,505 497,950 na na na na 8.6% 10.3% 12.0 - Bank card overdrafts na na na na 4,417 7,901 14,118 na na na na 0.1% 0.3% 0.3 - Others na na na na 187,910 137,059 277,274 na na na na 5.4% 4.4% 6.7 Total personal loans na na na na 491,185 464,465 789,342 na na na na 14.1% 15.0% 19.1 Discounted bills na na na na 204,127 257,163 352,230 na na na na 5.9% 8.3% 8.5 Overseas operations na na na na 17,705 19,234 27,924 na na na na 0.5% 0.6% 0.7 Total loans to customers na na na na 3,474,174 3,100,159 4,138,187 na na na na 100.0% 100.0% 100.0
ICBC Corporate loans - Manufacturing 1,141,417 1,063,272 662,376 672,589 738,121 758,764 793,233 33.5 28.7 20.1 18.5 18.1 16.6 13.8 - Transportation and logistics 309,027 379,680 367,371 525,048 602,103 690,809 800,244 9.1 10.2 11.2 14.5 14.8 15.1 14.0 - Production and supply of electricity, gas and water 198,553 261,222 281,179 343,038 404,873 501,411 531,562 5.8 7.0 8.5 9.4 9.9 11.0 9.3 - Water, environment and public utility management 275,469 510,721 8.9 - Wholesale, retail and lodging 345,465 255,591 265,906 255,142 346,865 188,831 261,261 10.2 6.9 8.1 7.0 8.5 4.1 4.6 - Real estate 203,385 207,071 194,024 230,064 303,984 343,895 421,804 6.0 5.6 5.9 6.3 7.5 7.5 7.4 - Leasing and commercial services 188,120 290,410 5.1 - Mining 85,054 105,575 1.8 - Construction 69,526 78,289 89,666 49,957 52,639 61,006 62,403 2.0 2.1 2.7 1.4 1.3 1.3 1.1 - Science, education, culture and sanitation 94,992 116,973 103,070 107,403 69,742 70,148 66,809 2.8 3.2 3.1 3.0 1.7 1.5 1.2 - Others 399,334 449,392 313,804 347,491 396,666 68,595 113,764 11.7 12.1 9.5 9.6 9.7 1.5 2.0 Total corporate loans 2,761,699 2,811,490 2,277,396 2,530,732 2,914,993 3,232,102 3,957,786 81.2 75.8 69.2 69.7 71.6 70.7 69.1 Personal loans 0.0 - personal property mortgage loans 330,115 412,449 377,704 410,227 536,331 611,345 874,244 9.7 11.1 11.5 11.3 13.2 13.4 15.3 - personal consumption loans 74,695 71,354 73,565 78,410 91,066 na na 2.2 1.9 2.2 2.2 2.2 na na - personal business loans na na 60,342 82,306 116,475 200,900 na na na 1.8 2.3 2.9 4.4 na - bank card overdraft 2,862 3,064 3,431 5,166 8,241 17,097 na 0.1 0.1 0.1 0.1 0.2 0.4 na Total personal loans 407,672 486,867 515,042 576,109 752,113 829,342 1,206,850 12.0 13.1 15.7 15.9 18.5 18.1 21.1 Discounted bills 156,489 310,148 392,717 412,313 252,103 326,315 329,792 4.6 8.4 11.9 11.4 6.2 7.1 5.8 Overseas operations 76,417 99,243 104,398 112,017 154,020 184,235 234,198 2.2 2.7 3.2 3.1 3.8 4.0 4.1 Total loans to customers 3,402,277 3,707,748 3,289,553 3,631,171 4,073,229 4,571,994 5,728,626 100.0 100.0 100.0 100.0 100.0 100.0 100.0
CCB Corporate loans - Manufacturing 347,051 396,631 433,104 510,427 592,502 663,350 803,302 17.4 17.8 17.6 17.8 18.1 17.5 16.7 - Transportation & Telecommunication 294,586 308,196 338,836 365,677 370,732 426,803 519,078 14.7 13.8 13.8 12.7 11.3 11.2 10.8 - Production and supply of electric power, gas and water 206,434 231,590 265,647 318,493 377,285 452,472 486,094 10.3 10.4 10.8 11.1 11.5 11.9 10.1 - Wholesale & retail trade 62,664 56,863 63,179 73,526 89,289 102,590 146,693 3.1 2.6 2.6 2.6 2.7 2.7 3.0 - Property development 248,520 244,036 256,396 302,290 317,780 329,381 358,651 12.4 11.0 10.4 10.5 9.7 8.7 7.4 - Construction 77,841 82,139 86,855 96,580 101,467 116,551 116,379 3.9 3.7 3.5 3.4 3.1 3.1 2.4 - Education 36,794 51,309 63,395 77,458 78,153 78,870 93,351 1.8 2.3 2.6 2.7 2.4 2.1 1.9 - Others 234,588 253,655 268,379 313,510 417,549 519,767 827,767 11.7 11.4 10.9 10.9 12.8 13.7 17.2 Total corporate loans 1,508,478 1,624,419 1,775,791 2,057,961 2,344,757 2,689,784 3,351,315 75.5 72.9 72.2 71.6 71.7 70.9 69.5 Personal loans - personal property mortgage loans 258,918 309,401 348,219 428,039 527,888 603,147 852,531 13.0 13.9 14.2 14.9 16.1 15.9 17.7 - personal consumption loans 59,895 63,509 60,150 72,620 66,573 74,964 78,651 3.0 2.9 2.4 2.5 2.0 2.0 1.6 - Others 35,914 39,365 45,520 84,426 129,344 143,420 157,277 1.8 1.8 1.9 2.9 4.0 3.8 3.3 Total personal loans 354,727 412,275 453,889 585,085 723,805 821,531 1,088,459 17.8 18.5 18.5 20.4 22.1 21.7 22.6 Discounted bills 103,421 157,275 194,122 159,368 102,826 163,161 228,361 5.2 7.1 7.9 5.5 3.1 4.3 4.7 Overseas operations 31,128 33,457 34,596 71,195 100,769 119,467 151,638 1.6 1.5 1.4 2.5 3.1 3.1 3.1 Total loans to customers 1,997,754 2,227,426 2,458,398 2,873,609 3,272,157 3,793,943 4,819,773 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Nomura 85 14 January 2011
Banks | China Lucy Feng
Gross loans breakdown by business line (RMBmn) As % of total loans 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 BOC Corporate loans - Manufacturing 559,348 523,732 531,410 603,078 687,925 778,219 1,059,185 25.9 24.4 23.8 24.8 24.1 23.6 21.6 - Transportation & logistics 177,664 185,449 193,428 211,786 266,905 318,328 489,527 8.2 8.6 8.7 8.7 9.4 9.7 10.0 - Energy, mining and agriculture 188,821 203,544 230,854 260,706 299,849 103,938 197,414 8.7 9.5 10.3 10.7 10.5 3.2 4.0 - Production and supply of electric power, gas and water 310,806 353,284 9.4 7.2 - Commerce & services 430,993 348,432 301,863 301,254 357,702 410,830 725,227 19.9 16.2 13.5 12.4 12.5 12.5 14.8 - Real estate 216,734 187,110 190,297 217,960 247,481 271,484 366,630 10.0 8.7 8.5 9.0 8.7 8.2 7.5 - Construction 44,548 36,059 36,050 38,897 45,343 51,606 60,558 2.1 1.7 1.6 1.6 1.6 1.6 1.2 - Water, environment and public utility management 54,448 251,154 1.7 5.1 - Public utilities 75,465 87,731 91,924 106,141 70,601 68,589 84,329 3.5 4.1 4.1 4.4 2.5 2.1 1.7 - Financial services 48,261 46,518 96,245 72,909 53,474 74,321 111,515 2.2 2.2 4.3 3.0 1.9 2.3 2.3 - Others 35,673 35,072 40,191 36,544 88,697 50,145 64,053 1.7 1.6 1.8 1.5 3.1 1.5 1.3 Total corporate loans 1,777,507 1,653,647 1,712,262 1,849,275 2,117,977 2,492,714 3,762,876 82.3 77.0 76.6 76.0 74.3 75.6 76.6 Personal loans - personal mortgage loans 275,303 360,595 413,007 456,930 577,655 635,000 907,912 12.7 16.8 18.5 18.8 20.3 19.3 18.5 - credit card 4,944 5,973 6,785 8,458 10,677 16,495 31,336 0.2 0.3 0.3 0.3 0.4 0.5 0.6 - Others 103,146 127,473 103,211 117,356 144,252 151,937 208,234 4.8 5.9 4.6 4.8 5.1 4.6 4.2 Total personal loans 383,393 494,041 523,003 582,744 732,584 803,432 1,147,482 17.7 23.0 23.4 24.0 25.7 24.4 23.4 Total loans to customers 2,160,900 2,147,688 2,235,265 2,432,019 2,850,561 3,296,146 4,910,358 100.0 100.0 100.0 100.0 100.0 100.0 100.0
BCOM Corporate loans - Manufacturing 157,635 180,021 210,359 240,745 278,706 321,501 378,694 28.7 28.1 27.3 26.0 25.2 24.2 20.6 - Transportation and telecommunication 47,276 58,550 79,312 104,491 133,727 148,935 226,757 8.6 9.1 10.3 11.3 12.1 11.2 12.3 - Utilities 24,723 36,125 51,812 63,289 79,411 92,207 183,704 4.5 5.6 6.7 6.8 7.2 6.9 10.0 - Services 28,530 33,978 56,024 79,630 37,267 49,990 81,669 5.2 5.3 7.3 8.6 3.4 3.8 4.4 - Property development 53,970 63,321 60,913 65,962 77,592 88,568 129,325 9.8 9.9 7.9 7.1 7.0 6.7 7.0 - Construction 17,124 20,916 25,958 35,961 46,206 52,261 55,387 3.1 3.3 3.4 3.9 4.2 3.9 3.0 - Others 65,329 48,254 47,256 53,869 247,627 300,337 371,268 11.9 7.5 6.1 5.8 22.4 22.6 20.2 Total corporate loans 464,534 509,011 604,611 725,892 900,536 1,053,799 1,426,804 84.5 79.5 78.4 78.3 81.5 79.3 77.6 Personal loans 0.0 - mortgage loans 42,596 63,978 78,264 88,224 112,941 133,415 198,695 7.7 10.0 10.1 9.5 10.2 10.0 10.8 - car loans 6,156 5,113 3,961 3,932 4,534 4,271 4,894 1.1 0.8 0.5 0.4 0.4 0.3 0.3 - Others 11,435 16,686 21,828 33,972 54,999 67,372 107,049 2.1 2.6 2.8 3.7 5.0 5.1 5.8 Total personal loans 60,187 85,777 104,053 126,128 172,474 205,058 310,638 10.9 13.4 13.5 13.6 15.6 15.4 16.9 Discounted bills 24,038 43,996 60,876 72,805 31,480 69,733 101,872 4.4 6.9 7.9 7.9 2.9 5.2 5.5 Interest receivables 1,184 1,274 1,834 2,580 na na na 0.2 0.2 0.2 0.3 na na na Total loans to customers 549,943 640,058 771,374 927,405 1,104,490 1,328,590 1,839,314 100.0 100.0 100.0 100.0 100.0 100.0 100.0
CMB Corporate loans - Manufacturing 47,210 61,621 75,735 103,870 132,652 158,018 191,890 15.4 16.5 16.0 18.4 19.7 18.1 16.2 - Transportation and telecommunication 48,086 59,967 66,154 77,181 75,827 90,391 106,456 15.6 16.0 14.0 13.6 11.3 10.3 9.0 - Production and supply of electric power, gas and water 28,365 39,292 44,820 38,260 40,901 62,063 65,797 9.2 10.5 9.5 6.8 6.1 7.1 5.5 - Property development 14,890 17,971 20,089 26,686 43,181 47,233 63,611 4.8 4.8 4.3 4.7 6.4 5.4 5.4 - Construction 7,407 8,703 11,305 12,668 17,145 22,774 26,027 2.4 2.3 2.4 2.2 2.5 2.6 2.2 - Wholesale, retail 30,332 32,081 33,966 31,003 58,441 56,897 75,310 9.9 8.6 7.2 5.5 8.7 6.5 6.4 - Others 34,384 38,735 46,553 70,215 77,718 81,064 128,271 11.2 10.4 9.9 12.4 11.5 9.3 10.8 Total corporate loans 210,674 258,370 298,622 359,883 445,865 518,440 657,362 68.5 69.1 63.2 63.6 66.2 59.3 55.4 Personal loans 0.0 - residential mortgage loans 26,820 46,483 64,609 81,383 131,138 148,452 263,997 8.7 12.4 13.7 14.4 19.5 17.0 22.3 - credit card 891 2,157 4,550 10,146 21,324 31,604 39,942 0.3 0.6 1.0 1.8 3.2 3.6 3.4 - Others 6,898 6,121 4,877 10,454 22,564 39,286 65,076 2.2 1.6 1.0 1.8 3.4 4.5 5.5 Total personal loans 34,609 54,761 74,036 101,983 175,026 219,342 369,015 11.3 14.6 15.7 18.0 26.0 25.1 31.1 Discounted bills 62,224 60,886 99,527 103,836 52,276 95,766 102,549 20.2 16.3 21.1 18.4 7.8 11.0 8.6 Overseas 40,814 56,896 4.7 4.8 Total loans to customers 307,507 374,017 472,185 565,702 673,167 874,362 1,185,822 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Nomura 86 14 January 2011
Banks | China Lucy Feng
Gross loans breakdown by business line (RMBmn) As % of total loans 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 CITIC Bank Corporate loans - Total Manufacturing 51,860 71,247 81,537 108,539 145,272 163,164 210,446 20.2 23.2 22.0 23.4 25.3 24.5 19.7 - Transportation, storage and post service 20,882 22,459 23,633 35,933 62,856 62,938 102,557 8.1 7.3 6.4 7.8 10.9 9.5 9.6 - Production & supply of electricity , gas & water 9,857 23,825 26,559 38,022 44,392 57,199 85,106 3.8 7.8 7.2 8.2 7.7 8.6 8.0 - Wholesale and retail 23,099 26,023 29,902 33,468 42,239 48,855 85,872 9.0 8.5 8.1 7.2 7.3 7.3 8.1 - Real estate 25,313 27,640 22,957 28,796 41,741 42,225 46,312 9.8 9.0 6.2 6.2 7.3 6.4 4.3 - Water, environmental and public utility mgt 10,926 18,109 20,811 26,915 28,324 58,596 74,604 4.2 5.9 5.6 5.8 4.9 8.8 7.0 - Rent and business services 7,370 14,538 18,566 29,375 34,793 31,396 49,900 2.9 4.7 5.0 6.3 6.0 4.7 4.7 - Construction 8,752 13,980 15,963 23,364 22,199 23,739 34,554 3.4 4.6 4.3 5.0 3.9 3.6 3.2 - Others 36,458 38,601 42,347 44,744 43,704 45,510 133,284 14.2 12.6 11.4 9.7 7.6 6.8 12.5 Total corporate loans 194,517 256,422 282,275 369,156 465,520 533,622 822,635 75.6 83.6 76.2 79.7 80.9 80.3 77.2 Personal loans 0.0 - Residential mortgage loans 8,149 17,838 26,246 36,470 60,833 73,000 114,156 3.2 5.8 7.1 7.9 10.6 11.0 10.7 - credit card loans 3,835 7,372 6,162 5,863 4,145 6,218 14,191 1.5 2.4 1.7 1.3 0.7 0.9 1.3 - Others 1,740 1,787 1,455 2,091 11,111 12,222 19,893 0.7 0.6 0.4 0.5 1.9 1.8 1.9 Total personal loans 17,237 31,730 37,834 48,375 76,089 91,439 148,240 6.7 10.3 10.2 10.4 13.2 13.8 13.9 Discounted bills 45,559 18,727 50,151 45,636 33,599 43,539 94,774 17.7 6.1 13.5 9.9 5.8 6.5 8.9 Total loans to customers 257,313 306,879 370,260 463,167 575,208 664,924 1,065,649 100.0 100.0 100.0 100.0 100.0 100.0 100.0
SPDB Corporate loans - Manufacturing 76,948 94,042 111,050 124,163 140,517 174,664 202,455 30.1 30.2 29.4 26.9 25.5 25.0 21.8 - Public utilities 9,711 12,959 19,356 23,772 29,801 48,264 48,229 3.8 4.2 5.1 5.2 5.4 6.9 5.2 - Constructions 9,031 11,127 12,774 20,952 30,680 37,966 48,253 3.5 3.6 3.4 4.5 5.6 5.4 5.2 - Transportation & telecom 14,400 17,757 21,685 24,264 35,872 50,609 69,334 5.6 5.7 5.7 5.3 6.5 7.3 7.5 - Wholesale, retails & entertainment 35,347 37,614 53,306 53,459 59,142 69,121 88,316 13.8 12.1 14.1 11.6 10.7 9.9 9.5 - Real estate 29,473 37,148 37,516 48,972 58,733 63,953 80,904 11.5 11.9 9.9 10.6 10.7 9.2 8.7 - Social services 16,308 17,703 22,893 43,017 36,263 46,678 64,660 6.4 5.7 6.1 9.3 6.6 6.7 7.0 - Others 35,000 33,670 42,029 60,376 69,711 98,489 168,956 13.7 10.8 11.1 13.1 12.7 14.1 18.2 Total corporate loans 226,217 262,021 320,610 398,975 460,719 589,744 771,107 88.4 84.2 85.0 86.6 83.6 84.5 83.0 Personal loans 29,631 49,101 56,613 61,918 90,269 107,821 157,748 11.6 15.8 15.0 13.4 16.4 15.5 17.0 - Residential mortgage loans na na na na 81,816 94,909 138,980 na na na na 14.8 13.6 15.0 - Personal consumer loans na na na na 3,138 na 5,188 na na na na 0.6 na 0.6 - Credit card loans na na na na na 4,631 na na na na na na 0.7 na - Others na na na na 5,316 8,281 13,580 na na na na 1.0 1.2 1.5 Total loans to customers 255,848 311,122 377,223 460,893 550,988 697,565 928,855 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Minsheng Corporate loans - Manufacturing 50,255 79,763 97,993 124,566 106,276 103,132 121,940 23.9 26.6 21.1 22.5 16.2 13.4 13.8 - Trading 18,724 16,770 13,788 17,104 26,108 25,811 35,772 8.9 5.6 3.0 3.1 4.0 3.4 4.1 - Real estate 23,598 31,407 40,318 52,714 71,903 90,158 103,713 11.2 10.5 8.7 9.5 11.0 11.8 11.7 - Transportation 14,493 21,879 29,799 39,743 48,452 69,840 75,137 6.9 7.3 6.4 7.2 7.4 9.1 8.5 - Telecom 8,957 7,834 6,548 5,818 4,960 3,816 4.3 2.6 1.4 1.1 0.0 0.6 0.4 - Construction 6,826 10,144 12,755 20,860 24,786 25,307 26,144 3.2 3.4 2.8 3.8 3.8 3.3 3.0 - Conglomerates 6,733 11,298 6,957 8,196 37,678 na na 3.2 3.8 1.5 1.5 5.8 na na - Public utilities 5,510 9,929 17,162 26,529 50,563 46,761 48,515 2.6 3.3 3.7 4.8 7.7 6.1 5.5 - Education & social service 7,778 8,215 10,722 14,312 17,418 14,290 22,125 3.7 2.7 2.3 2.6 2.7 1.9 2.5 - Rental & commercial service 4,569 7,180 9,914 18,179 26,687 51,045 94,644 2.2 2.4 2.1 3.3 4.1 6.7 10.7 - Financials 8,545 11,338 8,288 11,922 8,704 25,135 37,835 4.1 3.8 1.8 2.2 1.3 3.3 4.3 - Others 8,855 11,020 11,864 17,523 36,924 93,350 149,458 4.2 3.7 2.6 3.2 5.6 12.2 16.9 Total corporate loans 164,843 226,777 266,108 357,466 420,837 485,858 719,099 78.4 75.7 57.4 64.7 64.3 63.4 81.4 Personal loans 23,853 42,983 57,167 68,574 99,460 108,571 163,880 2.6 4.8 6.3 7.6 11.0 12.0 18.6 - Residential mortgage loans na na 54,785 65,334 89,589 87,401 99,619 Na Na 11.8 11.8 13.7 11.4 11.3 - Credit card na na 174 1,169 5,426 12,727 14,266 Na Na 0.0 0.2 0.8 1.7 1.6 - Others na na 2,209 2,071 4,445 8,443 49,995 Na Na 0.5 0.4 0.7 1.1 5.7 Discounted bills 21,622 29,940 83,309 57,970 34,662 63,931 35,221 2.4 3.3 18.0 10.5 5.3 8.3 4.0 Total loans to customers 201,773 288,362 406,544 472,088 554,959 658,360 882,979 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Banks Annual reports, Nomura research
Nomura 87 14 January 2011
Banks | China Lucy Feng
Exhibit 146. Gross loans by maturities
Amount (RMBmn) Growth (% y-y) as % of total loans 2005 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 ABC Overdue/on demand na na - - - na na na na na 0.0 0.0 0.0 less than 1 month na na 140,030 130,212 200,279 na na -7.0% 53.8% na 5.2 4.3 5.0 1 to 3 months na na 302,325 314,869 453,547 na na 4.1% 44.0% na 11.2 10.4 11.3 3 months to 1 yr na na 986,714 1,198,665 1,297,465 na na 21.5% 8.2% na 36.4 39.8 32.3 1 to 5 yr na na 617,303 652,129 997,473 na na 5.6% 53.0% na 22.8 21.6 24.9 more than 5 yrs na na 608,077 697,676 1,045,585 na na 14.7% 49.9% na 22.4 23.1 26.1 undated na na 54,743 21,400 17,146 na na -60.9% -19.9% na 2.0 0.7 0.4 Total loans na na 2,709,192 3,014,951 4,011,495 na na 11.3% 33.1% na 100.0 100.0 100.0
ICBC Overdue/on demand 43,621 45,600 5,951 9,624 5,552 4.5 (86.9) 61.7 (42.3) 1.3 0.2 0.2 0.1 less than 1 month na 177,053 199,793 195,162 243,689 na 12.8 (2.3) 24.9 5.0 5.0 4.4 4.4 1 to 3 months 518,383 393,317 364,512 388,501 514,854 (24.1) (7.3) 6.6 32.5 11.1 9.2 8.8 9.2 3 months to 1 yr 997,064 1,086,543 1,182,578 1,300,790 1,296,576 9.0 8.8 10.0 (0.3) 30.7 29.9 29.3 23.2 1 to 5 yr 829,482 885,149 1,057,925 1,182,466 1,606,635 6.7 19.5 11.8 35.9 25.0 26.7 26.7 28.8 more than 5 yrs 716,047 859,394 1,113,118 1,313,697 1,878,490 20.0 29.5 18.0 43.0 24.3 28.1 29.6 33.6 undated 101,264 86,922 33,665 45,771 37,378 (14.2) (61.3) 36.0 (18.3) 2.5 0.9 1.0 0.7 Total loans 3,205,861 3,533,978 3,957,542 4,436,011 5,583,174 10.2 12.0 12.1 25.9 100.0 100.0 100.0 100.0
CCB Overdue/on demand 71,195 21,773 27,271 38,088 34,097 (69.4) 25.3 39.7 (10.5) 0.8 0.9 1.0 0.7 less than 1 month na 110,061 122,830 124,660 181,801 na 11.6 1.5 45.8 3.9 3.9 3.4 3.9 1 to 3 months 332,389 236,353 250,102 263,120 346,437 (28.9) 5.8 5.2 31.7 8.5 7.9 7.1 7.4 3 months to 1 yr 783,035 833,647 924,681 1,119,663 1,172,502 6.5 10.9 21.1 4.7 29.8 29.0 30.4 25.0 1 to 5 yr 657,218 834,980 941,207 1,071,249 1,447,143 27.0 12.7 13.8 35.1 29.9 29.6 29.1 30.8 more than 5 yrs 551,476 709,290 880,105 1,028,537 1,483,090 28.6 24.1 16.9 44.2 25.4 27.6 27.9 31.6 undated - 49,872 37,033 38,258 27,877 (25.7) 24.6 3.3 (27.1) 1.8 1.2 1.0 0.6 Total loans 2,395,313 2,795,976 3,183,229 3,683,575 4,692,947 13.9 (3.2) 15.7 27.4 100.0 100.0 100.0 100.0
BOC Overdue/on demand 68,513 81,313 51,798 50,949 54,364 18.7 (36.3) (1.6) 6.7 3.5 1.9 1.6 1.1 less than 1 month 107,549 129,262 135,571 161,036 205,597 20.2 4.9 18.8 27.7 5.5 4.9 5.0 4.3 1 to 3 months 220,426 251,375 262,986 297,196 439,638 14.0 4.6 13.0 47.9 10.8 9.5 9.3 9.2 3 months to 1 yr 795,450 646,647 758,152 885,270 1,263,176 (18.7) 17.2 16.8 42.7 27.7 27.5 27.8 26.3 1 to 5 yr 506,258 624,209 771,723 926,058 1,415,028 23.3 23.6 20.0 52.8 26.7 28.0 29.0 29.5 more than 5 yrs 453,916 604,920 774,263 869,143 1,419,605 33.3 28.0 12.3 63.3 25.9 28.1 27.2 29.6 undated - - - - - 0.0 0.0 0.0 0.0 Total loans 2,152,112 2,337,726 2,754,493 3,189,652 4,797,408 8.6 17.8 15.8 50.4 100.0 100.0 100.0 100.0
BCOM Overdue/on demand 16,179 15,796 15,722 16,585 13,347 (2.4) (0.5) 5.5 na 1.7 1.4 1.3 0.7 less than 1 month 57,479 64,025 72,497 88,802 104,985 11.4 13.2 22.5 na 7.0 6.7 6.8 5.8 1 to 3 months 111,693 129,257 135,269 145,404 207,754 15.7 4.7 7.5 na 14.2 12.5 11.2 11.5 3 months to 1 yr 346,722 387,041 434,784 554,908 568,784 11.6 12.3 27.6 na 42.5 40.0 42.7 31.6 1 to 5 yr 112,901 170,539 229,664 305,592 534,841 51.1 34.7 33.1 na 18.7 21.2 23.5 29.7 more than 5 yrs 113,799 143,649 197,788 187,485 371,827 26.2 37.7 (5.2) na 15.8 18.2 14.4 20.6 undated - - - - - 0.0 0.0 0.0 0.0 Total loans 758,773 910,307 1,085,724 1,298,776 1,801,538 20.0 19.3 19.6 na 100.0 100.0 100.0 100.0
CMB Overdue/on demand 3,597 3,050 774 3,508 2,851 (15.2) (74.6) 353.2 (18.7) 0.6 0.1 0.4 0.2 less than 1 month 37,891 49,314 51,577 45,899 52,753 30.1 4.6 (11.0) 14.9 9.0 7.9 5.4 4.5 1 to 3 months 84,094 93,463 107,653 117,208 138,472 11.1 15.2 8.9 18.1 17.0 16.5 13.7 11.9 3 months to 1 yr 204,031 228,092 276,036 374,444 426,930 11.8 21.0 35.7 14.0 41.5 42.2 43.9 36.7 1 to 5 yr 67,524 66,783 117,932 167,610 288,670 (1.1) 76.6 42.1 72.2 12.2 18.0 19.7 24.8 more than 5 yrs 61,538 108,718 95,981 141,556 248,191 76.7 (11.7) 47.5 75.3 19.8 14.7 16.6 21.4 undated - - 4,4642,529 3,950 (43.3) 56.2 0.0 0.70.3 0.3 Total loans 458,675 549,420 654,417 852,754 1,161,817 19.8 19.1 30.3 36.2 100.0 100.0 100.0 100.0
Nomura 88 14 January 2011
Banks | China Lucy Feng
Amount (RMBmn) Growth (% y-y) 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 CITIC Bank Overdue/on demand 8,147 7,490 1,838 4,257 1,892 (8.1) (75.5) 131.6 (55.6) 1.7 0.3 0.6 0.2 less than 3 months 68,142 93,627 115,898 145,502 209,787 37.4 23.8 25.5 44.2 20.7 20.5 20.3 20.0 3 months to 1 yr 172,168 196,211 256,261 316,827 415,286 14.0 30.6 23.6 31.1 43.3 45.3 44.2 39.5 1 to 5 yr 61,230 96,211 108,397 135,357 253,548 57.1 12.7 24.9 87.3 21.2 19.2 18.9 24.1 more than 5 yrs 48,343 59,842 79,865 109,146 165,165 23.8 33.5 36.7 51.3 13.2 14.1 15.2 15.7 undated - - 3,6075,297 4,801 na na 46.9 (9.4) 0.0 0.60.7 0.5 Total loans 358,030 453,381 565,866 716,386 1,050,479 26.6 24.8 26.6 46.6 100.0 100.0 100.0 100.0
Minsheng Bank Overdue/on demand na na na na na na na na na 0.0 0.0 0.0 0.0 less than 1 month na 19,452 56,899 37,712 51,676 na 192.5 (33.7) 37.0 4.2 10.4 5.8 6.0 1 to 3 months na 60,974 57,375 77,581 96,156 na -5.9 35.2 23.9 13.1 10.5 12.0 11.1 3 months to 1 yr na 202,858 109,681 272,225 321,357 na -45.9 148.2 18.0 43.6 20.0 42.1 37.0 1 to 5 yr na 78,833 253,667 139,131 271,614 na 221.8 (45.2) 95.2 16.9 46.3 21.5 31.3 more than 5 yrs na 96,530 62,580 110,108 122,137 na -35.2 75.9 10.9 20.7 11.4 17.0 14.1 undated na 7,024 7,094 9,718 4,798 na 1.0 37.0 (50.6) 1.5 1.3 1.5 0.6 Total loans na 465,671 547,296 646,475 867,738 na 17.5 18.1 34.2 100.0 100.0 100.0 100.0 Source: Banks Annual reports, Nomura research
Nomura 89 14 January 2011
Banks | China Lucy Feng
Exhibit 147. Deposits by maturities
Amount (RMBmn) Growth (% y-y) as % of total loans 2006 2007 2008 2009 2007 2008 2009 2006 2007 2008 2009 ABC na 8.6 34.2 na 58.3 54.9 59.9 Overdue/on demand na 3,083,863 3,348,589 4,492,349 na 19.9 -0.2 na 14.6 15.1 12.3 less than 3 month na 770,076 923,203 921,804 na 29.1 16.7 na 20.1 22.5 21.4 3 months to 1 yr na 1,063,698 1,372,789 1,602,159 na 22.1 7.2 na 6.9 7.3 6.4 1 to 5 yr na 366,334 447,400 479,593 na 69.0 -68.6 na 0.1 0.1 0.0 more than 5 yrs na 3,223 5,447 1,713 na 15.3 23.0 na 100.0 100.0 100.0 Total deposits na 5,287,194 6,097,428 7,497,618 na 8.6 34.2 na 58.3 54.9 59.9
ICBC Overdue/on demand 3,190,873 3,817,479 4,177,866 5,227,043 19.6 9.4 25.1 50.4 55.3 50.8 53.5 Less than 1 month 558,260 552,438 608,284 654,704 (1.0) 10.1 7.6 8.8 8.0 7.4 6.7 1 to 3 months 544,932 546,154 742,451 864,840 0.2 35.9 16.5 8.6 7.9 9.0 8.9 3 months to 1yr 1,455,192 1,506,416 2,098,624 2,359,489 3.5 39.3 12.4 23.0 21.8 25.5 24.1 1 to 5yr 577,497 472,955 590,151 655,590 (18.1) 24.8 11.1 9.1 6.9 7.2 6.7 More than 5yrs 1,343 3,533 6,070 9,611 163.1 71.8 58.3 0.0 0.1 0.1 0.1 undated - - -- na na na 0.0 0.00.0 0.0 Total deposits 6,328,097 6,898,975 8,223,446 9,771,277 9.0 19.2 18.8 100.0 100.0 100.0 100.0
CCB Overdue/on demand 2,641,787 3,354,269 3,596,778 na 27.0 7.2 na 56.0 62.9 56.4 na Less than 1 month 377,198 206,589 327,958 na (45.2) 58.7 na 8.0 3.9 5.1 na 1 to 3 months 353,852 436,449 552,759 na 23.3 26.6 na 7.5 8.2 8.7 na 3 months to 1yr 998,144 1,063,397 1,482,616 na 6.5 39.4 na 21.1 20.0 23.3 na 1 to 5yr 336,958 260,626 409,035 na (22.7) 56.9 na 7.1 4.9 6.4 na More than 5yrs 13,317 8,177 6,769 na (38.6) (17.2) na 0.3 0.2 0.1 na undated - - -na na na na 0.0 0.00.0 na Total deposits 4,721,256 5,329,507 6,375,915 na 12.9 19.6 na 100.0 100.0 100.0 na
BOC Overdue/on demand 1,854,295 2,026,682 2,302,936 3,179,651 9.3 13.6 38.1 45.3 46.1 45.1 48.0 Less than 1 month 671,453 717,561 691,168 779,448 6.9 (3.7) 12.8 16.4 16.3 13.5 11.8 1 to 3 months 439,215 466,710 589,914 632,566 6.3 26.4 7.2 10.7 10.6 11.6 9.6 3 months to 1yr 847,843 985,708 1,219,512 1,664,340 16.3 23.7 36.5 20.7 22.4 23.9 25.1 1 to 5yr 277,401 202,954 290,326 361,906 (26.8) 43.1 24.7 6.8 4.6 5.7 5.5 More than 5yrs 911 496 8,255 2,641 (45.6) 1564.3 (68.0) 0.0 0.0 0.2 0.0 undated - - -- na na na 0.0 0.00.0 0.0 Total deposits 4,091,118 4,400,111 5,102,111 6,620,552 7.6 16.0 29.8 100.0 100.0 100.0 100.0
BCOM Overdue/on demand 922,735 878,104 919,140 1,156,980 (4.8) 4.7 25.9 65.0 56.0 49.3 48.8 Less than 1 month 174,487 234,148 369,548 na 34.2 57.8 0.0 11.1 12.5 15.6 1 to 3 months 119,151 150,239 206,153 254,380 26.1 37.2 23.4 8.4 9.6 11.0 10.7 3 months to 1yr 262,212 288,062 406,242 479,933 9.9 41.0 18.1 18.5 18.4 21.8 20.2 1 to 5yr 114,035 76,244 99,629 111,214 (33.1) 30.7 11.6 8.0 4.9 5.3 4.7 More than 5yrs 2,198 6 503 - (99.7) 8,283.3 (100.0) 0.2 0.0 0.0 0.0 undated - -- na na 0.0 0.00.0 0.0 Total deposits 1,420,331 1,567,142 1,865,815 2,372,055 10.3 19.1 27.1 100.0 100.0 100.0 100.0
CMB Overdue/on demand 489,451 610,629 694,315 967,216 24.8 13.7 39.3 63.3 64.7 55.5 60.1 Less than 1 month 46,856 58,231 113,071 135,785 24.3 94.2 20.1 6.1 6.2 9.0 8.4 1 to 3 months 66,385 89,705 144,483 162,468 35.1 61.1 12.4 8.6 9.5 11.6 10.1 3 months to 1yr 141,802 161,536 238,655 283,080 13.9 47.7 18.6 18.3 17.1 19.1 17.6 1 to 5yr 27,610 22,466 58,570 59,097 (18.6) 160.7 0.9 3.6 2.4 4.7 3.7 More than 5yrs 1,653 967 1,554 500 (41.5) 60.7 (67.8) 0.2 0.1 0.1 0.0 undated - - -- na na na 0.0 0.00.0 0.0 Total deposits 773,757 943,534 1,250,648 1,608,146 21.9 32.5 28.6 100.0 100.0 100.0 100.0
CITIC Bank Overdue/on demand 293,084 409,691 448,025 756,912 39.8 9.4 68.9 47.4 52.0 43.6 56.4 Less than 3 months 160,127 249,362 319,683 276,904 55.7 28.2 (13.4) 25.9 31.7 31.1 20.6 3 months to 1yr 119,650 98,883 218,942 264,917 (17.4) 121.4 21.0 19.3 12.6 21.3 19.7 1 to 5yr 41,877 25,226 36,808 38,667 (39.8) 45.9 5.1 6.8 3.2 3.6 2.9 More than 5yrs 3,674 4,049 3,867 4,527 10.2 (4.5) 17.1 0.6 0.5 0.4 0.3 undated - - - - na na na 0.0 0.0 0.0 0.0 Total deposits 618,412 787,211 1,027,325 1,341,927 27.3 30.5 30.6 100.0 100.0 100.0 100.0
Nomura 90 14 January 2011
Banks | China Lucy Feng
Amount (RMBmn) Growth (%y-y) As % of total loans 2006 2007 2008 2009 2007 2008 2009 2006 2007 2008 2009 Minsheng Bank Overdue/on demand 245,570 295,813 404,990 551,715 20.5 36.9 36.2 42.1 44.1 51.5 48.9 Less than 1 month 81,107 85,370 44,301 189,072 5.3 (48.1) 326.8 13.9 12.7 5.6 16.8 1 to 3 months 56,813 66,452 84,457 108,183 17.0 27.1 28.1 9.7 9.9 10.7 9.6 3 months to 1yr 122,234 124,108 165,613 195,335 1.5 33.4 17.9 21.0 18.5 21.1 17.3 1 to 5yr 75,015 92,080 85,660 82,647 22.7 (7.0) (3.5) 12.9 13.7 10.9 7.3 More than 5yrs 2,576 7,396 765 986 187.1 (89.7) 28.9 0.4 1.1 0.1 0.1 undated - - - - na na na 0.0 0.0 0.0 0.0 Total deposits 583,315 671,219 785,786 1,127,938 15.1 17.1 43.5 100.0 100.0 100.0 100.0 Source: Banks Annual reports, Nomura research
Nomura 91 14 January 2011
Banks | China Lucy Feng
Exhibit 148. Off-balance sheet exposures
2006 2007 2008 2009 Growth (% y-y) As % of As % of As % of As % of total total total total (RMBmn) Amount assets Amount assets Amount assets Amount assets 2006 2007 2008 2009 ABC Loan commitments – original maturity <1y na na 25,041 0.5 41,667 0.6 50,650 0.6 na na 66.4 21.6 Loan commitments – original maturity >1y na na 313,242 5.9 362,172 5.2 693,874 7.8 na na 15.6 91.6 Credit card commitments na na - 0.0 - 0.0 - 0.0 na na Na Na Acceptances na na 204,695 3.9 189,126 2.7 271,871 3.1 na na (7.6) 43.8 Letters of guarantee issued na na 129,214 2.4 149,837 2.1 151,355 1.7 na na 16.0 1.0 Letters of credit issued na na 51,983 1.0 38,780 0.6 53,933 0.6 na na (25.4) 39.1 Others na na - 0.0 - 0.0 - 0.0 na na na na Total na na 724,175 13.6 781,582 11.1 1,221,683 13.8 na na 7.9 56.3 By category Corporate na na 724,175 13.6 781,582 11.1 1,221,683 13.8 na na 7.9 56.3 Retail (ie, credit cards) na na na na na na na na na na na na Total assets na na 5,305,506 7,014,351 8,882,588
BOC Loan commitments – original maturity <1y 212,179 4.0 228,484 3.8 274,078 3.9 200,205 2.3 16.0 7.7 20.0 14.7 Loan commitments – original maturity >1y 258,392 4.9 337,515 5.6 467,949 6.7 620,645 7.1 28.1 30.6 38.6 106.1 Credit card commitments - 0.0 - 0.0 - 0.0 - 0.0 na na na na Acceptances 217,093 4.1214,758 3.6 227,937 3.3 329,635 3.8 11.2 (1.1)6.1 29.8 Letters of guarantee issued 290,205 5.4 423,771 7.1 532,845 7.7 574,090 6.6 36.3 46.0 25.7 (10.3) Letters of credit issued 109,083 2.0 130,334 2.2 109,636 1.6 147,726 1.7 7.8 19.5 (15.9) (30.2) Others 870 0.0 685 0.0 1,618 0.0 3,098 0.0 (46.8) (21.3) 136.2 74.5 Total 1,087,822 20.4 1,335,547 22.3 1,614,063 23.2 1,875,399 21.4 21.4 22.8 20.9 24.8 By category Corporate 1,087,822 20.4 1,335,547 22.3 1,614,063 23.2 1,875,399 21.4 21.4 22.8 20.9 24.8 Retail (ie, credit cards) na na na na na na na na na na na na Total assets 5,327,653 5,991,217 6,951,680 8,748,177
CCB Loan commitments – original maturity <1y 28,370 0.5 53,973 0.8 47,941 0.6 84,261 0.9 67.3 90.2 (11.2) 7.9 Loan commitments – original maturity >1y 209,167 3.8 213,543 3.2 259,904 3.4 443,366 4.6 44.4 2.1 21.7 17.4 Credit card commitments 53,810 1.0 99,086 1.5 174,714 2.3 260,656 2.7 43.8 84.1 76.3 24.0 Acceptances 112,678 2.1143,166 2.2 219,603 2.9 339,354 3.5 (18.8) 27.153.4 84.4 Letters of guarantee issued 206,585 3.8 370,907 5.6 545,186 7.2 565,092 5.9 36.7 79.5 47.0 (16.7) Letters of credit issued 44,359 0.8 79,642 1.2 71,496 0.9 119,464 1.2 36.7 79.5 (10.2) (35.9) Others 6,306 0.19,242 0.1 31,636 0.4 49,280 0.5 (69.1) 46.6242.3 111.7 Total 661,275 12.1 969,559 14.7 1,350,480 17.9 1,861,473 19.3 22.0 46.6 39.3 9.0 By category Corporate 607,465 11.1 870,473 13.2 1,175,766 15.6 1,600,817 16.6 20.4 43.3 35.1 7.2 Retail (ie, credit cards) 53,810 1.0 99,086 1.5 174,714 2.3 260,656 2.7 43.8 84.1 76.3 24.0 Total assets 5,448,511 6,598,177 7,555,452 9,623,355
ICBC Loan commitments – original maturity <1y 21,799 0.3 13,281 0.2 144,585 1.5 216,253 1.8 (15.1) (39.1) 988.7 326.9 Loan commitments – original maturity >1y 202,798 2.7 212,195 2.4 94,102 1.0 241,703 2.1 172.0 4.6 (55.7) (56.6) Credit card commitments 89,477 1.2 106,136 1.2 160,830 1.6 198,086 1.7 32.1 18.6 51.5 6.3 Acceptances 134,684 1.8 155,073 1.8 206,632 2.1 209,967 1.8 45.5 15.1 33.2 45.1 Letters of guarantee issued 171,205 2.3 191,748 2.2 217,071 2.2 210,243 1.8 41.4 12.0 13.2 (11.8) Letters of credit issued 74,531 1.0 111,254 1.3 113,253 1.2 163,435 1.4 44.1 49.3 1.8 (13.5) Others - 0.0 - 0.0 - 0.0 - 0.0 na na na na Total 694,494 9.2 789,687 9.1 936,473 9.6 1,239,687 10.5 60.3 13.7 18.6 (0.4) By category Corporate 605,017 8.1 683,551 7.9 775,643 7.9 1,041,601 8.8 65.5 13.0 13.5 (1.6) Retail (ie, credit cards) 89,477 1.2 106,136 1.2 160,830 1.6 198,086 1.7 32.1 18.6 51.5 6.3 Total assets 7,508,751 8,683,712 9,757,146 11,785,053
Nomura 92 14 January 2011
Banks | China Lucy Feng
2006 2007 2008 2009 Growth (% y-y) As % of As % of As % of As % of total total total total (RMBmn) Amount assets Amount assets Amount assets Amount assets 2006 2007 2008 2009 CITIC Bank Loan commitments – original maturity <1y 147 0.0 102 0.0 442 0.0 15,979 0.9 na (30.6) 333.3 751.1 Loan commitments – original maturity >1y 5,547 0.8 8,048 0.8 6,828 0.6 25,250 1.4 na 45.1 (15.2) (27.7) Credit card commitments 8,412 1.2 16,934 1.7 32,608 2.7 40,597 2.3 na 101.3 92.6 11.3 Acceptances 132,000 18.7 166,939 16.5 222,158 18.7 305,363 17.2 19.4 26.5 33.1 28.8 Letters of guarantee issued 49,466 7.0 68,563 6.8 74,401 6.3 62,901 3.5 159.9 38.6 8.5 (25.1) Letters of credit issued - 0.0 - 0.0 - 0.0 52,585 3.0 na na na na Others - 0.0 - 0.0 - 0.0 - 0.0 na na na na Total 195,572 27.7 260,586 25.8 336,437 28.3 502,675 28.3 36.6 33.2 29.1 11.2 By category Corporate 187,160 26.5 243,652 24.1 303,829 25.6 462,078 26.0 30.7 30.2 24.7 11.2 Retail (ie, credit cards) 8,412 1.2 16,934 1.7 32,608 2.7 40,597 2.3 na 101.3 92.6 11.3 Total assets 706,723 1,011,186 1,188,152 100.0 1,776,276
BCOM Loan commitments – original maturity <1y 24,694 1.4 59,369 2.8 95,564 3.6 138,956 4.2 145.9 140.4 61.0 (17.1) Loan commitments – original maturity >1y 10,953 0.6 11,907 0.6 6,937 0.3 25,748 0.8 47.2 8.7 (41.7) 8.0 Credit card commitments - 0.0 - 0.0 - 0.0 - 0.0 na na na na Acceptances 166,094 9.7172,127 8.2 193,826 7.2 233,871 7.1 6.1 3.612.6 (2.0) Letters of guarantee issued 83,917 4.9 157,771 7.5 154,918 5.8 177,357 5.4 69.1 88.0 (1.8) (28.6) Letters of credit issued 28,375 1.7 34,779 1.6 25,637 1.0 37,452 1.1 27.2 22.6 (26.3) (45.3) Others - 0.0 - 0.0 - 0.0 - 0.0 na na na na Total 314,033 18.3 435,953 20.7 476,882 17.8 613,384 18.5 27.7 38.8 9.4 (16.6) By category Corporate 314,033 18.3 435,953 20.7 476,882 17.8 613,384 18.5 27.7 38.8 9.4 (16.6) Retail (ie, credit cards) na na na na na na na na na na na Total assets 1,719,483 2,110,444 2,682,947 3,309,137
CMB Loan commitments – original maturity <1y 1,371 0.1 1,210 0.1 929 0.1 5,461 0.3 56.2 (11.7) (23.2) 361.4 Loan commitments – original maturity >1y 5,172 0.6 8,620 0.7 13,139 0.8 32,643 1.6 110.7 66.7 52.4 27.0 Credit card commitments 31,694 3.4 50,881 3.9 92,877 5.9 110,880 5.4 60.6 60.5 82.5 6.3 Acceptances 166,513 17.8 180,002 13.7 197,582 12.6 319,758 15.5 34.8 8.1 9.8 44.7 Letters of guarantee issued 37,063 4.0 55,263 4.2 69,408 4.4 86,736 4.2 6.8 49.1 25.6 (22.8) Letters of credit issued 28,323 3.0 23,937 1.8 17,721 1.1 31,051 1.5 26.2 (15.5) (26.0) (31.1) Others - 0.0 12 0.0 3 0.0 3 0.0 na na (75.0) (59.6) Total 270,136 28.9 319,925 24.4 391,659 24.9 586,532 28.4 32.6 18.4 22.4 21.3 By category Corporate 238,442 25.5 269,044 20.5 298,782 19.0 475,652 23.0 29.6 12.8 11.1 24.5 Retail (ie, credit cards) 31,694 3.4 50,881 3.9 92,877 5.9 110,880 5.4 60.6 60.5 82.5 6.3 Total assets 934,102 1,310,552 1,571,797 100.0 2,067,941
Minsheng Loan commitments – original maturity <1y 361 0.0 524 0.1 120 0.0 1,766 0.1 24.2 45.2 (77.1) (87.5) Loan commitments – original maturity >1y 2,985 0.4 4,332 0.5 5,880 0.6 3,656 0.3 24.2 45.2 35.7 (60.3) Credit card commitments 9,635 1.3 26,574 2.9 28,140 2.7 28,466 2.0 na 175.8 5.9 (51.4) Acceptances 70,853 9.8 96,624 10.5 145,005 13.8 216,657 15.2 (17.2) 36.4 50.1 80.5 Letters of guarantee issued 22,881 3.2 32,770 3.6 49,029 4.7 45,593 3.2 133.5 43.2 49.6 (13.1) Letters of credit issued 12,490 1.7 15,879 1.7 8,250 0.8 15,094 1.1 63.4 27.1 (48.0) (41.6) Others 0.0 - 0.0 475 0.0 1,841 0.1 na na na na Total 119,204 16.4 176,703 19.2 236,899 22.5 313,073 21.9 12.7 48.2 34.1 24.3 By category Corporate 109,569 15.1 150,129 16.3 208,759 19.8 284,607 20.0 3.6 37.0 39.1 40.7 Retail (ie, credit cards) 9,635 1.3 26,574 2.9 28,140 2.7 28,466 2.0 na 175.8 5.9 (51.4) Total assets 725,087 919,796 1,054,350 1,426,392 Source: Banks Annual reports, Nomura research
Nomura 93 14 January 2011
Banks | China Lucy Feng
Exhibit 149. NPL ratio NPL ratio (%) FY05 FY06 FY07 FY08 FY09 ABC Manufacturing na na 31.40 4.28 3.88 Chemicals na na 26.48 3.77 4.26 Non-metallic mineral products na na 43.79 6.35 3.60 Smelting and pressing (ferrous/non ferrous metals) na na 12.04 1.41 1.42 Textiles and apparels na na 32.49 6.55 5.57 Metal processing na na 22.75 2.97 3.03 Communication equipment, computers and other electronic equipment na na 17.38 7.01 7.90 Electrical machinery and equipment na na 18.65 1.88 1.79 Paper and paper products na na 29.00 6.93 6.97 Food processing na na 65.60 4.70 3.73 Others na na 35.85 5.34 5.03 Mining na na 16.14 1.71 1.26 Transportation and logistics na na 9.48 3.93 3.05 Power generation and supplies na na 7.77 5.71 3.90 Retail, wholesale and catering na na 51.94 5.50 4.58 Leasing, commercial and servicing na na 43.08 6.22 2.18 Information system, computer services and software na na 13.48 2.74 1.95 Property development na na 10.35 6.06 3.47 Water, environment, public utility management na na 7.88 6.51 2.39 Construction na na 16.02 4.77 2.77 Others na na 46.66 9.09 6.52 Total corporate na na 27.13 5.23 3.66
Personal loans na na 14.02 2.22 1.40
ICBC Manufacturing 12.30 10.16 7.56 5.934.36 Chemicals 13.20 11.49 8.20 6.50 4.60 Machinery 18.53 12.17 8.79 6.12 4.41 Iron and steel 4.35 4.38 1.90 1.11 0.58 Metal processing 14.74 6.84 8.68 3.41 1.97 Textile and apparels 8.33 9.67 4.34 9.41 6.85 Electronics 7.33 8.36 4.32 7.84 6.61 Automobile 10.84 7.93 8.47 2.77 2.23 Petroleum processing 1.55 1.87 2.88 1.73 0.91 Cement 22.45 17.49 14.43 10.41 8.30 Others 15.34 15.32 11.44 8.83 6.59 Transportation and logistics 1.05 1.27 1.05 1.37 1.40 Power generation and supply 2.18 1.88 1.32 1.53 1.23 Water, environment and public utility management na 0.55 0.49 0.65 0.07 Property development 5.13 4.34 2.82 2.21 1.50 Leasing and commercial services na 2.08 0.84 1.00 0.45 Retail, wholesale and catering na 15.69 8.53 7.27 4.64 Science, education, culture and sanitation 3.41 3.06 2.69 2.80 1.69 Construction 1.99 3.02 2.57 2.582.13 Others 2.00 3.12 2.74 2.01 1.36 Total corporate 6.25 5.02 3.51 2.90 1.94
Personal loans 2.12 1.61 1.14 1.16 0.83
Nomura 94 14 January 2011
Banks | China Lucy Feng
NPL ratio (%) FY05 FY06 FY07 FY08 FY09 CCB Manufacturing 6.00 5.64 4.19 3.592.67 Production and supply of electric power, gas and water 3.00 1.37 1.58 1.47 0.82 Transportation storage and postal services 2.00 1.51 1.61 1.26 0.65 Real Estate 6.90 6.05 4.84 4.67 2.60 Leasing and commercial services na 4.90 3.13 2.53 0.60 Water, environment and public utility management 1.70 1.52 1.18 1.63 0.77 Construction 5.10 3.89 2.54 2.041.94 Wholesale and Retail trade 12.50 11.11 8.75 7.51 5.04 Mining 1.50 1.20 0.91 0.53 0.38 Education 1.00 1.59 1.83 1.49 1.20 Telecommunications, computer services and software 2.50 3.73 3.23 2.76 4.45 Others 8.50 7.55 6.18 3.83 1.78 Total corporate 4.82 4.07 3.28 2.77 1.71
Residential mortgage loans 1.30 1.37 0.80 0.82 0.42 Personal consumer loans 3.70 3.34 2.95 2.25 1.69 other loans 4.00 2.50 1.34 1.55 1.45 Personal loans 1.90 1.77 1.09 1.08 0.66
BOC (Mainland) Manufacturing 6.76 6.14 5.22 4.762.62 Commerce and services 9.96 8.83 6.74 5.68 2.26 Transportation and logistics 4.69 4.53 3.99 3.61 2.87 Production and supply of electronic power, gas and water na na na 1.62 1.39 Real estate 13.24 9.43 4.87 3.80 1.48 Water, environment and public utility management na na na 2.38 0.34 Mining na na na 0.77 0.24 Financial services 0.28 0.35 0.75 0.12 0.03 Public Utilities 5.03 4.27 4.05 3.25 2.17 Construction 2.40 6.70 4.28 2.430.89 Others 0.00 6.35 0.33 9.03 2.99 Energy, mineral and agriculture 3.17 2.56 2.10 na na Total corporate 6.54 5.76 4.61 3.83 2.00
Mortgage loans 1.34 1.21 0.89 0.99 0.63 Credit card advances 11.82 7.63 5.26 4.18 3.24 Others 5.93 5.16 4.25 3.65 2.33 Personal loans 2.49 2.17 1.65 1.60 1.03
CMB Manufacturing and processing 4.42 2.96 2.43 1.66 1.53 Transportation, storage and postal services 1.01 0.50 0.84 0.56 0.49 Production and supply of electric power, gas and water 0.78 1.56 0.86 0.99 0.71 Wholesale and Retail, 6.90 8.06 3.13 3.26 2.23 Property development 14.09 8.89 3.78 2.53 1.32 Leasing and commercial services na 4.22 2.43 1.59 0.96 Construction 1.14 0.84 0.52 0.190.34 Water, environment and public utility management na na 0.12 0.11 0.04 Mining na 0.00 0.00 0.00 0.00 Info transmission, computer service and software na na na 3.70 1.74 Others 4.30 4.66 3.88 2.61 2.18 Financial services 2.46 na 1.94 na na Education na 0.15 na na na Telecommunications, computer services and software na 4.64 na na na Hospitality 8.77 na na na na Total corporate 3.92 3.18 2.15 1.57 1.18
Residential Mortgage loans 0.50 0.40 0.26 0.27 0.14 Credit card advances 1.71 1.53 1.92 2.77 2.79 Automobile loans 3.93 6.03 na 1.18 na Others retail loan 0.46 0.24 0.29 0.16 0.19 Personal loans 2.58 2.12 0.46 0.62 0.44
Nomura 95 14 January 2011
Banks | China Lucy Feng
NPL ratio (%) FY05 FY06 FY07 FY08 FY09 CITIC Manufacturing 6.18 4.40 2.79 2.641.88 Wholesale and Retail 9.89 7.12 3.64 2.59 1.48 Real estate development 9.91 4.62 1.88 1.71 2.41 Leasing and commercial services 6.48 2.82 1.03 1.18 0.69 Electricity, gas and water production and supply 0.41 0.04 0.05 0.49 0.41 Financial sector 3.86 7.72 15.28 11.04 2.11 Transportation, warehousing and postal services 2.21 0.43 0.10 0.19 0.10 Construction 0.81 0.21 0.13 0.390.47 Water, environment and public facility management 0.12 0.07 0.06 0.05 0.06 Public and social organizations 1.35 0.97 0.16 na na Others 8.69 4.01 2.63 2.08 1.97 Total corporate 5.28 3.02 1.72 1.56 1.09
Personal loans 1.04 0.85 0.64 0.82 0.75 Source: Banks Annual reports, Nomura research
Nomura 96 14 January 2011
Banks | China Lucy Feng
Regional banks valuation comparison
Exhibit 150. Regional banks historical performance
Bloomberg Price performance ticker YTD 1M 3M 6M 12M China (H-share) ABC-H 1288 HK 2 (5) (4) na na ICBC-H 1398 HK 1 (2) 1 7 (6) CCB-H 939 HK 1 0 6 17 10 BOC-H 3988 HK 1 (1) 2 10 1 BOCOM-H 3328 HK 3 (2) (8) (2) (9) CMB-H 3968 HK 3 (2) (2) 10 4 CITIC Bank-H 998 HK 4 (2) 1 6 (20) Minsheng-H 1988 HK (1) (5) (9) (5) (9) Sector mean 1 (1) 2 10 0 HSI Index HSI Index 3 1 4 19 6 HSCEI Index HSCEI Index 2 0 1 14 (1)
China (A-share) ABC-A 601288 CH (1) (0) 2 na na ICBC-A 601398 CH 1 (0) 8 6 (16) CCB-A 601939 CH 3 (2) 5 (2) (20) BOC-A 601988 CH 1 (1) 1 (3) (20) BOCOM-A 601328 CH 4 1 (2) (4) (34) CMB-A 600036 CH 3 (1) 2 1 (17) CITIC Bank-A 601998 CH 2 (2) 6 (5) (30) Minsheng-A 600016 CH 0 (2) (1) (2) (22) SPDB 600000 CH 7 1 2 (4) (16) Industrial Bank 601166 CH 10 7 15 14 (26) SZDB 000001 CH 4 (2) 1 (6) (28) Huaxia 600015 CH 5 1 6 5 (4) Bank of Beijing 601169 CH 5 (1) 1 (4) (33) Bank of Nanjing 601009 CH 7 4 6 10 (20) Bank of Ningbo 002142 CH 6 6 10 15 (18) Sector mean 3 (1) 5 1 (20) SHCOMP Index SHCOMP Index 1 (1) 7 17 (11)
Hong Kong HSBC Holdings 5 HK 4 1 1 16 (9) Standard Chartered 2888 HK 0 (5) (4) 14 10 Hang Seng Bank 11 HK 4 4 14 27 16 BOC (HK) 2388 HK 5 5 12 58 63 Bank of East Asia 23 HK 5 4 5 23 12 Wing Hang Bank 302 HK 5 8 25 53 51 ICBC Asia 349 HK 0 0 4 42 73 Dah Sing Finan'l 440 HK 5 4 (9) 27 30 Dah Sing Banking Group 2356 HK 9 6 (1) 52 33 Sector mean 3 1 3 23 8
Taiwan Fubon 2881 TT (3) 1 (0) 6 2 Mega Financial 2886 TT (3) 1 0 18 15 First Financial 2892 TT (8) 2 17 35 28 Chinatrust 2891 TT (2) 8 5 19 10 Chang Hwa Bank 2801 TT (7) 2 13 55 57 Sinopac 2890 TT (4) 8 7 22 2 Taishin 2887 TT (7) 10 13 36 30 Bloomberg (7) ticker (3) 8 19 41 48 Hua Nan 2880 TT (6) 14 19 19 33 E Sun 2884 TT 0 8 5 11 (9) Ta Chong Bank 2847 TT (1) 16 15 23 4 Cathay 2882 TT (3) 5 7 21 12 Shin Kong 2888 TT (3) 1 (0) 6 2 Sector mean (3) 1 0 18 15
Nomura 97 14 January 2011
Banks | China Lucy Feng
Bloomberg Price performance ticker YTD 1M 3M 6M 12M China insurance (H-share) China Life-H 2628 HK 3 (2) (1) (4) (15) Ping An-H 2318 HK (3) (8) 11 30 20 PICC 2328 HK (2) (4) 2 42 43 CTIH 966 HK 3 (10) (9) (5) (6) China Pacific-H 2601 HK 4 9 11 7 5 H share sector mean 1 (3) 4 11 2
China insurance (A-share) China Life-A 601628 CH 2 (7) 1 (14) (27) Ping An-A 601318 CH (6) (12) 0 13 1 China Pacific-A 601601 CH (1) (7) 4 (4) (9) A share sector mean (1) (9) 1 (3) (15)
Korea KB Financial Group 105560 KS (1) 7 14 27 3 Shinhan Financial Group 055550 KS (2) 12 10 17 19 Woori Finance Holdings 053000 KS (2) 2 1 8 2 Korean Exchange Bank 004940 KS (2) 4 (13) (6) (20) Hana Bank 086790 KS 2 12 23 41 31 Industrial Bank of Korea 024110 KS (1) 10 6 34 31 Busan Bank 005280 KS 6 10 7 41 10 Daegu Bank 005270 KS 11 15 12 30 6 Sector mean (1) 8 9 22 11
Singapore DBS Group Holdings DBS SP 4 6 3 8 (3) OCBC OCBC SP 4 5 14 17 15 United Overseas Bank UOB SP 7 7 3 0 (2) Sector mean 5 6 7 9 3
Malaysia Public Bank PBKF MK 4 6 8 13 21
Alliance Financial Group AFG MK 5 3 (2) 8 31 Aeon Credit Service ACSM MK 3 4 4 (1) (3) AMMB Holdings AMM MK 1 13 19 41 38 Sector mean 1 11 15 35 36
Indonesia Bank Central Asia BBCA IJ 0 (2) (8) 10 29 Bank Rakyat Indo. BBRI IJ (7) (15) (8) 7 28 Bank Mandiri BMRI IJ (2) (6) (9) 12 35 Bank International Indonesia BNII IJ (19) (15) 80 121 100 Bank Danamon BDMN IJ (8) (22) (15) 1 15 Bank Pan Indonesia PNBN IJ (3) 3 0 11 39 Bank Niaga BNGA IJ (12) (14) 33 69 134 Sector mean (5) (9) 0 21 42
India Bank of Baroda BOB IN (5) (6) (8) 18 58 Canara Bank CBK IN (8) (13) (3) 32 48 HDFC HDFC IN (6) (2) (6) 18 29 HDFC Bank HDFCB IN (3) (3) (7) 17 32 ICICI Bank ICICIBC IN (8) (6) (8) 24 18 Indian Overseas Bank IOB IN (8) (5) (9) 26 18 Punjab National Bank PNB IN (4) (2) (11) 10 27 State Bank of India SBIN IN (8) (9) (19) 13 13 Union Bank of India UNBK IN (7) (5) (18) 3 19 Sector mean (6) (6) (11) 17 25
Thailand Bank of Ayudhya BAY TB 3 12 8 34 23 Bangkok Bank BBL TB 11 6 5 27 41 Kasikornbank KBANK TB 4 1 12 43 50 Siam Commercial Bank SCB TB (1) (7) (1) 24 18 Sector mean 4 2 5 32 34 Note: Closing prices as of 7 Jan, 2011 Source: Bloomberg, Nomura research
Nomura 98 14 January 2011
Banks | China Lucy Feng
Regional banks’ performance comparisons
Exhibit 151. Regional banks’ performance comparison
P/B (X) P/E (X) P/PPOP (X) Div. Y (%) ROE (%) ROA (%) Bloomberg Current Mkt cap ticker Rating price (US$mn) 09 10F 11F 09 10F 11F 09 10F 11F 09 10F 11F 09 10F 11F 09 10F 11F China (H-share) ABC - H 1288 HK BUY 3.99 166,709 2.65 2.06 1.62 14.0 10.7 8.5 7.96 6.96 5.17 2.2 1.9 5.3 20.5 21.4 21.4 0.82 0.97 1.12 ICBC-H 1398 HK BUY 5.87 252,224 2.54 2.07 1.71 13.3 10.2 8.6 9.10 7.33 5.78 3.3 4.3 5.3 20.2 22.3 21.9 1.20 1.31 1.29 CCB-H 939 HK BUY 7.06 212,237 2.58 2.08 1.72 13.5 10.7 8.9 8.80 7.47 5.86 3.3 4.1 5.0 20.8 21.5 21.1 1.24 1.31 1.33 BOC-H 3988 HK BUY 4.14 135,188 1.80 1.57 1.34 11.3 10.2 8.3 7.33 6.35 4.87 3.9 4.4 5.4 16.6 17.1 17.5 1.03 1.02 1.03 BOCOM-H 3328 HK NEUTRAL 8.03 50,610 2.10 1.75 1.46 11.4 9.8 7.6 6.95 6.05 4.55 3.5 4.1 5.3 19.2 20.8 21.1 1.01 1.09 1.14 CMB-H 3968 HK BUY 20.20 49,681 3.64 2.71 2.10 18.5 13.7 9.8 13.4 8.82 6.17 1.2 2.2 3.1 21.2 23.8 24.3 1.00 1.19 1.31 CITIC Bank-H 998 HK BUY 5.22 26,211 1.71 1.47 1.25 10.6 9.0 8.6 8.15 5.40 4.82 1.9 3.9 4.0 16.9 17.5 17.2 1.14 0.97 0.96 Minsheng-H 1988 HK NEUTRAL 6.59 18,872 1.46 1.52 1.31 9.1 9.2 8.5 6.13 6.01 5.24 0.9 2.1 2.4 17.1 17.3 17.9 0.98 1.00 1.00 Sector mean 113,967 2.45 2.00 1.63 13.30 10.76 8.41 8.59 7.08 5.47 3.16 3.70 5.15 19.6 20.9 20.8 1.09 1.18 1.21
China (A-share) ABC - A 601288 CH Not rated 2.65 166,709 2.01 1.61 1.35 10.60 9.20 6.87 6.04 5.43 4.28 2.90 2.45 6.55 20.5 21.4 21.4 0.82 0.97 1.12 ICBC-A 601398 CH Not rated 4.30 235,551 2.13 1.80 1.57 11.16 8.90 7.65 7.62 6.30 5.28 3.95 5.08 5.91 20.2 22.3 21.9 1.20 1.32 1.29 CCB-A 601939 CH Not rated 4.73 225,165 1.98 1.64 1.44 10.35 8.60 7.29 6.73 5.88 4.89 4.27 5.23 6.17 20.8 21.5 21.1 1.24 1.31 1.33 BOC-A 601988 CH Not rated 3.27 140,936 1.62 1.46 1.33 10.24 9.41 7.95 6.61 5.89 4.79 4.28 4.78 5.66 16.6 17.1 17.5 1.09 1.06 1.07 BOCOM-A 601328 CH Not rated 5.70 52,953 1.70 1.46 1.30 9.23 7.51 6.50 5.64 5.04 4.03 4.33 5.32 6.15 19.2 20.8 21.1 1.01 1.10 1.14 CMB-A 600036 CH Not rated 13.25 45,455 2.73 2.10 1.73 13.89 10.48 7.81 10.0 6.80 5.04 1.58 2.86 3.84 21.1 23.8 24.3 1.00 1.19 1.31 CITIC Bank-A 601998 CH Not rated 5.37 29,891 1.94 1.73 1.57 14.40 10.82 10.82 9.58 6.52 6.18 1.64 3.23 3.23 14.3 16.9 16.6 0.98 0.970.96 Minsheng-A 600016 CH Not rated 5.03 20,894 1.26 1.37 1.25 9.25 8.35 7.85 5.34 5.39 4.99 0.99 2.40 2.55 17.0 17.2 17.9 0.98 1.00 1.00 SPDB 600000 CH NEUTRAL 13.23 28,624 1.72 1.44 1.22 8.84 9.27 7.55 5.76 6.17 4.89 1.13 1.08 1.32 24.1 20.2 17.5 0.90 1.08 1.08 Industrial Bank 601166 CH BUY 26.52 23,963 2.22 1.61 1.32 9.98 7.86 6.58 7.49 5.44 4.80 1.89 1.27 1.52 24.5 25.2 22.0 1.13 1.32 1.32 SZDB 000001 CH NEUTRAL 16.41 54,376 2.49 1.74 1.49 10.13 8.34 7.06 6.58 5.23 4.59 0.00 1.12 1.42 27.3 24.3 22.8 0.95 0.99 1.04 Huaxia 600015 CH REDUCE 11.46 8,624 1.88 1.45 1.31 15.21 14.65 12.21 6.97 4.89 4.03 1.13 1.02 1.23 13.0 12.7 11.3 0.48 0.58 0.60 Bank of Beijing 601169 CH Not rated 12.05 11,315 1.69 1.47 na 10.25 8.58 na na na na 2.16 2.67 3.51 16.9 17.9 20.1 1.16 1.16 1.17 Bank of Nanjing 601009 CH Not rated 10.63 4,759 1.63 1.44 1.35 12.84 10.35 9.23 na na na 2.54 2.94 Na 14.7 15.2 14.6 1.27 1.28 1.20 Bank of Ningbo 002142 CH Not rated 13.20 5,740 2.45 2.16 1.84 16.44 13.50 11.38 na na na 1.80 2.30 2.67 17.5 17.0 17.0 1.18 1.16 1.11 Sector mean 68,101 1.99 1.66 1.43 10.77 9.02 7.48 6.81 5.76 4.76 3.38 4.27 5.01 20.1 20.9 20.6 1.09 1.17 1.20
Hong Kong Hang Seng Bank 11 HK Susp 133.4 32,808 4.4 3.9 3.5 19.9 17.6 15.8 18.0 16.9 15.4 3.9 4.2 4.5 24.1 23.3 23.4 1.66 1.69 1.77 Chong Hing Bank 1111 HK Susp 22.5 1,259 1.6 1.5 1.5 42.7 20.1 16.4 29.5 16.1 13.8 1.2 2.7 3.4 3.8 7.7 9.1 0.33 0.68 0.81 Bank of East Asia 23 HK Susp 34.15 8,971 1.8 1.6 1.6 27.5 22.0 17.3 15.5 15.3 12.2 2.4 2.6 2.9 7.6 9.3 9.2 0.60 0.80 0.84 BOC Hong Kong (Hldgs) 2388 HK Susp 27.85 37,878 2.9 2.7 2.5 27.2 17.8 15.8 21.2 14.3 12.7 3.1 3.7 4.1 14.8 15.7 16.6 1.16 1.32 1.40 Standard Chartered 2888 HK Susp 212 54,789 2.8 2.5 2.2 16.2 13.8 11.8 7.5 7.2 6.7 1.2 2.5 2.8 19.5 19.3 19.8 0.75 0.86 0.87 Wing Hang Bank 302 HK Susp 113 4,293 2.7 2.4 2.2 32.4 20.4 16.5 26.2 16.8 13.7 0.6 1.1 1.6 10.5 13.4 14.2 0.86 1.15 1.29 ICBC (Asia) 349 HK Susp 29.4 5,110 2.1 2.0 1.9 20.1 16.6 15.3 13.5 12.1 11.4 2.9 3.2 3.2 15.8 12.4 12.7 1.23 1.08 1.16 Dah Sing Financial 440 HK Susp 53.4 2,011 1.2 1.1 1.0 35.9 13.0 11.4 16.2 9.1 8.2 na na 2.6 5.9 8.8 9.2 0.52 0.85 0.93 HSBC Holdings 5 HK Susp 82.75 184,314 1.9 1.7 1.6 31.4 14.5 14.0 5.6 5.4 5.7 2.3 3.2 3.4 7.3 12.5 11.6 0.24 0.53 0.54 Fubon Bank (Hong Kong) 636 HK Not rated 3.78 570 1.1 1.0 1.0 na 16.2 11.1 9.5 7.8 7.1 0.8 1.3 2.1 (1.6) 7.1 9.1 (0.10) 0.48 0.64 Ltd Sector mean 33,200 2.4 2.2 2.0 27.0 15.4 14.1 9.7 8.5 8.0 2.3 3.2 3.5 12.0 14.9 14.6 0.60 0.82 0.85
P/B (X) P/E (X) P/PPOP (X) Div. Y (%) ROE (%) ROA (%) Bloomberg Current Mkt cap ticker Rating price (US$mn) 09 10F 11F 09 10F 11F 09 10F 11F 09 10F 11F 09 10F 11F 09 10F 11F India Axis Bank AXSB IN NEUTRAL 1,675 11,348 4.5 3.2 2.8 25.3 19.4 16.3 12.3 9.3 8.2 0.8 0.9 0.9 19.1 19.2 18.3 1.41 1.53 1.57 Bank of India BOI IN REDUCE 450 5,211 2.0 1.9 1.6 7.9 13.6 8.2 4.3 5.0 4.2 1.6 1.7 2.9 29.2 14.2 20.8 1.50 0.70 0.99 HDFC HDFC IN NEUTRAL 660 22,075 7.4 6.5 5.7 42.6 34.7 27.9 29.8 24.7 20.0 1.0 1.2 1.6 18.2 20.0 21.8 2.45 2.59 2.79 HDFC Bank HDFCB IN NEUTRAL 2,660 22,902 6.4 4.8 4.2 45.3 34.6 26.4 15.5 15.0 12.9 0.4 0.5 0.8 16.0 16.4 17.1 1.35 1.48 1.59 ICICI Bank ICICIBC IN BUY 1,355 26,567 2.4 2.3 2.1 31.1 29.1 22.8 13.1 12.0 12.0 1.2 1.2 1.5 7.8 8.0 9.6 0.96 1.08 1.34 Punjab National Bank PNB IN NEUTRAL 960 8,124 2.8 2.3 1.9 11.9 11.1 9.3 na na na na na na 25.8 23.1 22.9 na na na Reliance Capital RCAPT IN REDUCE 834 3,432 2.1 2.0 1.9 17.1 34.6 26.5 na na na na na na 12.9 5.9 7.3 4.70 2.17 2.70 State Bank of India SBIN IN BUY 3,765 36,411 2.9 2.5 2.2 18.1 18.0 14.1 9.2 9.0 6.4 1.1 1.2 1.2 17.1 14.8 16.5 1.08 0.91 1.01 Union Bank of India UNBK IN NEUTRAL 260 3,576 2.3 1.9 1.6 9.4 8.7 7.3 na na na na na na 27.2 23.9 23.9 na na na Sector mean 17,009 4.2 3.5 3.1 29.0 25.6 20.1 na na na na na na 16.3 15.2 16.6 na na na
Indonesia Bank Central Asia BBCA IJ NEUTRAL 6,400 17,478 5.7 4.8 4.1 23.1 19.4 17.0 14.6 13.4 12.0 2.0 2.3 2.7 26.6 26.8 26.0 2.58 2.69 2.69 Bank Negara Indonesia BBNI IJ BUY 3,550 7,333 2.8 2.4 1.8 21.8 14.0 13.7 7.3 5.8 5.9 1.4 2.1 2.2 14.4 18.4 16.0 1.16 1.65 1.83 Bank Rakyat Indonesia BBRI IJ BUY 9,800 13,396 4.4 3.6 2.9 16.5 13.5 10.7 8.4 6.6 5.9 2.1 2.2 2.8 29.5 29.5 29.8 2.60 2.64 2.86 Bank Danamon Indonesia BDMN IJ NEUTRAL 5,250 4,855 2.8 2.5 2.3 28.6 17.7 14.7 6.2 7.1 6.3 1.8 2.8 3.4 11.6 14.9 16.2 1.49 2.36 2.47 Bank Mandiri BMRI IJ BUY 6,400 14,885 3.8 3.3 2.6 18.8 15.8 14.2 10.8 9.5 8.9 1.9 2.2 2.5 21.8 22.3 21.1 1.90 2.01 2.17 Sector mean 11,589 4.3 3.6 3.0 20.8 16.3 14.2 10.6 9.3 8.5 1.9 2.3 2.6 23.2 24.2 23.5 2.14 2.34 2.47
Nomura 99 14 January 2011
Banks | China Lucy Feng
P/B (X) P/E (X) P/PPOP (X) Div. Y (%) ROE (%) ROA (%) Bloomberg Current Mkt cap ticker Rating price (US$mn) 09 10F 11F 09 10F 11F 09 10F 11F 09 10F 11F 09 10F 11F 09 10F 11F Malaysia AEON Credit Service M Bhd ACSM MK BUY 3.83 150 2.1 1.8 1.6 9.4 8.5 7.2 4.9 4.1 3.6 3.9 4.4 5.6 24.5 23.3 23.5 5.94 5.65 5.90 Alliance Financial Group AFG MK BUY 3.18 1,604 1.8 1.7 1.5 21.5 16.3 12.3 9.9 9.7 8.1 2.0 2.0 3.3 8.6 10.6 13.0 0.77 0.95 1.19 Bhd AMMB Holdings AMM MK NEUTRAL 7.07 6,943 2.5 2.2 2.0 26.9 21.1 15.7 12.5 10.2 9.2 0.9 1.3 2.5 11.6 11.6 13.3 1.00 1.08 1.35 Bursa Malaysia BURSA MK BUY 8.33 1,430 5.2 4.5 4.4 45.8 23.2 21.5 na na na 2.2 4.1 4.4 22.6 22.2 22.0 12.26 13.57 14.36 CIMB Group Holdings CIMB MK BUY 8.93 21,624 3.1 2.6 2.3 22.5 17.9 14.4 12.7 11.4 9.6 1.5 1.0 1.4 15.0 16.3 17.0 1.26 1.46 1.62 Public Bank PBKF MK NEUTRAL 13.52 15,557 4.3 3.8 3.4 18.5 15.9 14.4 11.5 10.2 9.3 3.0 3.4 3.8 24.5 25.3 24.9 1.22 1.28 1.29 Sector mean 7,884.67 3.17 2.77 2.53 24.10 17.15 14.25 10.3 9.12 7.96 2.25 2.70 3.50 17.8 18.2 18.9 3.74 4.00 4.29
Singapore DBS Group Holdings DBS SP BUY 14.9 26,503 1.3 1.3 1.3 16.5 14.3 11.6 7.1 8.0 7.6 3.8 4.0 4.8 9.0 5.4 11.1 0.79 0.52 1.05 OCBC OCBC SP BUY 10.3 26,512 1.8 1.7 1.6 17.0 14.5 12.9 11.0 10.7 9.6 2.7 2.9 3.3 11.3 11.9 12.4 1.04 1.13 1.15 Singapore Exchange SGX SP NEUTRAL 8.46 6,982 11.6 11.1 10.6 29.3 27.9 25.3 na na na 3.1 3.2 3.6 36.9 40.6 42.9 32.78 43.1 46.87 United Overseas Bank UOB SP NEUTRAL 19.44 23,366 1.5 1.5 1.4 15.4 12.9 11.6 8.8 9.3 8.4 3.1 4.1 4.6 11.0 12.2 12.4 1.03 1.24 1.25 Sector mean 19,999 2.7 2.6 2.5 18.2 15.9 13.8 8.0 8.3 7.6 3.2 3.4 4.0 13.3 12.4 15.4 4.62 5.75 6.43
Korea Korea Exchange Bank 004940 KS NEUTRAL 11,550 6,620 0.9 0.9 0.8 8.4 7.1 8.2 5.4 3.9 4.8 4.4 5.5 1.3 12.2 12.8 10.4 0.89 1.07 0.89 Daegu Bank 005270 KS BUY 17,250 2,026 1.3 1.1 1.0 13.4 9.5 6.4 5.1 3.9 3.7 0.9 1.7 2.3 10.1 12.7 16.6 0.63 0.82 1.13 Busan Bank 005280 KS NEUTRAL 15,200 2,522 1.3 1.1 0.9 11.1 7.9 8.0 5.3 4.8 4.7 1.1 na 2.6 13.0 14.9 12.4 0.84 1.13 1.06 Industrial Bank of Korea 024110 KS NEUTRAL 18,500 10,588 1.2 1.0 0.9 15.2 7.7 7.0 4.9 2.9 3.1 1.2 2.5 3.5 9.0 15.2 14.6 0.49 0.91 0.92 Woori Finance Hldgs 053000 KS BUY 15,150 10,853 0.9 0.9 0.7 11.9 11.4 5.9 3.3 2.5 2.7 0.7 0.3 0.7 7.9 7.6 13.5 0.36 0.37 0.68 Shinhan Financial Group 055550 KS BUY 52,000 20,065 1.2 1.1 1.0 18.8 9.8 8.1 6.3 5.3 4.9 0.8 1.5 1.7 7.0 12.3 13.3 0.50 0.99 1.12 Hana Financial Group 086790 KS NEUTRAL 43,950 8,275 1.0 0.9 0.8 30.2 9.2 7.9 7.7 4.1 3.8 na 2.1 1.8 3.3 10.0 10.7 0.20 0.65 0.72 KB Financial Group 105560 KS BUY 59,300 20,362 1.1 1.1 1.0 36.1 90.0 7.7 6.8 6.3 4.1 0.4 1.0 1.4 3.2 1.2 13.4 0.20 0.09 0.95 Sector mean 10,164 1.1 1.0 0.9 21.7 29.5 7.5 5.9 4.6 4.0 0.9 1.7 1.7 6.7 9.2 13.1 0.42 0.64 0.93
Taiwan Fubon FHC 2881 TT BUY 38.95 10,807 1.5 1.5 1.4 15.1 14.5 12.9 na na na 4.9 4.5 5.1 11.3 10.3 11.2 0.79 0.68 0.70 Cathay Financial Hldg 2882 TT REDUCE 51.8 17,102 2.4 2.3 2.2 45.2 60.8 32.2 na na na 1.0 0.8 1.5 6.3 3.9 7.1 0.28 0.19 0.32 E.Sun FHC 2884 TT BUY 19.4 2,515 1.4 1.3 1.3 35.6 16.5 13.4 16.2 9.6 7.9 1.0 3.6 4.9 3.8 8.0 9.7 0.22 0.44 0.54 Yuanta Financial Hldgs 2885 TT NEUTRAL 21.75 5,986 1.5 1.5 1.5 24.6 21.2 19.0 27.3 19.0 14.8 4.1 3.7 4.1 6.5 7.1 7.9 1.37 1.50 1.59 Mega FHC 2886 TT NEUTRAL 21.7 11,961 1.2 1.2 1.2 16.8 16.4 14.8 7.8 11.0 9.3 4.6 4.9 5.4 7.7 7.4 8.0 0.59 0.59 0.65 Taishin Financial Hldgs 2887 TT NEUTRAL 16.1 3,243 0.9 1.0 0.9 11.3 14.0 14.0 15.4 10.9 8.1 na 3.7 4.4 13.9 12.4 11.2 0.35 0.35 0.35 Chinatrust FHC 2891 TT BUY 21 7,144 1.3 1.3 1.3 137.6 14.1 11.9 12.0 9.9 8.2 3.1 4.8 5.7 1.2 11.2 13.4 0.08 0.77 0.94 First FHC 2892 TT BUY 24.7 5,453 1.5 1.5 1.5 54.8 34.7 20.5 13.6 13.4 9.3 2.0 1.8 2.4 2.8 4.4 7.3 0.15 0.23 0.37 Sector mean 8,027 1.6 1.6 1.5 41.9 29.5 19.6 7.9 7.0 5.5 2.9 3.2 3.9 6.8 7.4 9.1 0.5 0.6 0.6
Thailand Bank of Ayudhya BAY TB BUY 26.5 5,295 1.7 1.7 1.6 24.1 17.6 13.3 8.8 6.5 5.7 1.3 3.8 4.9 7.7 9.7 12.4 0.87 1.12 1.38 Bangkok Bank BBL TB NEUTRAL 162.5 10,204 1.6 1.5 1.4 14.9 13.2 11.1 8.4 7.2 6.3 2.5 2.5 3.4 11.2 11.5 12.6 1.21 1.32 1.49 Kasikornbank KBANK TB NEUTRAL 130.5 10,274 2.4 2.3 2.0 21.0 17.5 14.2 10.2 8.8 7.3 1.9 1.9 2.3 12.1 13.2 15.1 1.12 1.23 1.37 Siam Commercial Bank SCB TB BUY 102.5 11,439 2.5 2.2 2.0 16.8 14.2 11.9 10.4 8.6 7.2 2.4 2.9 3.9 15.5 16.3 17.3 1.64 1.82 1.97 Sector mean 9,303 2.1 1.9 1.8 18.5 15.3 12.5 9.6 8.0 6.7 2.1 2.6 3.5 12.3 13.2 14.7 1.27 1.42 1.59 Note: Closing prices as of 7 Jan, 2011 Source: Bloomberg, Nomura research
Nomura 100 14 January 2011
Agricultural Bank of China 1288 HK
FINANCIALS | CHINA Maintained NOMURA INTERNATIONAL (HK) LIMITED Lucy Feng +852 2252 2165 [email protected]
Donger Wang +852 2252 1590 [email protected] BUY
Action Closing price on 7 Jan HK$3.99 We have lifted our FY11F NIM assumption from 2.73% to 2.76% based on our Price target HK$4.80 expectation of further rounds of symmetrical rate hikes in 2011F, given ABC’s (f ro m HK $ 4. 70 ) larger proportion of demand deposits. Having a low LDR of 55, ABC also looks to Upside/downside 20.3% be in the sweet spot of county banking and should benefit most from China’s Difference from consensus 23.4% urbanisation, in our view. At 1.6x FY11F P/BV, the stock remains a BUY; PT FY11F net profit (RMBmn) 125,337 revised to HK$4.80, for potential upside of 20%. Difference from consensus 12.8% Source: Nomura Catalysts We see further rounds of rate hikes as a catalyst for sector NIM expansion. Nomura vs consensus Anchor themes Our net profit forecast is above We think the operating environment remains favourable for Chinese banks in consensus due to our higher NIM 2011F, but negative sentiment from uncertainties over policies and asset quality and lower credit cost assumptions. continues to weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a re-rating in the near term.
Key financials & valuations Low LDR relatively immune to 31 Dec (RMBmn) FY09 FY10F FY11F FY12F PPOP 114,070 158,474 201,279 248,169 RRR hikes Reported net profit 64,992 93,569 125,337 155,067 Normalised net profit 64,992 93,569 125,337 155,067 Benefits from favourable policies; PT lifted to HK$4.80 Normalised EPS (RMB) 0.25 0.32 0.39 0.48 We revise our PT to HK$4.80 (from HK$4.70), based on a new P/BV Norm. EPS growth (%) (7.3) 28.0 20.6 23.7 Norm. P/E (x) 14.0 10.7 8.5 6.5 multiple of 2.0x (from 2.2x), with our estimates rolling over to FY11F. Price/adj. book (x) 2.65 2.06 1.62 1.33 Being the largest banking services provider in county areas, ABC Price/book (x) 2.652.061.621.33 continues to benefit from favourable policies, such as lower RRR and Dividend yield (%) 2.2 1.9 5.3 6.9 ROE (%) 20.5 21.4 21.4 22.6 capital requirement, tax incentives and subsidies. We think ABC is in ROA (%) 0.82 0.97 1.12 1.19 a sweet spot to further grow its county loan business on the back of a Earnings revisions low LDR of 55% (3Q10). The issuance of RMB50bn in subordinated Previous norm. net profit 92,382 124,459 159,699 bonds should further enhance ABC’s FY11F CAR by around 0.8pp to Change from previous (%) 1.3 0.7 (2.9) Previous norm. EPS (RMB) 0.32 0.38 0.49 13.4%, on our estimates, supporting business growth. Source: Company, Nomura estimates
Rate hikes relatively beneficial, given high proportion of Share price relative to MSCI China demand deposits (HK$) Price The PBoC lifted benchmark interest rates for the second time on 26 4.6 Rel MSCI China 130.000 4.4 110.000 December. Both the 1-year deposit rate and 1-year lending rate rose 4.2 90.000 4.0 70.000 by 25bps, while the rate for demand deposits was unchanged. ABC 3.8 had the highest proportion of demand deposits among the Big 4, at 3.6 50.000 3.4 30.000 55.7% of total deposits at end-1H10 (source: company data); we 3.2 10.000 expect it to benefit most from rate hikes among the Big 4, given 3.0 -10.000 limited pressure on deposit costs. Jul10 Sep10 Nov10 1m 3m 6m Overhang on lock-up expiry and LGFV loans Absolute ( HK$) (5.0) (4.3) na Absolute ( US$) (5.0) (4.5) na We see potential downside in late January due to expiry of a lock-up Relative to Index (4.9) (5.2) na period, by which time five of 11 cornerstone investors can dispose of Market cap (US$mn) 166,709 not more than 50% of their subscribed H shares without restriction. Estimated free float (%) 62.0 The 21st Century Business Herald reported in late December that the 52-week range (HK$) 4.49/3.21 3-mth avg daily turnover (US$mn) 110.2 CBRC may require lenders to re-classify LGFV loans into five Stock borrowability Easy categories. Given ABC’s relatively low coverage ratio (160% at end- Major shareholders (%) 3Q10, per company data), we expect more pressure on credit costs MOF 39.2 Huijin 40.0 as it has limited excess provisions to cover newly classified NPL loans Source: Company, Nomura estimates derived from LGFV loan downgrades. Based on our base case estimation, the impact on FY11F NPAT would be 13%.
Nomura 101 14 January 2011
Agricultural Bank of China Lucy Feng
Exhibit 152. ABC: earnings revisions
New Old % change Profit & loss (RMBmn) FY10F FY11F FY12F FY10F FY11F FY12F FY10F FY11F FY12F Net interest income 238,196 288,982 341,863 232,143 285,398 338,620 2.6 1.3 1.0 Fee income 43,505 53,467 65,975 43,505 53,467 65,975 0.0 0.0 0.0 Non-interest income 46,553 57,056 71,276 46,553 57,056 71,276 0.0 0.0 0.0 Operating Income 284,750 346,038 413,139 278,696 342,454 409,897 2.2 1.0 0.8 Operating expenses (126,276) (144,759) (164,970) (126,283) (144,745) (165,030) 0.0 0.0 0.0 PPOP 158,474 201,279248,169 152,413 197,710 244,866 4.0 1.8 1.3 Provisions (35,343) (37,424)(45,449) (30,843) (35,003) (36,092) 14.6 6.9 25.9 Operating pre-tax 123,131 163,856 202,719 121,570 162,707 208,774 1.3 0.7 (2.9) Profit tax (29,552) (38,506) (47,639) (29,177) (38,236) (49,062) 1.3 0.7 (2.9) Minority interest (11) (12) (13) (11) (12) (13) 0.0 0.0 0.0 Profits attributable to equity holders 93,569 125,337155,067 92,382 124,459 159,699 1.3 0.7 (2.9) Source: Company data, Nomura estimates
Exhibit 153. % of demand deposits to total deposits Exhibit 154. % of county loans to total loans (as of 30 June, 2010) (as of 30 June, 2010)
(%) (%)
60 31 30.4 30.4 55.7 54.7 55 30 50.8 28.8 50 29 46.2 45 28 26.8 40 27
35 26
30 25 ABC ICBC CCB BOC 2007 2008 2009 1H10
Source: Company data, Nomura Research Source: Company data, Nomura Research
Exhibit 155. Loan to deposit ratio comparison Exhibit 156. Coverage ratio comparison (as of 30 September, 2010) (as of September, 2010)
(%) (%) 80 74.68 350 304 70 300 61.34 259 58.24 55.15 250 213 60 210 199 176 50 200 160 168 150 40 100 30 50 20 0 10 ABC CCB BOC CMB ICBC
0 CITIC BCOM ABC ICBC CCB BOC Minsheng
Source: Company data, Nomura Research Source: Company data, Nomura Research Valuation methodology Our revised PT of HK$4.80 is based on 2.0x P/BV applied to FY11F BVPS (rolled over Revised PT of HK$4.80 is based from the average of FY10F and FY11F BVPS). Our sustainable ROE assumption is on 2.0x P/BV applied to the FY11F 15.9%. We use a Gordon Growth model (target P/BV= (sustainable ROE – long-term BVPS (rolled over from the growth) / (cost of equity – long-term growth)) to derive our fair P/BV range, assuming a average of FY10F and FY11F BVPS) cost of equity of 12% and terminal growth rate of 8.0%. We derive our terminal growth rate assumption by applying a 50% payout ratio to our long-term sustainable ROE assumption.
Nomura 102 14 January 2011
Agricultural Bank of China Lucy Feng
Investment risks Being one of the largest banks in China, ABC remains closely tied to the Chinese Severer-than-expected macro economy. Severer-than-expected macro tightening could result in a sharp rise in bad tightening could result in sharp debt costs. The government may implement certain policies specifically for ABC in rise in bad debt costs county areas which might or might not be to the benefit of ABC. A slowing economy would likely have negative implications for loan growth and asset quality. The concept of market and operations-related risks has only been introduced into China’s banking system in recent years, and the system itself has yet to go through a full credit cycle. Therefore, there is no historical data showing how Chinese banks might perform under a more testing credit environment.
Nomura 103 14 January 2011
Agricultural Bank of China Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 321,855 296,147 382,186 467,597 571,878 Interest expense (121,852) (114,508) (143,989) (178,615) (230,015) Net interest income 200,003 181,639 238,196 288,982 341,863 Net fees and commissions 23,798 35,640 43,505 53,467 65,975 Trading related profits (571) 271 48 421 611 Other operating revenue (9,214) 6,087 3,001 3,168 4,690 Non-interest income 14,013 41,998 46,553 57,056 71,276 Operating income 214,016 223,637 284,750 346,038 413,139 Depreciation (11,423) (10,775) (11,314) (11,879) (12,473) Amortisation - - - - - Operating expenses (98,752) (98,792) (114,962) (132,879) (152,497) Employee share expense Op. profit before provisions 103,841 114,070 158,474 201,279 248,169 Provisions for bad debt (39,858) (44,289) (35,343) (37,424) (45,449) Other provision charges (11,620) 4,147 - - - Operating profit 52,363 73,928 123,131 163,856 202,719 Other non-operating income (14) - - - - Associates & JCEs - - - - - Pre-tax profit 52,349 73,928 123,131 163,856 202,719 Income tax (896) (8,926) (29,552) (38,506) (47,639) Net profit after tax 51,453 65,002 93,580 125,350 155,080 Minority interests 21 (10) (11) (12) (13) Other items - - - - - Preferred dividends - - - - - Normalised NPAT 51,474 64,992 93,569 125,337 155,067 Extraordinary items - - - - - Reported NPAT 51,474 64,992 93,569 125,337 155,067 Dividends - (20,000) (21,053) (56,407) (69,786) Transfer to reserves 51,474 44,992 72,516 68,930 85,281
Valuation and ratio analysis FD normalised P/E (x) 13.4 14.0 10.7 8.5 6.5 FD normalised P/E at price target (x) 16.1 16.8 12.9 10.2 7.8 Reported P/E (x) 13.4 14.0 10.7 8.5 6.5 NIM expansion Dividend yield (%) - 2.2 1.9 5.3 6.9 Price/book (x) 3.1 2.6 2.1 1.6 1.3 Price/adjusted book (x) 3.1 2.6 2.1 1.6 1.3 Net interest margin (%) 3.13 2.28 2.59 2.76 2.87 Yield on interest earning assets (%) 5.03 3.71 4.16 4.47 4.79 Cost of interest bearing liabilities (%) 2.01 1.51 1.63 1.76 1.97 Net interest spread (%) 3.02 2.20 2.53 2.71 2.82 Non-interest/operating income (%) 6.5 18.8 16.3 16.5 17.3 Cost to income (%) 51.5 49.0 44.3 41.8 39.9 Effective tax rate (%) 1.7 12.1 24.0 23.5 23.5 Dividend payout (%) - 30.8 22.5 45.0 45.0 ROE (%) (23.5) 20.5 21.4 21.4 22.6 ROA (%) 0.84 0.82 0.97 1.12 1.19 Operating ROE (%) (24.0) 23.3 28.1 28.0 29.5 Operating ROA (%) 0.85 0.93 1.28 1.46 1.56
Growth (%) Net interest income 21.8 (9.2) 31.1 21.3 18.3 Non-interest income (27.3) 199.7 10.8 22.6 24.9 Non-interest expenses 47.8 0.0 16.4 15.6 14.8 Pre-provision earnings (4.6) 9.9 38.9 27.0 23.3 Net profit 17.6 26.3 44.0 34.0 23.7 Normalised EPS (25.1) (7.3) 28.0 20.6 23.7 Normalised FDEPS (25.1) (7.3) 28.0 20.6 23.7 Source: Nomura estimates
Nomura 104 14 January 2011
Agricultural Bank of China Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents 1,145,884 1,517,806 2,054,160 2,369,134 2,520,185 Inter-bank lending 107,147 111,128 124,463 139,399 156,127 Deposits with central bank - - - - - Total securities 2,269,060 2,504,496 2,787,232 3,102,115 3,452,826 Other interest earning assets 246,370 421,093 463,202 509,523 560,475 Gross loans 3,100,159 4,138,187 4,924,071 5,923,341 7,250,333 Less provisions (85,175) (126,692) (157,366) (189,753) (231,133) Net loans 3,014,984 4,011,495 4,766,705 5,733,587 7,019,200 Long-term investments 155 141 141 141 141 Fixed assets 103,883 111,973 114,212 116,497 118,827 Goodwill - - - - - Other intangible assets 17,107 19,659 17,693 15,924 14,331 Other non IEAs 109,761 184,797 68,622 69,309 70,002 Total assets 7,014,351 8,882,588 10,396,432 12,055,628 13,912,113 Customer deposits 6,097,428 7,497,618 8,708,128 10,135,681 11,801,584 Bank deposits, CDs, debentures 346,894 714,218 763,475 825,933 901,717 Other interest bearing liabilities 51,774 163,681 223,762 284,852 297,050 Total interest bearing liabilities 6,496,096 8,375,517 9,695,366 11,246,465 13,000,351 Non interest bearing liabilities 227,714 164,146 167,842 171,653 175,586 Total liabilities 6,723,810 8,539,663 9,863,208 11,418,119 13,175,937 Minority interest 96 106 107 108 109 Common stock 260,000 260,000 324,794 324,794 324,794 Preferred stock Retained earnings 12,022 39,817 (8,660) 37,258 94,463 Proposed dividends - 20,000 21,053 56,407 69,786 Other equity 18,423 23,002 195,929 218,942 247,023 Shareholders' equity 290,445 342,819 533,117 637,401 736,067 Total liabilities and equity 7,014,351 8,882,588 10,396,432 12,055,628 13,912,113 Non-performing assets (RMB) 134,067 120,241 101,280 106,138 131,819
Balance sheet ratios (%) Loans to deposits 50.8 55.2 56.5 58.4 61.4 Equity to assets 4.1 3.9 5.1 5.3 5.3
Asset quality & capital NPAs/gross loans (%) 4.3 2.9 2.1 1.8 1.8 Bad debt charge/gross loans (%) 1.29 1.07 0.72 0.63 0.63 Loss reserves/assets (%) 1.21 1.43 1.51 1.57 1.66 Loss reserves/NPAs (%) 63.5 105.4 155.4 178.8 175.3 Tier 1 capital ratio (%) 8.0 7.7 9.7 9.8 9.4 Total capital ratio (%) 9.4 10.1 12.9 13.4 12.6
Growth (%) Loan growth 11.3 33.1 18.8 20.3 22.4 Interest earning assets 33.8 25.0 15.5 16.5 18.0 Interest bearing liabilities 10.8 28.9 15.8 16.0 15.6 Asset growth 32.2 26.6 17.0 16.0 15.4 Deposit growth 15.3 23.0 16.1 16.4 16.4
Per share Reported EPS (RMB) 0.27 0.25 0.32 0.39 0.48 Norm EPS (RMB) 0.27 0.25 0.32 0.39 0.48 Fully diluted norm EPS (RMB) 0.27 0.25 0.32 0.39 0.48 DPS (RMB) - 0.08 0.06 0.17 0.21 PPOP PS (RMB) 0.54 0.44 0.54 0.62 0.76 BVPS (RMB) 1.12 1.32 1.64 1.96 2.27 ABVPS (RMB) 1.12 1.32 1.64 1.96 2.27 NTAPS (RMB) 1.05 1.24 1.59 1.91 2.22 Source: Nomura estimates
Nomura 105 14 January 2011 CONVICTION CALL CONVICTION CALL CONVICTION CALL CONVICTION CALL
ICBC 1398 HK
FINANCIALS/BANKS | CHINA Maintained NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] Donger Wang +852 2252 1590 [email protected] BUY
Action Closing price on 7 Jan HK$5.87 We believe ICBC is well positioned to benefit from further rate hikes given its larger Price target HK$7.60 deposit base and, hence, lower costs. With a phase-in period, we think potential (from HK$7.30) policy changes would not have any significant earnings impact in 2011F. At 1.78x Upside/downside 29.5% Difference from consensus 10.3% P/BV and 8.9x P/E for FY11F, ICBC’s valuations remain undemanding. We maintain our BUY rating and roll over our price target to HK$7.60 in 2011F. FY11F net profit (RMBmn) 196,056 Difference from consensus 2.9% Catalysts Source: Nomura We see further rounds of rate hikes as a catalyst to boost its NIM in 2011F. Nomura vs consensus Anchor themes Our net profit forecast is above The operating environment remains favourable for Chinese banks in 2011F, but consensus estimates due to our negative sentiment from uncertainties over policies and asset quality continues to higher NIM and lower credit cost weigh on valuations. Better visibility on regulatory policies (capital and provisioning) assumptions. could trigger a re-rating in the near term.
Key financials & valuations Well positioned for moving 31 Dec (RMBmn) FY09 FY10F FY11F FY12F PPOP 188,592 238,079 284,298 331,795 towards dynamic RRR Reported net profit 128,645 168,676 196,056 228,592 Normalised net profit 128,645 168,676 196,056 228,592 Valuation and price target for 2011F Normalised EPS (RMB) 0.390.490.560.65 Norm. E PS growth (%) 16.1 28 .2 13 .7 1 6.6 We roll over our price target to HK$7.60 in 2011F and forecast ICBC’s Norm. P/E (x) 13.3 10.2 8.6 7.0 FY11F and FY12F earnings to come in at RMB196.1bn and Price/adj. book (x) 2.54 2.07 1.71 1.41 Price/book (x) 2.542.071.711.41 RMB228.6bn, growing by 16% y-y and 17% y-y, respectively. At 1.78x Dividend yield (%) 3.3 4.3 5.3 6.5 P/BV and 8.9x P/E for FY11F, ICBC’s valuations remain RO E (% ) 20.2 22 .3 21 .9 2 2.3 undemanding and we maintain our BUY rating for ICBC. RO A (% ) 1.19 1.31 1.29 1 .27 Earnings revisions Previous norm. net profit 161,732 187,588 222,389 Positive FY11F earnings outlook and benefits from Change from previous (%) 4.3 4.5 2.8 moving towards dynamic RRR Previous norm. EPS (RMB) 0.47 0.53 0.63 As our economics team expects one 25bp rate hike for each quarter Source: Company, Nomura estimates in 2011F, we estimate ICBC’s FY11F NIM should expand by 13bp to Share price relative to MSCI China 2.54% – due to its large deposit base, hence, lower funding costs – (HK$) Price thus underpinning 16% y-y earnings growth to RMB196.1bn in 2011F. 7.1 Rel MSCI China 105 We believe ICBC would be the biggest beneficiary of moving towards 6.6 100 dynamic RRR as its lower LDR ratio would allow it to gain more from 95 6.1 the interbank market by lending to smaller banks. 90 5.6 85 Marginal impact from new rules on LGFV loans 5.1 80 We believe that the more stringent loan classification method and risk Jul10 Jan10 Apr10 Jun10 Oct10 Feb10 Mar10 May10 Aug10 Sep10 Nov10 Dec10 weight measurement standards on LGFV loans rolled out by CBRC at 1m 3m 6m end-December 2010 should have a marginal impact on ICBC’s Absolute (HK$) (1 .7) 1 .1 7.0 earnings in 2011F. Based on our sensitivity analysis, after taking into Absolute (US$) (1 .8) 0 .8 7.3 Rel ative to Ind ex (1 .5) 0 .1 (7 .8) consideration the loan-loss provision ratio requirement of 2.5%, the Market cap (US$mn) 252,224 new rules on LGFV loans should have no impact on ICBC’s FY11F Estimated free float (%) 62.0 net profit, assuming that the allowance of up to 100% is applied to 52-week range (HK$) 6.76/5.31 3-mth avg daily turnover (US$mn) 259.2 NPL derived from LGFV downgrades. Even in the worst scenario Stock borrowability Easy where we assume allowance of 150% is applied to NPL loans derived Major shareholders (%) from LGFV downgrades, its FY11F NAPT would only be reduced by Huijin 35.4 8%, on our estimates. However, we think the worst scenario is MOF 35.3 Source: Company, Nomura estimates unlikely to happen. As such, we believe ICBC should stay largely intact despite the new rules on LGFV loans.
Nomura 106 14 January 2011
ICBC Lucy Feng
Exhibit 157. ICBC: earnings revisions
Revised Previous Change (%) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 300,963 361,612 427,053 291,229 349,649 418,231 3.3 3.4 2.1 Non-interest income 78,576 93,108 111,232 78,576 93,108 111,232 0.0 0.0 0.0 Operating Income 379,540 454,720 538,286 369,805 442,757 529,464 2.6 2.7 1.7 Operating Expenses (141,461) (170,422) (206,490) (140,916) (169,732) (205,832) 0.4 0.4 0.3 PPOP 238,079 284,298331,795 228,889 273,025 323,632 4.04.1 2.5 Provisions (16,508) (26,828) (31,676) (16,395) (26,624) (31,621) 0.70.8 0.2 Operating pretax 221,571 257,470 300,120 212,494 246,401 292,011 4.3 4.5 2.8 Profit tax (52,069) (60,505) (70,528) (49,936) (57,904) (68,622) 4.3 4.5 2.8 Minority Interest (826) (909) (1,000) (826) (909) (1,000) 0.0 0.0 0.0 PROFITS attributable to equity holders 168,676 196,056 228,592 161,732 187,588 222,389 4.3 4.5 2.8 Source: Company Data, Nomura estimates
Valuation methodology Our revised price target of HK$7.60 is based on fine-tuned 2.21x P/BV multiplier and rolled over FY11F BVPS. Our sustainable ROE assumption is 15.8%, revised down from 16.6%. We use the Gordon Growth Model [target P/BV = (sustainable ROE – long-term growth)/(cost of equity – long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 11.5% and a terminal growth rate of 7.9% (previously 8.3%). We derive our terminal growth figure by applying a 50% payout ratio to our long-term sustainable ROE.
Risks to our investment view As the largest bank in China, ICBC and its performance remain closely tied to the Chinese economy. Hence, we believe that more severe-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth, in our view. The concept of market and operation-related risks has only been introduced to the bank over the past few years. Moreover, fewer rate hikes than expected in 2011F would likely pose a downward risk to our NIM assumptions.
Nomura 107 14 January 2011
ICBC Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year- end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 440,574 405,878 556,299 762,826 1,020,231 Interest expense (177,537) (160,057) (255,335) (401,213) (593,178) Net int erest income 263,037 245,821 300,963 361,612 427,053 Net fees and commissions 44,002 55,147 73,756 88,646 106,929 Tradi ng rel ated profits (34) 7,135 3,486 3,101 2,915 Other operating revenue 3,190 1,308 1,334 1,361 1,388 Non-interest income 47,158 63,590 78,576 93,108 111,232 Operating income 310,195 309,411 379,540 454,720 538,286 Depreciation Amortisation - - - - - Operating expenses (111,335) (120,819) (141,461) (170,422) (206,490) Employee share expense Op. profit before provisions 198,860 188,592 238,079 284,298 331,795 Provisions for bad debt (36,512) (21,682) (18,693) (29,233) (34,320) Other provision charges (18,950) (1,603) - - - Operating profit 143,398 165,307 219,385 255,065 297,475 Other non-operating income - - - - - Associates & JCEs 1,978 1,987 2,186 2,404 2,645 Pre-tax profit 145,376 167,294 221,571 257,470 300,120 Income tax (34,150) (37,898) (52,069) (60,505) (70,528) Net profit after tax 111,226 129,396 169,502 196,964 229,592 Minority interests (385) (751) (826) (909) (1,000) Other items - - - - - Preferred dividends - - - - - Normalised NPAT 110,841 128,645 168,676 196,056 228,592 Extraordinary items - - - - - Reported NPAT 110,841 128,645 168,676 196,056 228,592 Divi dends (55,113) (56,783) (76,276) (88,634) (103,316) Transfer to reserves 55,728 71,862 92,400 107,422 125,276
Valuation and ratio analysis NIM rebound FD normalised P/E (x) 16.0 13.3 10.2 8.6 7.0 FD normalised P/E at price target (x) 20.8 17.3 13.2 11.1 9.0 Reported P/E (x) 16.0 13.3 10.2 8.6 7.0 Divi den d yi eld (%) 3 .1 3.3 4.3 5.3 6.5 Price/book (x) 2.9 2.5 2.1 1.7 1.4 Price/adjusted book (x) 2.9 2.5 2.1 1.7 1.4 Net interest margin (%) 2.95 2.26 2.41 2.54 2.63 Yield on interest earning assets (%) 4.94 3.74 4.45 5.36 6.29 Cost of interest bearing liabilities (%) 2.14 1.58 2.13 2.91 3.74 Net interest spread (%) 2.80 2.16 2.32 2.45 2.55 Non-interest/operating income (%) 15.2 20.6 20.7 20.5 20.7 Cost to income (%) 35.9 39.0 37.3 37.5 38.4 Effective tax rate (%) 23.5 22.7 23.5 23.5 23.5 Dividend payout (%) 49.7 44.1 45.2 45.2 45.2 ROE (%) 19.4 20.2 22.3 21.9 22.3 ROA (%) 1.20 1.19 1.31 1.29 1.27 Operating ROE (%) 25.1 25.9 29.1 28.5 29.0 Operating ROA (%) 1.56 1.53 1.70 1.68 1.66
Growt h (%) Net interest income 17.2 (6.5) 22.4 20.2 18.1 Non-i nterest income 43.1 34.8 23.6 18.5 19.5 Non-i nterest expenses 6.4 8.5 17.1 20.5 21.2 Pre-provi si on earnings 30.2 (5.2) 26.2 19.4 16.7 Net profit 36.0 16.1 31.1 16.2 16.6 Normalised EPS 36.0 16.1 28.2 13.7 16.6 Normalised FDEPS 36.0 16.1 28.2 13.7 16.6 Source: Nomura estimates
Nomura 108 14 January 2011
ICBC Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents - - - - - Inter-bank lending 168,363 235,301 263,537 295,162 330,581 Deposi ts with central bank 1,693,024 1,693,048 2,414,792 3,239,201 4,228,566 Total securi ti es 3,014,669 3,579,026 3,985,862 4,439,253 4,944,559 Other interest earning assets 163,493 408,826 449,709 494,679 544,147 Gross loans 4,571,994 5,728,626 6,733,687 7,882,609 9,277,503 Less provi si ons (135,983) (145,452) (155,585) (179,783) (208,121) Net loans 4,436,011 5,583,174 6,578,102 7,702,825 9,069,382 Long-term investments 28,421 36,278 36,278 36,278 36,278 Fixed assets 86,800 95,684 97,598 99,550 101,541 Goodwill - - - - - Other i ntangible assets 10,746 18,696 16,826 15,144 13,629 Other non IEAs 155,619 135,020 136,370 137,734 139,111 Total assets 9,757,146 11,785,053 13,979,073 16,459,825 19,407,795 Customer deposits 8,223,446 9,771,277 11,626,560 13,841,712 16,486,887 Bank deposits, CDs, debentures 646,980 1,003,106 1,123,008 1,257,392 1,407,977 Other interest bearing liabilities 39,648 111,060 161,666 165,633 169,996 Total interest bearing liabilities 8,910,074 10,885,443 12,911,234 15,264,736 18,064,860 Non interest bearing liabili ti es 240,442 220,676 226,882 233,392 240,229 Total liabilities 9,150,516 11,106,119 13,138,116 15,498,128 18,305,089 Minority interest 3,955 5,041 5,091 5,142 5,194 Common stock 334,019 334,019 349,019 349,019 349,019 Preferred stock Retained earnings 17,816 61,977 154,871 263,202 389,477 Proposed dividends 55,113 56,783 76,276 88,634 103,316 Other equi ty 195,727 221,114 255,700 255,700 255,700 Shareholders' equity 602,675 673,893 835,866 956,555 1,097,512 Total liabilities and equity 9,757,146 11,785,053 13,979,073 16,459,825 19,407,795 Non-performi ng assets (RMB) 104,482 88,467 85,612 94,313 103,610
Balance sheet ratios (%) Stable asset quality Loans to deposits 55.6 58.6 57.9 56.9 56.3 Equity to assets 6.2 5.7 6.0 5.8 5.7
Ass et quality & capit al NPAs/gross loans (%) 2.3 1.5 1.3 1.2 1.1 Bad debt charge/gross loans (%) 0.80 0.38 0.28 0.37 0.37 Loss reserves/assets (%) 1.39 1.23 1.11 1.09 1.07 Loss reserves/NPAs (%) 130.1 164.4 181.7 190.6 200.9 Tier 1 capital ratio (%) 10.8 9.9 9.9 9.5 9.0 Total capi tal ratio (%) 13.1 12.4 12.9 12.1 11.3
Growt h (%) Loan growth 12.1 25.9 17.8 17.1 17.7 Interest earning assets 12.2 21.4 19.1 18.1 18.2 Interest bearing liabi lities 12.3 22.2 18.6 18.2 18.3 Asset growth 12.4 20.8 18.6 17.7 17.9 Deposi t growth 19.2 18.8 19.0 19.1 19.1
Per share Reported EPS (RMB) 0.33 0.39 0.49 0.56 0.65 Norm EPS (RMB) 0.33 0.39 0.49 0.56 0.65 Fully diluted norm EPS (RMB) 0.33 0.39 0.49 0.56 0.65 DPS (RMB) 0.16 0.17 0.22 0.25 0.30 PPOP PS (RMB) 0.60 0.56 0.70 0.81 0.95 BVPS (RMB) 1.80 2.02 2.39 2.74 3.14 ABVPS (RMB) 1.80 2.02 2.39 2.74 3.14 NTAPS (RMB) 1.77 1.96 2.35 2.70 3.11 Source: Nomura estimates
Nomura 109 14 January 2011
China Construction Bank-H 939 HK
FINANCIALS/BANKS | CHINA Maintained NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] BUY Donger Wang +852 2252 1590 [email protected]
Action Closing price on 7 Jan HK$7.06 We believe further rate hikes and tightening credit policy should help improve Price target HK$8.60 pricing power and boost NIM, whereas potential policy changes would not have any (from HK$8.50) Upside/downside 21.8% significant earnings impact on CCB in 2011F. At 1.69x P/B and 8.54x P/E for Difference from consensus 10.5% FY11F, CCB’s valuation is still undemanding. We reaffirm BUY rating and roll over our price target to HK$8.60 for 2011F. FY11F net profit (RMBmn) 162,245 Difference from consensus 0.8%
Catalysts Source: Nomura We see further rounds of rate hikes as a catalyst to boost its NIM in 2011F.
Anchor themes Nomura vs consensus The operating environment remains favourable for Chinese banks in 2011F, but Our net profit forecast is higher than negative sentiment from uncertainties over policies and asset quality continues to consensus, due to likely higher NIM and lower credit cost assumptions. weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a re-rating in the near term.
Key financials & valuations Adequate capital and 31 Dec (RMBmn) FY09 FY10F FY11F FY12F PPOP 164,168 201,136 241,633 293,217 manageable LGFV loan risks Reported net profit 106,756 137,456 162,245 197,945 Normalised net profit 106,756 137,456 162,245 197,945 Normalised EPS (RMB) 0.460.570.650.79 Valuation and price target for 2011F Norm. E PS growth (%) 15.3 24 .4 14 .2 2 2.0 We roll over our price target to HK$8.60 for 2011F and forecast CCB’s Norm. P/E (x) 13.5 10.7 8.9 6.9 FY11F and FY12F earnings to reach RMB162.2bn and RMB197.9bn, Price/adj. book (x) 2.58 2.08 1.72 1.41 Price/book (x) 2.582.081.721.41 growing by 18% y-y and 22% y-y, respectively. At 1.69x P/B and Dividend yield (%) 3.3 4.1 5.0 6.5 8.54x P/E for FY11F, its valuation is still undemanding and we reaffirm RO E (% ) 20.8 21 .5 21 .1 2 2.4 BUY rating for CCB in 2011F. RO A (% ) 1.24 1.31 1.33 1 .39 Earnings revisions Previous norm. net profit 137,456 165,898 205,949 Healthy FY11F earnings outlook Cha nge from previous (% ) (0 .0) (2 .2) (3 .9) As our economics team expects one 25bp rate hike for each quarter Previous norm. EPS (RMB) 0.57 0.66 0.82 Source: Company, Nomura estimates in 2011F, we estimate CCB’s FY11F NIM should expand by 13bp to 2.61%, due to improving pricing power and higher loan yields. As Share price relative to MSCI China such, we forecast 18% y-y earnings growth to RMB162.2bn in 2011F. (HK$) Price With completion of its RMB61.5bn rights issue at end-2010, we judge 8.3 Rel MSCI China 120 that CCB’s T1 CAR and CAR should stand at 9.1% and 11.3% in 7.8 115 7.3 110 2011F, above the current requirement, and should be able to support 6.8 105 sustainable growth of its business in the year ahead. 6.3 100 5.8 95 Manageable LGFV loan risks 5.3 90
CBRC recently announced more stringent loan classification methods Jul10 Jan10 Apr10 Jun10 Oct10 Feb10 Mar10 May10 Aug10 Sep10 Nov10 Dec10 and risk weight measurement standards on LGFV loans. This, 1m 3m 6m combined with the loan-loss provision ratio requirement of 2.5%, Absolute (HK$) - 5 .8 1 7.4 Absolute (US$) (0 .1) 5 .6 1 7.6 should push its credit cost and dampen earnings. Based on our Rel ative to Ind ex 0 .1 4 .9 2.5 estimates, in the base-case scenario where we assume allowance of Market cap (US$mn) 212,237 35% and 100% to be applied to NPL derived from categories of Estimated free float (%) 31.8 “partial” and “no” coverage, its FY11F earnings should remain intact. 52-week range (HK$) 8.05/5.60 3-mth avg daily turnover (US$mn) 233.9 However, in worse and worst case scenarios where we assume Stock borrowability Easy allowance of 100% and 150%, to be applied to NPL derived from Major shareholders (%) LGFV downgrades, CCB’s FY11F earnings would likely decline by 4% Huijin 57.1 Bank of America 11.0 and 16%, respectively. However, we see limited likelihood of the worst Source: Company, Nomura estimates case happening. We believe that risks from LGFV loans are manageable for CCB.
Nomura 110 14 January 2011
China Construction Bank-H Lucy Feng
Exhibit 158. CCB: earning revisions Revised Previous Change (%) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 253,646 303,862 362,411 253,646 308,607 373,133 0.0 (1.5) (2.9) Non-interest income 72,760 87,982111,499 72,760 87,982 111,499 0.0 0.0 0.0 Operating Income 326,405 391,844 473,910 326,405 396,588 484,632 0.0 (1.2) (2.2) Operating Expenses (125,270) (150,211) (180,693) (125,270) (150,211) (180,693) 0.0 0.0 0.0 PPOP 201,136 241,633293,217 201,136 246,378 303,940 0.0 (1.9)(3.5) Provisions (22,507) (30,799) (36,007) (22,507) (30,800) (36,335) 0.0 0.0 (0.9) Operating pretax 178,629 210,834 257,210 178,629 215,578 267,605 0.0 (2.2) (3.9) Profit tax (41,085) (48,492) (59,158) (41,085) (49,583) (61,549) 0.0 (2.2) (3.9) Minority Interest (88) (97) (106) (88) (97) (106) 0.0 0.0 0.0 Profits attributable to equity holders 137,456 162,245 197,945 137,456 165,898 205,949 0.0 (2.2) (3.9) Source: Company Data, Nomura Research
Valuation methodology Our revised price target of HK$8.60 is based on fine-tuned 2.11x P/BV multiplier and rolled over FY11F BVPS. Our sustainable ROE assumption is 16.29%, revised from 16.94%. We use the Gordon Growth Model [target P/BV = (sustainable ROE – long- term growth)/(cost of equity – long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 12% and a terminal growth rate of 8.1% (previously 8.5%). We derive our terminal growth figure by applying a 50% payout ratio to our long-term sustainable ROE.
Risks to our investment view Downside risks: we believe that more severe-than-expected macro tightening could result in a sharp increase in bad debt costs. In addition, a slowing economy would have negative implications for loan growth and could lead to a significant rise in NPLs, in our view. Moreover, fewer rate hikes than expected in 2011F would pose a downward risk to our NIM assumption.
Nomura 111 14 January 2011
China Construction Bank-H Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year- end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 356,500 339,463 427,040 534,107 666,688 Interest expense (131,580) (127,578) (173,394) (230,245) (304,277) Net interest income 224,920 211,885 253,646 303,862 362,411 Net fees and commissions 38,446 48,059 64,591 80,739 104,961 Tradi ng rel ated profits 961 6,704 5,363 4,291 3,432 Other operating revenue 5,420 2,666 2,805 2,952 3,106 Non-interest income 44,827 57,429 72,760 87,982 111,499 Operating income 269,747 269,314 326,405 391,844 473,910 Depreciation - - - - - Amortisation - - - - - Operating expenses (99,193) (105,146) (125,270) (150,211) (180,693) Employee share expense - - - - - Op. profit before provisions 170,554 164,168 201,136 241,633 293,217 Provi si ons for bad debt (36,246) (24,256) (22,526) (30,820) (36,030) Other provision charges (14,583) (1,204) - - - Operating profit 119,725 138,708 178,610 210,813 257,188 Other non-operating income - - - - - Associates & JCEs 16 17 19 21 23 Pre-tax profit 119,741 138,725 178,629 210,834 257,210 Income tax (27,099) (31,889) (41,085) (48,492) (59,158) Net profit after tax 92,642 106,836 137,544 162,342 198,052 Minority interests (43) (80) (88) (97) (106) Other items - - - - - Preferred dividends - - - - - Normalised NPAT 92,599 106,756 137,456 162,245 197,945 Extraordinary items - - - - - Reported NPAT 92,599 106,756 137,456 162,245 197,945 Divi dends (45,383) (47,205) (61,855) (73,010) (89,075) Transfer to reserves 47,216 59,551 75,601 89,235 108,870 NIM rebound Valuation and ratio analysis FD normalised P/E (x) 16.1 13.5 10.7 8.9 6.9 FD normalised P/E at price target (x) 19.7 16.5 13.0 10.9 8.4 Reported P/E (x) 16.1 13.5 10.7 8.9 6.9 Divi dend yield (%) 3.0 3.3 4.1 5.0 6.5 Price/book (x) 3.1 2.6 2.1 1.7 1.4 Price/adjusted book (x) 3.1 2.6 2.1 1.7 1.4 Net interest margin (%) 3.24 2.41 2.48 2.61 2.72 Yield on interest earning assets (%) 5.13 3.85 4.18 4.59 5.01 Cost of interest bearing liabilities (%) 2.04 1.55 1.85 2.18 2.56 Net interest spread (%) 3.10 2.30 2.33 2.41 2.44 Non-interest/operating income (%) 16.6 21.3 22.3 22.5 23.5 Cost to income (%) 36.8 39.0 38.4 38.3 38.1 Effective tax rate (%) 22.6 23.0 23.0 23.0 23.0 Divi dend payout (%) 49.0 44.2 45.0 45.0 45.0 ROE (%) 20.9 20.8 21.5 21.1 22.4 ROA (%) 1.31 1.24 1.31 1.33 1.39 Operating ROE (%) 27.0 27.1 28.0 27.4 29.1 Operating ROA (%) 1.69 1.61 1.71 1.72 1.81
Growt h (%) Net interest income 16.7 (5.8) 19.7 19.8 19.3 Non-i nterest income 60.4 28.1 26.7 20.9 26.7 Non-i nterest expenses 7.4 6.0 19.1 19.9 20.3 Pre-provi si on earnings 32.8 (3.7) 22.5 20.1 21.3 Net profit 34.1 15.3 28.8 18.0 22.0 Normalised EPS 31.5 15.3 24.4 14.2 22.0 Normalised FDEPS 31.5 15.3 24.4 14.2 22.0 Source: Nomura estimates
Nomura 112 14 January 2011
China Construction Bank-H Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents 34,313 29,173 37,722 45,196 53,529 Inter-bank lending 49,932 123,380 148,056 177,667 213,201 Deposi ts with central bank 1,213,137 1,429,475 1,848,360 2,214,624 2,622,899 Total securi ti es 2,194,748 2,578,799 2,965,619 3,410,462 3,922,031 Other interest earning assets - - - - - Gross loans 3,793,943 4,819,773 5,632,209 6,605,404 7,806,526 Less provi si ons (110,368) (126,826) (135,220) (152,374) (184,069) Net loans 3,683,575 4,692,947 5,496,989 6,453,030 7,622,457 Long-term investments 1,728 1,791 1,970 2,167 2,384 Fixed assets 63,957 74,693 78,428 82,349 86,466 Goodwill 1,527 1,590 1,431 1,288 1,159 Other i ntangible assets 7,855 10,790 9,711 8,740 7,866 Other non IEAs 304,680 680,717 714,753 750,490 788,015 Total assets 7,555,452 9,623,355 11,303,039 13,146,014 15,320,007 Customer deposits 6,375,915 8,001,323 9,441,561 11,141,042 13,146,430 Bank deposits, CDs, debentures 490,578 812,911 837,299 862,418 888,291 Other interest bearing liabilities 53,810 98,644 138,644 138,644 138,644 Total interest bearing liabilities 6,920,303 8,912,878 10,417,504 12,142,104 14,173,365 Non interest bearing liabili ti es 167,587 151,457 166,603 183,263 201,589 Total liabilities 7,087,890 9,064,335 10,584,107 12,325,367 14,374,954 Minority interest 1,596 34 35 36 36 Common stock 233,689 233,689 250,011 250,011 250,011 Preferred stock - - - - - Retained earnings 14,210 88,907 157,531 231,249 320,830 Proposed dividends 45,383 47,205 61,855 73,010 89,075 Other equi ty 172,684 189,185 249,500 266,340 285,100 Shareholders' equity 465,966 558,986 718,897 820,611 945,017 Total liabilities and equity 7,555,452 9,623,355 11,303,039 13,146,014 15,320,007 Non-performi ng assets (RMB) 83,822 72,156 73,375 92,763 118,516
Balance sheet ratios (%) Stable asset quality Loans to deposits 59.5 60.2 59.7 59.3 59.4 Equity to assets 6.2 5.8 6.4 6.2 6.2
Ass et quality & capit al NPAs/gross loans (%) 2.2 1.5 1.3 1.4 1.5 Bad debt charge/gross loans (%) 0.96 0.50 0.40 0.47 0.46 Loss reserves/assets (%) 1.46 1.32 1.20 1.16 1.20 Loss reserves/NPAs (%) 131.7 175.8 184.3 164.3 155.3 Tier 1 capital ratio (%) 10.2 9.3 9.4 8.9 8.8 Total capital ratio (%) 12.2 11.7 12.3 11.3 10.8
Growt h (%) Loan growth 15.7 27.4 17.1 17.4 18.1 Interest earning assets 13.6 23.6 18.5 17.2 17.3 Interest bearing liabilities 16.8 28.8 16.9 16.6 16.7 Asset growth 14.5 27.4 17.5 16.3 16.5 Deposi t growth 19.6 25.5 18.0 18.0 18.0
Per share Reported EPS (RMB) 0.40 0.46 0.57 0.65 0.79 Norm EPS (RMB) 0.40 0.46 0.57 0.65 0.79 Fully diluted nor m EPS (RMB) 0.40 0.46 0.57 0.65 0.79 DPS (RMB) 0.19 0.20 0.25 0.29 0.36 PPOP PS (RMB) 0.73 0.70 0.83 0.97 1.17 BVPS (RMB) 1.99 2.39 2.88 3.28 3.78 ABVPS (RMB) 1.99 2.39 2.88 3.28 3.78 NTAPS (RMB) 1.95 2.34 2.83 3.24 3.74 Source: Nomura estimates
Nomura 113 14 January 2011 114
Bank of China (H-share) 3988 HK
FINANCIALS/BANKS | CHINA Maintained NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] Donger Wang +852 2252 1590 [email protected] BUY
Action Closing price on 7 Jan HK$4.14 BOC’s valuation remains undemanding at 1.3x FY11F P/BV. We reiterate our view Price target HK$5.20 that increased use of the RMB in overseas markets will benefit BOC the most, (f ro m HK $ 5. 30 ) Upside/downside 25.6% given its clearing centre and distinctive role in RMB-trade settlement in Hong Kong. Difference from consensus 4.6% We see the recent expansion of the RMB settlement pilot programme as a further catalyst for BOC. We reaffirm our BUY rating with a revised PT of HK$5.20. FY11F net profit (RMBmn) 114,864 Difference from consensus 0.4%
Catalysts Source: Nomura We see further rounds of rate hikes as a catalyst in expanding the sector NIM. Nomura vs consensus Anchor themes Our estimates are higher than The operating environment remains favourable for Chinese banks in 2011F, but consensus estimates, mainly owing negative sentiment from uncertainties over policies and asset quality continues to to our higher NIM and lower credit cost assumptions. weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a re-rating in the near term.
Key financials & valuations Benefits from RMB liberalisation 31 Dec (RMBmn) FY09 FY10F FY11F FY12F PPOP 125,595 155,037 190,521 233,605 Expanding scope for RMB settlement; PT revised to Reported net profit 81,068 97,024 114,864 140,834 HK$5.20 Normalised net profit 81,068 97,024 114,864 140,834 Normalised EPS (RMB) 0.32 0.35 0.41 0.50 We have revised our PT to HK$5.20, based on a new P/BV multiple, Norm. EPS growth (%) 26.0 8.8 18.4 22.6 with our forecasts rolling over to FY11F. We believe that BOC will Norm. P/E (x) 11.3 10.2 8.3 6.4 continue to be the biggest beneficiary when more enterprises can use Price/adj. book (x) 1.80 1.57 1.34 1.14 RMB for trade settlement. The PBOC announced last month that the Price/book (x) 1.80 1.57 1.34 1.14 Dividend yield (%) 3.9 4.4 5.4 7.1 number of enterprises allowed in the pilot programme for RMB ROE (%) 16.6 17.1 17.5 19.4 settlement jumped from 365 to 67,359. China banks completed ROA (%) 1.03 1.02 1.03 1.08 RMB126bn of cross-border RMB trade settlement in 9M10 (up 157% Earnings revisions Previous norm. net profit 97,024 113,084 141,498 q-q in 3Q10) and we believe the uptrend will continue. With the shares Change from previous (%) - 1.6 (0.5) at an undemanding 1.3x P/BV, we reiterate our BUY rating. Previous norm. EPS (RMB) 0.34 0.40 0.50 Source: Company, Nomura estimat es Launch of first-ever RMB bond index BOC (HK), a subsidiary of BOC, announced on 20 December 2010 Share price relative to MSCI China the launch of an Offshore RMB Bond Index, the first of its kind, on (HK$) Price 31 December 2010. In our view, the index provides an objective 5.4 Rel MSCI China 110 benchmark enabling investors to have a better understanding of the 4.9 105 market performance, which implies further expansion of the RMB 4.4 100
bond market and should facilitate liquidity in the secondary market of 3.9 95 offshore RMB bonds. Given its leading role in RMB business, we 3.4 90 believe that BOC will benefit most from the continuous and rapid Jul10 Apr10 Oct10
growth of the RMB bond market in Hong Kong. Jan10 Feb10 Mar10 Jun10 May10 Aug10 Sep10 Nov10 Dec10 1m 3m 6m Limited impact from new LGFV loan requirement Absolute (HK$) (1.2) (2.6) 5.1 Absolute (US$) (1.3) (2.8) 5.3 Market media reported recently that the regulator may re-classify Relative to Index (1.0) (3.5) (9.8) LGFV loans into five categories according to cashflow, guarantee and Market cap (US$mn) 135,188 Estimated free float (%) 67.3 collateral value. Besides, the regulator may assign higher risk weights 52-week range (HK$) 5.00/3.59 on LGFV loans. Based on our estimates, BOC’s FY11F CAR and 3-mth avg daily turnover (US$mn) 181.5 T1CAR would fall by 0.9pp and 0.7pp, respectively; while pressure on Stock borrowability Easy credit costs would be limited (1% impact if 100% provision is applied Major shareholders (%) Huijin 67.5 to the NPL derived) assuming BOC meets the 2.5% loan-loss HKSCC Nominees 21.8 provision requirement by end-FY11F. We believe impact would be Source: Company, Nomura estimat es dampened if a phase-in period is introduced.
Nomura 114 14 January 2011
Bank of China (H-share) Lucy Feng
Exhibit 159. BOC: earnings revisions Revised Previous % change Profit & loss (RMBmn) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 189,092 227,764 273,945 189,092 228,259 275,149 0.0 (0.2) (0.4) Fee income 60,687 78,088 98,056 60,687 78,088 98,056 0.0 0.0 0.0 Non-interest income 84,888 103,868 127,639 84,888 103,868 127,639 0.0 0.0 0.0 Operating income 273,980 331,633 401,585 273,980 332,128 402,788 0.0 (0.1) (0.3) Operating expenses (118,943) (141,111) (167,980) (118,943) (141,137) (168,043) 0.0 0.0 0.0 PPOP 155,037 190,521 233,605 155,037 190,991 234,745 0.0 (0.2) (0.5) Provisions (24,703) (39,798) (46,120) (24,703) (39,920) (46,386) 0.0 (0.3) (0.6) Associated companies 903 993 1,093 903 993 1,093 0.0 0.0) 0.0 Operating pre-tax 131,238 151,716 188,577 131,238 152,064 189,452 0.0 (0.2) (0.5) Profit tax (29,684) (34,367) (43,214) (29,684) (34,451) (43,424) 0.0 (0.2) (0.5) Minority interest (4,530) (4,530) (4,530) (4,530) (4,530) (4,530) 0.0 0.0 0.0 Profits attributable to equity holders 97,024 112,819 140,834 97,024 113,084 141,498 0.0 (0.2) (0.5) Source: Company data, Nomura estimates
Exhibit 160. Settlement fee as % of total operating Exhibit 161. RMB settlement for cross-border trade income (1H10)
(%) (RMBbn) 6 90
5 80 70 4 60 3 50 2 40 1 30 20 0 10 ABC CCB BOC CMB ICBC
CITIC 0
BOCOM 1Q10 2Q10 3Q10 Minsheng
Source: Company data, Nomura research Source: CEIC, Nomura research
Valuation methodology We derive our revised price target of HK$5.20 (previous: HK$5.30) by applying a P/BV of 1.7x (from 2.0x) to our FY11F BVPS forecast. Our sustainable ROE assumption is revised from 16.0% to 15.1%. We use the Gordon Growth Model [target P/BV= (sustainable ROE – long-term growth)/(cost of equity – long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 12.0% and a terminal growth rate of 7.6%(previous: 8.0%). We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE.
Investment risks Downside risks: We believe that more-severe-than-expected macro tightening could result in a sharp rise in bad debt costs. Any downturn in the global economy, and especially Hong Kong’s economy, could also weigh on the bank’s earnings performance given its bigger foreign exposure relative to that of peers.
Nomura 115 14 January 2011
Bank of China (H-share) Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 286,927 261,424 330,388 413,600 507,033 Interest expense (123,991) (102,543) (141,296) (185,836) (233,087) Net interest income 162,936 158,881 189,092 227,764 273,945 Net fees and commissions 39,947 46,013 60,687 78,088 98,056 Trading related profits 5,045 5,849 4,800 4,740 6,760 Other operating revenue 20,968 21,873 19,401 21,040 22,823 Non-interest income 65,960 73,735 84,888 103,868 127,639 Operating income 228,896 232,616 273,980 331,633 401,585 Depreciation Amortisation Operating expenses (97,412) (107,021) (118,943) (141,111) (167,980) Employee share expense Op. profit before provisions 131,484 125,595 155,037 190,521 233,605 Provisions for bad debt (45,031) (14,987) (24,703) (37,108) (46,120) Other provision charges Operating profit 86,453 110,608 130,335 153,413 187,485 Other non-operating income Associates & JCEs 726 821 903 993 1,093 Pre-tax profit 87,179 111,429 131,238 154,406 188,577 Income tax (21,285) (25,831) (29,684) (35,013) (43,214) Net profit after tax 65,894 85,598 101,554 119,394 145,364 Minority interests (1,534) (4,530) (4,530) (4,530) (4,530) Other items Preferred dividends Normalised NPAT 64,360 81,068 97,024 114,864 140,834 Extraordinary items Reported NPAT 64,360 81,068 97,024 114,864 140,834 Dividends (32,999) (35,537) (43,661) (51,689) (63,375) Transfer to reserves 31,361 45,531 53,363 63,175 77,459
Valuation and ratio analysis FD normalised P/E (x) 14.8 11.3 10.2 8.3 6.4 FD normalised P/E at price target (x) 18.6 14.3 12.9 10.4 8.0 Reported P/E (x) 14.8 11.3 10.2 8.3 6.4 NIM recovery Dividend yield (%) 3.5 3.9 4.4 5.4 7.1 Price/book (x) 2.0 1.8 1.6 1.3 1.1 Price/adjusted book (x) 2.0 1.8 1.6 1.3 1.1 Net interest margin (%) 2.63 2.04 2.12 2.23 2.36 Yield on interest earning assets (%) 4.63 3.36 3.70 4.05 4.36 Cost of interest bearing liabilities (%) 2.18 1.41 1.69 1.92 2.10 Net interest spread (%) 2.45 1.94 2.01 2.12 2.26 Non-interest/operating income (%) 28.8 31.7 31.0 31.3 31.8 Cost to income (%) 42.6 46.0 43.4 42.6 41.8 Effective tax rate (%) 24.4 23.2 22.6 22.7 22.9 Dividend payout (%) 51.3 43.8 45.0 45.0 45.0 ROE (%) 14.5 16.6 17.1 17.5 19.4 ROA (%) 0.99 1.03 1.02 1.03 1.08 Operating ROE (%) 19.5 22.7 23.0 23.4 25.8 Operating ROA (%) 1.34 1.41 1.37 1.37 1.44
Growth (%) Net interest income 6.7 (2.5) 19.0 20.5 20.3 Non-interest income 56.2 11.8 15.1 22.4 22.9 Non-interest expenses 14.2 9.9 11.1 18.6 19.0 Pre-provision earnings 19.9 (4.5) 23.4 22.9 22.6 Net profit 14.4 26.0 19.7 18.4 22.6 Normalised EPS 14.4 26.0 8.8 18.4 22.6 Normalised FDEPS 14.4 26.0 8.8 18.4 22.6 Source: Nomura estimates
Nomura 116 14 January 2011
Bank of China (H-share) Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents 72,533 434,351 907,529 1,296,993 1,753,843 Inter-bank lending 488,465 223,444 223,444 223,444 223,444 Deposits with central bank 1,207,613 1,111,351 1,278,054 1,431,420 1,603,190 Total securities 1,646,208 1,816,679 1,909,370 2,006,844 2,109,352 Other interest earning assets 32,039 36,099 36,099 36,099 36,099 Gross loans 3,296,146 4,910,358 5,756,254 6,784,983 8,049,551 Less provisions (106,494) (112,950) (128,666) (152,754) (184,106) Net loans 3,189,652 4,797,408 5,627,588 6,632,229 7,865,445 Long-term investments 7,376 10,668 11,948 13,382 14,988 Fixed assets 92,236 113,508 119,183 125,143 131,400 Goodwill Other intangible assets Other non IEAs 215,558 204,669 225,703 248,978 274,742 Total assets 6,951,680 8,748,177 10,338,917 12,014,532 14,012,502 Customer deposits 5,102,111 6,620,552 7,860,652 9,237,022 10,888,665 Bank deposits, CDs, debentures 835,811 1,126,963 1,294,923 1,487,946 1,709,778 Other interest bearing liabilities 163,827 175,599 227,922 252,710 280,455 Total interest bearing liabilities 6,101,749 7,923,114 9,383,497 10,977,678 12,878,898 Non interest bearing liabilities 360,044 283,435 299,027 315,582 333,171 Total liabilities 6,461,793 8,206,549 9,682,524 11,293,260 13,212,069 Minority interest 25,629 30,402 32,105 33,809 35,512 Common stock 253,839 253,839 279,147 279,147 279,147 Preferred stock Retained earnings 50,428 69,547 114,786 169,933 235,706 Proposed dividends 32,999 35,537 43,661 51,689 63,375 Other equity 126,992 152,303 186,694 186,694 186,694 Shareholders' equity 464,258 511,226 624,288 687,463 764,922 Total liabilities and equity 6,951,680 8,748,177 10,338,917 12,014,532 14,012,502 Non-performing assets (RMB) 90,879 76,006 82,529 97,828 118,972
Balance sheet ratios (%) Loans to deposits 64.6 74.2 73.2 73.5 73.9 Equity to assets 6.7 5.8 6.0 5.7 5.5
Asset quality & capital NPAs/gross loans (%) 2.8 1.5 1.4 1.4 1.5 Bad debt charge/gross loans (%) 1.37 0.31 0.43 0.55 0.57 Higher CAR should mean no Loss reserves/assets (%) 1.53 1.29 1.24 1.27 1.31 more capital raising over the Loss reserves/NPAs (%) 117.2 148.6 155.9 156.1 154.7 next three years Tier 1 capital ratio (%) 11.0 9.1 9.6 9.1 8.7 Total capital ratio (%) 13.4 11.1 12.4 11.7 11.1
Growth (%) Loan growth 15.8 50.4 17.3 17.9 18.6 Interest earning assets 16.4 21.6 13.6 13.8 14.6 Interest bearing liabilities 17.1 29.8 18.4 17.0 17.3 Ass et growth 16.0 25.8 18.2 16.2 16.6 Deposit growth 16.0 29.8 18.7 17.5 17.9
Per share Reported EPS (RMB) 0.25 0.32 0.35 0.41 0.50 Norm EPS (RMB) 0.25 0.32 0.35 0.41 0.50 Fully diluted norm EPS (RMB) 0.25 0.32 0.35 0.41 0.50 DPS (RMB) 0.13 0.14 0.16 0.19 0.23 PPOP PS (RMB) 0.52 0.49 0.56 0.68 0.84 BVPS (RMB) 1.83 2.01 2.24 2.46 2.74 ABVPS (RMB) 1.83 2.01 2.24 2.46 2.74 NTAPS (RMB) 1.83 2.01 2.24 2.46 2.74 Source: Nomura estimates
Nomura 117 14 January 2011
Bank of Communications 3328 HK
FINANCIALS/BANKS | CHINA From Buy NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] Donger Wang +852 2252 1590 [email protected] NEUTRAL
Action Closing price on 7 Jan HK$8.03 We downgrade BCOM to NEUTRAL with a revised price target of HK$9.00. This Price target HK$9.00 based on our view that the market will likely be disappointed with BCOM’s loan (from HK$11.00) Upside/downside 12.1% growth in 2011 on the back of the new RRR system. However, at 1.5x FY11F P/B, Difference from consensus -12.6% BCOM’s valuation is the most undemanding among the Big 5 China banks under our coverage. FY11F net profit (RMBmn) 49,237 Difference from consensus 5.9% Catalysts Source: Nomura We see further rounds of rate hikes as a catalyst for sector NIM expansion. Nomura vs consensus Anchor themes Our net profit forecast is above The operating environment remains favourable for Chinese banks in 2011F, but consensus estimates due to our negative sentiment from uncertainties over policies and asset quality continues to higher NIM and lower credit cost weigh on valuations. Better visibility on regulatory policies (capital and provisioning) assumptions. could trigger a re-rating in the near term.
Key financials & valuations Most affected under new 31 Dec (RMBmn) FY09 FY10F FY11F FY12F PPOP 49,556 63,688 79,732 93,625 differentiate RRR system Reported net profit 30,118 39,802 49,237 58,296 Normalised net profit 30,118 39,802 49,237 58,296 Normalised EPS (RMB) 0.61 0.76 0.87 1.03 Downgrade to NEUTRAL; cutting PT to HK$9.00 Norm. EPS growth (%) 6.1 22.9 15.6 18.4 We cut our PT to HK$9.00 as we lower long-term ROE to 15.7% (from Norm. P/E (x) 11.4 9.8 7.6 6.0 17.6%), with our estimates rolling over to FY11F. We understand that Price/adj. book (x) 2.10 1.75 1.46 1.22 Price/book (x) 2.101.751.461.22 BCOM is classified as one of the Big 5 banks under the new RRR Dividend yield (%) 3.5 4.1 5.3 6.7 system. In our view, the market expects BCOM to have above sector ROE (%) 19.2 20.8 21.1 22.1 loan growth relative to the others. Under the new RRR system, this ROA (%) 1.01 1.09 1.14 1.14 Earnings revisions could trigger a higher anti-cyclical buffer, the effect of which would be Previous norm. net profit 39,316 48,593 57,547 exacerbated by the new system excess capital factor. We believe Change from previous (%) 1.2 1.3 1.3 other joint stock banks will be less affected because their factor is a Previous norm. EPS (RMB) 0.75 0.86 1.02 function of total asset size relative to BCOM’s total asset size; ie, their Source: Company, Nomura estimates factor will always be less than BCOM’s given BCOM’s larger asset Share price relative to MSCI China size. As a result, we downgrade the stock to NEUTRAL. (HK$) Price 10 Rel MSCI Chi na 110 LGFVs: concerns on both quality and risk-weighting 10 105 change 9 100 9 95 Media reports indicate that the regulator may re-classify LGFV loans 8 90 into 5 categories based on cashflow coverage, guarantee and 8 85 collateral value. The regulator may also assign higher risk weights on 7 80 LGFV loans. As of 30 June 2010, BCOM had LGFV loans of RMB Jul10 Apr10 Oct10 Jun10 Jan10 Feb10 Mar10 May10 Aug10 Sep10 Nov10 Dec10 139bn. We estimate its FY11F CAR and T1CAR will be reduced by 1m 3m 6m 1.0pct and 0.7pct respectively, while FY11F NPAT will be reduced 5% Absolute (HK$) (1.7) (8.4) (1.8) (assuming 100% provision is applied to the NPL derived). Absolute (US$) (1.9) (8.7) (1.6) Relative to Index (1.6) (9.3) (16.7) Issuance of RMB20bn bonds in Hong Kong Market cap (US$mn) 50,610 Estimated free float (%) 62.9 On 31 Dec 2010, BCOM announced its plan to issue RMB 20bn of 52-week range (HK$) 9.74/7.41 RMB-denominated bonds in Hong Kong by end-2012 (up to RMB10bn 3-mth avg daily turnover (US$mn) 44.21 by end-2011). According to the announcement, the proceeds will be Stock borrowability Easy Major shareholders (%) used for granting loans, general working capital and general corporate MOF 26.5 purposes. We estimate BCOM’s FY11F and FY12F CAR will increase HSB C 18.6 10pct and 35pct to 13.8% and 13.7% respectively. Given its FY11F Source: Company, Nomura estimates and FY12F T1 CAR of 9.4% and 9.5% respectively, we do not expect any further capital raising for BCOM in the near future.
Nomura 118 14 January 2011
Bank of Communications Lucy Feng
Exhibit 162. BCOM: earning revisions New Old %change Profit & Loss (RMBmn) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 82,596 102,506 121,063 82,027 101,852 120,311 0.7 0.6 0.6 Fee income 15,892 20,198 25,613 15,892 20,198 25,613 0.0 0.0 0.0 Non-interest income 19,263 23,454 28,778 19,263 23,454 28,778 0.0 0.0 0.0 Operating income 101,859 125,960 149,841 101,291 125,306 149,089 0.6 0.5 0.5 Operating expenses (38,172) (46,228) (56,216) (38,148) (46,200) (56,184) 0.1 0.1 0.1 PPOP 63,688 79,732 93,625 63,143 79,106 92,905 0.9 0.8 0.8 Provisions (12,137) (15,989) (18,171) (12,219) (16,194) (18,417) (0.7) (1.3) (1.3) Operating pre-tax 51,550 63,743 75,454 50,924 62,912 74,488 1.2 1.3 1.3 Profit tax (11,599) (14,342) (16,977) (11,458) (14,155) (16,760) 1.2 1.3 1.3 Minority Interest (150) (165) (181) (150) (165) (181) 0.0 0.0 0.0 Profits attributable to equity holders 39,802 49,237 58,296 39,316 48,593 57,547 1.2 1.3 1.3 Source: Company data, Nomura research estimates
Valuation methodology Our revised PT of HK$9.00 is based on a P/BV multiple of 1.68x, which we apply to our FY11F BVPS forecast. In deriving our target multiple, we assume a sustainable ROE of 15.7%, revised from 17.6%. We use the Gordon Growth Model [target P/BV = (sustainable ROE – long-term growth)/(cost of equity – long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 12.5% and a terminal growth rate of 7.8% (previously 8.8%). We derive our terminal growth by applying a 50% payout ratio to our long-term sustainable ROE.
Investment risks Downside risks: severer-than-expected macro tightening could result in a sharp rise in bad debt costs. A sharper-than-expected fall in exports could hurt BCOM more than peers, given its exposure to China’s coastal regions. Finally, a slowing economy would have negative implications for loan growth. Upside risks: A strong NIM rebound amid the interest rate hike cycle.
Nomura 119 14 January 2011
Bank of Communications Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 117,106 116,743 147,265 189,729 248,025 Interest expense (51,244) (50,075) (64,669) (87,223) (126,962) Net interest income 65,862 66,668 82,596 102,506 121,063 Net fees and commissions 8,837 11,399 15,892 20,198 25,613 Trading related profits 1,783 2,126 1,913 1,722 1,550 Other operating revenue 794 1,385 1,458 1,534 1,615 Non-interest income 11,414 14,910 19,263 23,454 28,778 Operating income 77,276 81,578 101,859 125,960 149,841 Depreciation Amortisation - - - - - Operating expenses (30,867) (32,022) (38,172) (46,228) (56,216) Employee share expense - - - - - Op. profit before provisions 46,409 49,556 63,688 79,732 93,625 Provisions for bad debt (10,690) (11,255) (12,137) (15,989) (18,171) Other provision charges - - - - - Operating profit 35,719 38,301 51,550 63,743 75,454 Other non-operating income - - - - - Associates & JCEs - - - - - Pre-tax profit 35,719 38,301 51,550 63,743 75,454 Income tax (7,229) (8,047) (11,599) (14,342) (16,977) Net profit after tax 28,490 30,254 39,952 49,401 58,477 Minority interests (97) (136) (150) (165) (181) Other items - - - - - Preferred dividends - - - - - Normalised NPAT 28,393 30,118 39,802 49,237 58,296 Extraordinary items - - - - - Reported NPAT 28,393 30,118 39,802 49,237 58,296 Dividends (9,798) (12,102) (15,981) (19,760) (23,391) Transfer to reserves 18,595 18,016 23,821 29,476 34,905
Valuation and ratio analysis FD normalised P/E (x) 12.6 11.4 9.8 7.6 6.0 NIM rebound FD normalised P/E at price target (x) 14.1 12.8 11.0 8.5 6.8 Reported P/E (x) 12.6 11.4 9.1 7.6 6.0 Dividend yield (%) 2.7 3.5 4.1 5.3 6.7 Price/book (x) 2.3 2.1 1.7 1.5 1.2 Price/adjusted book (x) 2.3 2.1 1.7 1.5 1.2 Net interest margin (%) 2.97 2.26 2.42 2.64 2.74 Yield on interest earning assets (%) 5.28 3.96 4.32 4.89 5.61 Cost of interest bearing liabilities (%) 2.45 1.78 2.01 2.42 3.13 Net interest spread (%) 2.83 2.18 2.30 2.47 2.48 Non-interest/operating income (%) 14.8 18.3 18.9 18.6 19.2 Cost to income (%) 39.9 39.3 37.5 36.7 37.5 Effective tax rate (%) 20.2 21.0 22.5 22.5 22.5 Dividend payout (%) 34.5 40.2 40.2 40.1 40.1 ROE (%) 20.0 19.2 20.8 21.1 22.1 ROA (%) 1.18 1.01 1.09 1.14 1.14 Operating ROE (%) 25.2 24.4 26.9 27.4 28.6 Operating ROA (%) 1.49 1.28 1.42 1.47 1.47
Growth (%) Net interest income 22.1 1.2 23.9 24.1 18.1 Non-interest income 29.0 30.6 29.2 21.8 22.7 Non-interest expenses 22.0 3.7 19.2 21.1 21.6 Pre-provision earnings 23.8 6.8 28.5 25.2 17.4 Net profit 40.0 6.1 32.2 23.7 18.4 Normalised EPS 35.5 6.1 22.9 15.6 18.4 Normalised FDEPS 40.0 6.1 14.9 23.7 18.4 Source: Nomura estimates
Nomura 120 14 January 2011
Bank of Communications Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents 11,509 13,050 18,556 21,368 24,508 Inter-bank lending 331,511 222,671 256,072 294,482 338,655 Deposits with central bank 350,671 421,946 599,992 690,893 792,418 Total securities 627,727 778,131 857,407 944,830 1,041,247 Other interest earning assets - - - - - Gross loans 1,328,591 1,839,314 2,206,413 2,713,256 3,343,729 Less provisions (29,815) (37,776) (45,031) (53,640) (62,725) Net loans 1,298,776 1,801,538 2,161,382 2,659,616 3,281,003 Long-term investments - - - - - Fixed assets 35,279 29,878 31,372 32,940 34,588 Goodwill - - - - - Other intangible assets 2,693 5,821 5,239 4,715 4,244 Other non IEAs 24,781 36,102 37,907 39,802 41,793 Total assets 2,682,947 3,309,137 3,967,927 4,688,647 5,558,454 Customer deposits 1,865,815 2,372,055 2,917,628 3,559,506 4,342,597 Bank deposits, CDs, debentures 619,466 715,547 779,143 834,466 891,606 Other interest bearing liabilities - - - - - Total interest bearing liabilities 2,485,281 3,087,602 3,696,771 4,393,972 5,234,203 Non interest bearing liabilities 47,571 57,110 52,113 47,721 43,851 Total liabilities 2,532,852 3,144,712 3,748,883 4,441,693 5,278,054 Minority interest - 577 - - - Common stock 48,994 48,994 56,343 56,343 56,343 Preferred stock - - - - - Retained earnings 25,864 13,944 33,887 59,583 90,858 Proposed dividends 9,798 12,102 15,981 19,760 23,391 Other equity 65,439 88,808 112,833 111,267 109,809 Shareholders' equity 150,095 163,848 219,044 246,954 280,400 Total liabilities and equity 2,682,947 3,309,137 3,967,927 4,688,647 5,558,454 Non-performing assets (RMB) 25,520 25,009 28,043 32,964 39,023
Balance sheet ratios (%) Loans to deposits 71.2 77.5 75.6 76.2 77.0 Equity to assets 5.6 5.0 5.5 5.3 5.0
Asset quality & capital NPAs/gross loans (%) 1.9 1.4 1.3 1.2 1.2 Strong capital position post Bad debt charge/gross loans (%) 0.80 0.61 0.55 0.59 0.54 rights issue Loss reserves/assets (%) 1.11 1.14 1.13 1.14 1.13 Loss reserves/NPAs (%) 116.8 151.0 160.6 162.7 160.7 Tier 1 capital ratio (%) 9. 6 8.2 9.5 9.5 9.5 Total capital ratio (%) 13.5 12.0 13.6 13.5 13.4
Growth (%) Loan growth 19.9 38.7 20.0 23.1 23.4 Interest earning assets 27.6 23.6 20.2 18.5 18.8 Interest bearing liabilities 28.4 24.2 19.7 18.9 19.1 Asset growth 27.1 23.3 19.9 18.2 18.6 Deposit growth 19.9 27.1 23.0 22.0 22.0
Per share Reported EPS (RMB) 0.58 0.61 0.76 0.87 1.03 Norm EPS (RMB) 0.58 0.61 0.76 0.87 1.03 Fully diluted norm EPS (RMB) 0.58 0.61 0.71 0.87 1.03 DPS (RMB) 0.20 0.25 0.28 0.35 0.42 PPOP PS (RMB) 0.95 1.01 1.21 1.42 1.66 BVPS (RMB) 3.06 3.34 3.89 4.38 4.98 ABVPS (RMB) 3.06 3.34 3.89 4.38 4.98 NTAPS (RMB) 3.01 3.23 3.79 4.30 4.90 Source: Nomura estimates
Nomura 121 14 January 2011
China Merchants Bank 3968 HK
FINANCIALS/BANKS | CHINA Maintained NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] Donger Wang +852 2252 1590 [email protected] BUY
Action Closing price on 7 Jan HK$20.20 In view of CMB’s assets sensitive balance sheet, we assume a higher NIM based Price target HK$26.86 on our expectation of further rounds of symmetrical rate hikes in 2011F. As 89% of (from HK$26.36) Upside/downside 33.0% CMB’s LGFV loans are under full coverage, we do not think the new risk weighting Difference from consensus 21.8% and loan classifications on LGFV loans will have a significant impact on earnings. We would view any sentiment-driven underperformance as an opportunity to FY11F net profit (RMBmn) 36,635 accumulate. Difference from consensus 11.3% Source: Nomura Catalysts We see further rounds of rate hikes as a catalyst for sector NIM expansion. Nomura vs consensus Anchor themes Our net profit forecast is above The operating environment remains favourable for Chinese banks in 2011F, but consensus estimates due to our negative sentiment from uncertainties over policies and asset quality continues to higher NIM and lower credit cost assumptions. weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a re-rating in the near term.
Key financials & valuations Asset-sensitive balance sheet 31 Dec (RMBmn) FY09 FY10F FY11F FY12F PPOP - - - - least affected by LGFV loans Reported net profit 18,235 27,311 36,635 47,137 Normalised net profit 18,235 27,311 36,635 47,137 Rapidly growing SME business supported by enhanced Normalised EPS (RMB) 0.95 1.26 1.70 2.18 Norm . EPS growth (%) (33.4) 32.5 34.1 28.7 risk management; PT revised to HK$26.86 Norm. P/E (x) 18.5 13.7 9.8 7.2 We revised our PT to HK$26.86 based on a new PB multiple of 2.8x Price/adj. book (x) 3.64 2.71 2.10 1.63 (from 3.5x), with our estimates rolling over to FY11F. CMB kept its Price/book (x) 3.642.712.101.63 Dividend yield (%) 1.2 2.2 3.1 4.2 relatively rapid growth in SME loans (up by 4.7% q-q) which ROE (%) 21.2 23.8 24.3 25.6 accounted for 48.49% of total domestic corporate loans at end-3Q10); ROA (%) 1.00 1.19 1.31 1.39 both the NPL balance and ratio continued to drop 7bps q-q to 1.37%. Earnings revisions Given stronger pricing power with SME customers, we believe SME Previous norm. net profit 27,515 36,398 47,384 Change from previous (%) (0.7) 0.7 (0.5) business will remain as the a key driver of CMB’s future growth. Previous norm. EPS (RMB) 1.27 1.68 2.19 Trading at 2.1x FY11F PB, we find CMB’s valuation undemanding. Source: Company, Nomura estimates BUY reiterated. Share price relative to MSCI China
Asset-sensitive balance sheet (HK$) Price 25 Rel MSCI China 120 The PBOC lifted the benchmark interest rate for the second time in a 23 115 year last December. Both 1-year deposit rate and 1-year lending rate 110 21 are up by 25bp, while the rate of demand deposits remained 105 19 unchanged since the last rate hike in October. CMB had the highest 100 17 proportion of demand deposits among the listed banks at end-1H10, 95 15 90 which accounted for 56% of total deposits (55% at end 3Q10). Jul10 Apr10 Meanwhile, the majority of its lending is short-term working capital Oct10 Jan10 Mar10 Jun10 Feb10 Aug10 Sep10 Nov10 Dec10 May10 loans extended to SMEs. As a result, we view CMB as one of the 1m 3m 6m most asset-sensitive banks in this rate hike cycle. Absolute ( HK$) (1.9) (2.2) 10.0 Absolute ( US$) (2.0) (2.4) 10.2 Relative to Index (1.8) (3.1) (4.8) Least affected by risk-weighting changes on LGFVs Market cap (US$mn) 49,681 Media reports indicate that the regulator may re-classify LGFV loans Estimated free float (%) 100.0 52-week range (HK$) 23.50/16.22 into 5 categories based on cashflow coverage, guarantee and 3-mth avg daily turnover (US$mn) 59.2 collateral value. As 89% and 9% of CMB’s LGFV loans are under full Stock borrowability Easy coverage and basic coverage, we believe NPLs will not increase Major shareholders (%) significantly on this policy. Moreover, with the introduction of a loan- China Merchants Steam Navigation 12.4 China Ocean Shi ppi ng 6.4 loss provision ratio requirement of 2.5%, we see limited pressure of Source: Company, Nomura estimates extra credit costs on LGFV loans, as we think CMB can meet the provision target.
Nomura 122 14 January 2011
China Merchants Bank Lucy Feng
Exhibit 163. CMB earnings revisions New Old % change Profit & Loss (RMBmn, except %) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 57,942 76,073 98,757 55,571 73,824 96,221 4.3 3.0 2.6 Fee income 10,745 13,182 16,184 10,745 13,182 16,184 0.0 0.0 0.0 Non-interest income 15,151 17,578 20,659 15,151 17,578 20,659 0.0 0.0 0.0 Operating income 73,093 93,651 119,416 70,723 91,403 116,880 3.4 2.5 2.2 Operating expenses (30,979) (36,873) (46,624) (30,905) (36,828) (46,577) 0.2 0.1 0.1 PPOP 42,114 56,778 72,792 39,817 54,575 70,303 5.8 4.0 3.5 Provisions (6,496) (8,988)(11,294) (3,933) (7,095) (8,483) 65.2 26.733.1 Operating pre-tax 35,700 47,889 61,618 35,967 47,580 61,940 (0.7) 0.7 (0.5) Profit tax (8,390) (11,254) (14,480) (8,452) (11,181) (14,556) (0.7) 0.7 (0.5) Profits attributable to equity holders 27,311 36,635 47,137 27,515 36,398 47,384 (0.7) 0.7 (0.5) Source: Company data, Nomura estimates
Exhibit 164. Loan maturity change in 1H10 As % of total outstanding loans ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng Average End-1H10 (%) Overdue/on demand na 0.1 0.4 1.3 0.6 0.3 0.2 na 0.5 <1 month 4.3 4.6 3.3 4.5 6.5 5.1 na 5.1 4.8 1-3 months 8.0 7.3 6.9 9.2 9.9 12.2 17.2 9.9 10.1 3-12 months 32.2 22.5 26.5 25.2 32.0 32.1 39.9 37.4 31.0 1-5 years 27.1 29.2 29.6 28.4 29.1 25.0 24.5 29.2 27.8 >5 years 26.8 35.7 32.4 31.3 22.0 25.0 17.8 17.9 26.1 Undated 1.6 0.5 0.7na na 0.3 0.4 0.5 0.7 Total 100.0 100.0 100.0100.0 100.0 100.0 100.0 100.0100.0
End-2009 (%) Overdue/on demand na 0.1 0.7 1.1 0.7 0.2 0.2 na 0.5 <1 month 5.0 4.4 3.9 4.3 5.8 4.5 na 6.0 4.8 1-3 months 11.3 9.2 7.4 9.2 11.5 11.9 20.0 11.1 11.4 3-12 months 32.3 23.2 25.0 26.3 31.6 36.7 39.5 37.0 31.5 1-5 years 24.9 28.8 30.8 29.5 29.7 24.8 24.1 31.3 28.0 >5 years 26.1 33.6 31.6 29.6 20.6 21.4 15.7 14.1 24.1 Undated 0.4 0.7 0.6na na 0.3 0.5 0.6 0.5 Total 100.0 100.0 100.0100.0 100.0 100.0 100.0 100.0100.0
Change (bp) Overdue/on demand na 4 (30) 14 (17) 7 4 na (3) <1 month (66) 25 (53) 25 63 55 na (85) (5) 1-3 months (331) (193) (45) 7 (167) 29 (279) (121) (137) 3-12 months (19) (71) 153 (109) 47 (460) 36 36 (48) 1-5 years 219 46 (123) (110) (63) 14 41 (213) (24) >5 years 77 202 84 174 136 361 205 385 203 Undated 120 (13) 14 nana (6) (7) (0) 18 Total 0 0 0 0 0 0 0 0 0 Source: Company data, Nomura Research
Nomura 123 14 January 2011
China Merchants Bank Lucy Feng
Exhibit 165. % of demand deposits to total deposits Exhibit 166. CMB: NPL balance and NPL ratio
(as of 30 June, 2010)
(%) ( RMBmn) NPL balance (LHS) (%) NPL ratio (RHS) 60 56.2 10,500 1.1 55.7 54.7 55 50.8 49.3 10,000 1.0 47.8 50 46.2 47.2 45 9,500 0.9
40 9,000 0.8 35
30 8,500 0.7 CCB ABC BOC CMB ICBC CITIC 8,000 0.6
BOCOM 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Minsheng
Source: Company data, Nomura research Source: Company data, Nomura research
Exhibit 167. Proportion of LGFV loans under different categories (as of 30 September, 2010) Coverage Classification method Balance (RMBbn) Proportion (%) FULL Ratio is 100% or above - borrower's cash flow 116.10 89.34 is sufficient BASIC Ratio is between 70-100% and a portion of the 11.56 8.89 loan requires fiscal guarantee PARTIAL Ratio is between 30-70% and requires partial 2.13 1.64 fiscal guarantee NO Ratio is below 30% and majority of the loan 0.17 0.13 requires fiscal guarantee Total amount: 130 Source: Company Data, 21st Century Business Herald, Nomura research
Valuation methodology Our revised price target of HK$26.86 is based on 2.8xP/BV applied to our FY11F BVPS forecast. Our sustainable ROE is 17.0%. We use the Gordon Growth Model [target P/BV = (sustainable ROE – long-term growth) / (cost of equity – long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 11.5% and a terminal growth rate of 8.5%. We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE.
Investment risks Downside risks: severer-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth.
Nomura 124 14 January 2011
China Merchants Bank Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 72,635 65,838 95,622 128,145 162,433 Interest expense (25,750) (25,474) (37,681) (52,072) (63,676) Net interest income 46,885 40,364 57,942 76,073 98,757 Net fees and commissions 7,744 7,993 10,745 13,182 16,184 Trading related profits 493 1,057 1,318 1,582 1,289 Other operating revenue 522 2,434 3,089 2,815 3,186 Non-interest income 8,759 11,484 15,151 17,578 20,659 Operating income 55,644 51,848 73,093 93,651 119,416 Depreciation Amortisation - - - - - Operating expenses (23,742) (26,562) (30,979) (36,873) (46,624) Employee share expense Op. profit before provisions 31,902 25,286 42,114 56,778 72,792 Provisions for bad debt (3,703) (2,971) (6,496) (8,988) (11,294) Other provision charges (1,451) - - - - Operating profit 26,748 22,315 35,617 47,790 61,498 Other non-operating income - - - - - Associates & JCEs 11 69 83 99 119 Pre-tax profit 26,759 22,384 35,700 47,889 61,618 Income tax (5,813) (4,149) (8,390) (11,254) (14,480) Net profit after tax 20,946 18,235 27,311 36,635 47,137 Minority interests 131 - - - - Other items - - - - - Preferred dividends - - - - - Normalised NPAT 21,077 18,235 27,311 36,635 47,137 Extraordinary items - - - - - Reported NPAT 21,077 18,235 27,311 36,635 47,137 Dividends (5,883) (4,015) (8,193) (10,991) (14,141) Transfer to reserves 15,194 14,220 19,117 25,645 32,996
Valuation and ratio analysis FD normalised P/E (x) 12.8 18.5 13.7 9.8 7.2 NIM rebound FD normalised P/E at price target (x) 17.0 24.7 18.3 13.0 9.6 Reported P/E (x) 12.8 18.5 13.7 9.8 7.2 Dividend yield (%) 2.2 1.2 2.2 3.1 4.2 Price/book (x) 3.3 3.6 2.7 2.1 1.6 Price/adjusted book (x) 3.3 3.6 2.7 2.1 1.6 Net interest margin (%) 3.42 2.23 2.69 2.96 3.22 Yield on interest earning assets (%) 5.29 3.65 4.44 4.99 5.29 Cost of interest bearing liabilities (%) 2.05 1.50 1.87 2.13 2.16 Net interest spread (%) 3.24 2.14 2.58 2.85 3.13 Non-interest/operating income (%) 15.7 22.1 20.7 18.8 17.3 Cost to income (%) 42.7 51.2 42.4 39.4 39.0 Effective tax rate (%) 21.7 18.5 23.5 23.5 23.5 Dividend payout (%) 27.9 22.0 30.0 30.0 30.0 ROE (%) 28.6 21.2 23.8 24.3 25.6 ROA (%) 1.46 1.00 1.19 1.31 1.39 Operating ROE (%) 36.3 25.9 31.1 31.7 33.4 Operating ROA (%) 1.86 1.23 1.55 1.71 1.82
Growth (%) Net interest income 38.3 (13.9) 43.5 31.3 29.8 Non-interest income 22.6 31.1 31.9 16.0 17.5 Non-interest expenses 41.8 11.9 16.6 19.0 26.4 Pre-provision earnings 31.2 (20.7) 66.5 34.8 28.2 Net profit 38.3 (13.5) 49.8 34.1 28.7 Normalised EPS 269.2 (33.4) 32.5 34.1 28.7 Normalised FDEPS 38.3 (33.4) 32.5 34.1 28.7 Source: Nomura estimates
Nomura 125 14 January 2011
China Merchants Bank Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents 6,928 8,342 11,294 13,499 15,989 Inter-bank lending 193,394 277,738 327,631 386,938 457,483 Deposits with central bank 167,745 200,212 271,057 323,977 383,741 Total securities 310,446 377,072 477,948 606,025 768,698 Other interest earning assets - - - - - Gross loans 874,362 1,185,822 1,412,690 1,686,529 2,016,357 Less provisions (21,608) (24,005) (29,733) (37,282) (46,777) Net loans 852,754 1,161,817 1,382,957 1,649,247 1,969,580 Long-term investments 402 466 559 671 805 Fixed assets 15,062 16,008 19,210 23,052 27,662 Goodwill - - - - - Other intangible assets 2,521 2,786 3,622 4,708 6,121 Other non IEAs 22,545 23,500 35,250 52,875 79,313 Total assets 1,571,797 2,067,941 2,529,528 3,060,991 3,709,392 Customer deposits 1,250,648 1,608,146 1,968,328 2,401,361 2,929,660 Bank deposits, CDs, debentures 210,288 307,023 346,908 392,770 445,505 Other interest bearing liabilities - - - - - Total interest bearing liabilities 1,460,936 1,915,169 2,315,236 2,794,131 3,375,165 Non interest bearing liabilities 31,080 59,989 77,986 101,381 131,796 Total liabilities 1,492,016 1,975,158 2,393,222 2,895,512 3,506,961 Minority interest 266 - - - - Common stock 14,707 19,119 21,604 21,604 21,604 Preferred stock - - - - - Retained earnings 19,836 27,592 43,709 66,354 96,350 Proposed dividends 7,924 6,296 8,193 10,991 14,141 Other equity 37,048 39,776 62,798 66,530 70,335 Shareholders' equity 79,515 92,783 136,305 165,479 202,431 Total liabilities and equity 1,571,797 2,067,941 2,529,528 3,060,991 3,709,392 Non-performing assets (RMB) 9,677 9,732 9,602 12,236 15,384
Balance sheet ratios (%) Stable asset quality Loans to deposits 69.9 73.7 71.8 70.2 68.8 Equity to assets 5.1 4.5 5.4 5.4 5.5
Asset quality & capital NPAs/gross loans (%) 1.1 0.8 0.7 0.7 0.8 Bad debt charge/gross loans (%) 0.42 0.25 0.46 0.53 0.56 Loss reserves/assets (%) 1.37 1.16 1.18 1.22 1.26 Loss reserves/NPAs (%) 223.3 246.7 309.6 304.7 304.1 Tier 1 capital ratio (%) 6.7 6.8 8.3 8.5 8.7 Total capital ratio (%) 11.3 10.4 11.2 10.9 10.6
Growth (%) Loan growth 30.3 36.2 19.0 19.3 19.4 Interest earning assets 18.7 32.3 22.0 20.6 20.7 Interest bearing liabilities 19.1 31.1 20.9 20.7 20.8 Asset growth 19.9 31.6 22.3 21.0 21.2 Deposit growth 32.5 28.6 22.4 22.0 22.0
Per share Reported EPS (RMB) 1.43 0.95 1.26 1.70 2.18 Norm EPS (RMB) 1.43 0.95 1.26 1.70 2.18 Fully diluted norm EPS (RMB) 1.43 0.95 1.26 1.70 2.18 DPS (RMB) 0.40 0.21 0.38 0.51 0.65 PPOP PS (RMB) 2.17 1.32 1.95 2.63 3.37 BVPS (RMB) 5.41 4.85 6.31 7.66 9.37 ABVPS (RMB) 5.41 4.85 6.31 7.66 9.37 NTAPS (RMB) 5.24 4.71 6.14 7.44 9.09 Source: Nomura estimates
Nomura 126 14 January 2011
China CITIC Bank 998 HK
FINANCIALS/BANKS | CHINA Maintained NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] BUY Donger Wang +852 2252 1590 [email protected]
A ction Closing price on 7 Jan HK$5.22 Our higher NIM assumption is based on an expectation of further rounds of Price target HK$6.30 symmetrical (OK) rate hikes in 2011F. As over 57% of CITIC Bank’s loans had (from HK$6.60) maturities within 1 year, we believe it to be more sensitive to interest rate Upside/downside 20.7% Difference from consensus -1.6% adjustment. Pressure on deposit cost was also reduced due to a lower LDR (from 79.4% at end-09 to 73.3% at end-3Q10). On the back of the expected completion FY11F net profit (RMBmn) 23,633 of the rights issue and given an undemanding valuation (1.3x FY11F P/B), we Difference from consensus 2.9% maintain our BUY rating. Source: Nomura Catalysts Nomura vs consensus We see further rounds of rate hikes as a catalyst for sector NIM expansion. Our net profit forecast is above Anchor themes consensus estimates due to our The operating environment remains favourable for Chinese banks in 2011F, but higher NIM and lower credit cost negative sentiment from uncertainties over policies and asset quality continues to assumptions. weigh on valuations. Better visibility on regulatory policies (capital and provisioning) could trigger a re-rating in the near term. Key financials & valuations 31 Dec (RMBmn) FY09 FY10F FY11F FY12F Highly sensitive to rate hikes PPOP 24,153 32,163 41,401 50,274 Reported net profit 16,829 19,368 23,633 28,742 PT revised to HK$ 6.30 on earnings forecast adjustment Normalised net profit 16,829 19,368 23,633 28,742 We revised our PT to HK$6.30 based on a new PB multiple of 1.5x Normalised EPS (RMB) 0.43 0.50 0.55 0.60 Norm. EPS growth (%) 26.0 15.1 9.9 10.7 (from 1.8x) with our estimates rolling over to FY11F. Our FY11F and Norm. P/E (x) 10.6 9.0 8.6 6.7 FY12F earning forecasts adjust slightly to RMB 236mn (up by 1.6%) Price/adj. book (x) 1.71 1.47 1.25 1.06 and RMB 278mn (up by 0.7%) respectively, which represents 22% Price/book (x) 1.711.471.251.06 Dividend yield (%) 1.9 3.9 4.0 5.2 growth pa. Completion of the rights issue will remove the capital ROE (%) 16.9 17.5 17.2 17.1 raising overhang. CITIC Bank, which is currently trading at 1.3x ROA (%) 1.14 0.97 0.96 0.98 FY11F P/B and 8.6x FY11F P/E on our estimates, is now at the lower Earnings revisions end of the sector’s range. We reaffirm our BUY rating. Previous norm. net profit 18,868 23,272 28,554 Change from previous (%) 2.7 1.6 0.7 Previous norm. EPS (RMB) 0.48 0.54 0.60 Loans structure sensitive to rate hikes Source: Company, Nomura estimates The PBOC lifted the benchmark interest rate for the second time in a year last December. Both the 1-year deposit rate and 1-year lending Share price relative to MSCI HK rate are up 25bp, while the rate for demand deposits remains (HK$) Price 6.9 Rel MSCI HK 105 unchanged. Given CITIC Bank’s more sensitive loan structure (over 6.4 100 57% loans with maturity less than 1 year, the highest among H-share 5.9 95 90 5.4 listed banks under our coverage), we believe it will benefit more in a 85 rising interest rate environment. 4.9 80 4.4 75 3.9 70 Limited impact of new risk weighting arrangement on Jul10 Apr10 Oct10 Jan10 Mar10 Jun10 Feb10 Aug10 Sep10 Nov10 Dec10 LGFV loans May10 As of 30 September, 2010, CITIC had outstanding LGFV loans of 1m 3m 6m Absolute ( HK$) (1.9) 0.8 6.3 RMB 220bn, or 18.3% of total loans. As over 99% of its LGFV loans Absolute ( US$) (1.9) 0.6 6.5 are under “full coverage”, we estimate the impact on CAR from the Relative to Index (1.7) (0.1) (8.5) new risk weighting requirement will be limited (CAR and T1 CAR Market cap (US$mn) 26,211 reducing 0.42pct and 0.33pct respectively on our estimates) and only Estimated free float (%) 51.1 52-week range (HK$) 6.42/4.19 marginal NPL increase from the re-classification of LGFV loans. We 3-mth avg daily turnover (US$mn) 36.38 do not expect additional credit costs on CITIC if they can meet a loan- Stock borrowability Easy loss provision ratio of 2.5%, which we assume for the end of FY11F. Major shareholders (%) Citic Group 62.3 BBVA 15.0 Source: Company, Nomura estimates
Nomura 127 14 January 2011
China CITIC Bank Lucy Feng
Exhibit 168. Citic Bank earnings revisions
New Old % change Profit & Loss (RMBmn, except %) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 48,060 59,296 70,380 47,356 58,832 70,210 1.5 0.8 0.2 Fee income 5,895 8,225 11,457 5,895 8,225 11,457 0.0 0.0 0.0 Non-interest income 6,771 9,182 12,515 6,771 9,182 12,515 0.0 0.0 0.0 Operating income 54,831 68,478 82,896 54,127 68,014 82,725 1.3 0.7 0.2 Operating expenses (22,668) (27,077) (32,621) (22,627) (27,050) (32,611) 0.2 0.1 0.0 PPOP 32,163 41,40150,274 31,500 40,964 50,114 2.1 1.1 0.3 Provisions (6,509) (10,099)(12,206) (6,510) (10,140) (12,294) 0.0 (0.4) (0.7) Operating pre-tax 25,654 31,302 38,068 24,990 30,824 37,820 2.7 1.6 0.7 Profit tax (6,285) (7,669) (9,326) (6,123) (7,552) (9,266) 2.7 1.6 0.7 Profits attributable to equity holders 19,368 23,633 28,742 18,868 23,272 28,554 2.7 1.6 0.7 Source: Company data, Nomura estimates
Exhibit 169. Loan maturity change in 1H10 As % of total outstanding loans ABC ICBC CCB BOC BOCOM CMB CITIC Minsheng Average End-1H10 (%) Overdue/on demand na 0.1 0.4 1.3 0.6 0.3 0.2 na 0.5 <1 month 4.3 4.6 3.3 4.5 6.5 5.1 na 5.1 4.8 1-3 months 8.0 7.3 6.9 9.2 9.9 12.2 17.2 9.9 10.1 3-12 months 32.2 22.5 26.5 25.2 32.0 32.1 39.9 37.4 31.0 1-5 years 27.1 29.2 29.6 28.4 29.1 25.0 24.5 29.2 27.8 >5 years 26.8 35.7 32.4 31.3 22.0 25.0 17.8 17.9 26.1 Undated 1.6 0.5 0.7 na na 0.3 0.4 0.5 0.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company data, Nomura Research
Valuation methodology Our revised price target of HK$6.30 is based on 1.5x P/BV applied to our FY11F BVPS forecast assuming sustainable ROE of 14.3%. We use the Gordon Growth Model [target P/BV = (sustainable ROE – long-term growth)/(cost of equity – long-term growth)] to derive our fair P/BV, assuming a cost of equity of 12% and a terminal growth rate of 7.2%. We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE.
Investment risks Downside risks: severer-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth.
Nomura 128 14 January 2011
China CITIC Bank Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 58,867 57,376 79,889 116,648 142,432 Interest expense (22,776) (20,147) (31,829) (57,352) (72,052) Net interest income 36,091 37,229 48,060 59,296 70,380 Net fees and commissions 3,045 5,137 5,895 8,225 11,457 Trading related profits 873 383 363 341 319 Other operating revenue 363 536 514 616 740 Non-interest income 4,281 6,057 6,771 9,182 12,515 Operating income 40,372 43,285 54,831 68,478 82,896 Depreciation Amortisation - - - - - Operating expenses (16,148) (19,132) (22,668) (27,077) (32,621) Employee share expense Op. profit before provisions 24,224 24,153 32,163 41,401 50,274 Provisions for bad debt (5,379) (2,619) (6,509) (10,099) (12,206) Other provision charges (1,065) - - - - Operating profit 17,780 21,534 25,654 31,302 38,068 Other non-operating income - - - - - Associates & JCEs - - - - - Pre-tax profit 17,780 21,534 25,654 31,302 38,068 Income tax (4,426) (4,705) (6,285) (7,669) (9,326) Net profit after tax 13,354 16,829 19,368 23,633 28,742 Minority interests - - - - - NIM rebound Other items - - - - - Preferred dividends - - - - - Normalised NPAT 13,354 16,829 19,368 23,633 28,742 Extraordinary items - - - - - Reported NPAT 13,354 16,829 19,368 23,633 28,742 Dividends (2,088) (3,435) (6,779) (8,271) (10,060) Transfer to reserves 11,266 13,394 12,590 15,361 18,682
Valuation and ratio analysis FD normalised P/E (x) 13.8 10.6 9.0 8.6 6.7 FD normalised P/E at price target (x) 16.7 12.8 10.9 10.4 8.1 Reported P/E (x) 13.8 10.6 9.0 7.9 6.7 Dividend yield (%) 1.1 1.9 3.9 4.0 5.2 Price/book (x) 1.9 1.7 1.5 1.2 1.1 Price/adjusted book (x) 1.9 1.7 1.5 1.2 1.1 Net interest margin (%) 3.33 2.48 2.68 2.76 2.73 Yield on interest earning assets (%) 5.43 3.82 4.46 5.43 5.52 Cost of interest bearing liabilities (%) 2.32 1.53 1.94 2.91 3.00 Net interest spread (%) 3.11 2.28 2.52 2.51 2.52 Non-interest/operating income (%) 10.6 14.0 12.3 13.4 15.1 Cost to income (%) 40.0 44.2 41.3 39.5 39.4 Effective tax rate (%) 24.9 21.8 24.5 24.5 24.5 Dividend payout (%) 15.6 20.4 35.0 35.0 35.0 ROE (%) 14.9 16.9 17.5 17.2 17.1 ROA (%) 1.21 1.14 0.97 0.96 0.98 Operating ROE (%) 19.8 21.6 23.2 22.7 22.6 Operating ROA (%) 1.62 1.45 1.28 1.27 1.30
Growth (%) Net interest income 37.9 3.2 29.1 23.4 18.7 Non-interest income 139.8 41.5 11.8 35.6 36.3 Non-interest expenses 36.9 18.5 18.5 19.4 20.5 Pre-provision earnings 49.9 (0.3) 33.2 28.7 21.4 Net profit 60.5 26.0 15.1 22.0 21.6 Normalised EPS 44.2 26.0 15.1 9.9 10.7 Normalised FDEPS 60.5 26.0 15.1 0.0 21.6 Source: Nomura estimates
Nomura 129 14 January 2011
China CITIC Bank Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents 3,693 4,480 8,311 11,223 13,579 Inter-bank lending 50,446 81,808 91,625 102,620 114,934 Deposits with central bank 203,243 219,523 407,262 549,949 665,394 Total securities 198,223 206,260 230,922 258,535 289,452 Other interest earning assets - - - - - Gross loans 664,924 1,065,649 1,301,236 1,584,324 1,903,223 Less provisions (13,572) (15,170) (16,884) (22,605) (29,914) Net loans 651,352 1,050,479 1,284,352 1,561,719 1,873,308 Long-term investments - - - - - Fixed assets 9,129 11,733 11,968 12,207 12,451 Goodwill - - - - - Other intangible assets 2,068 2,095 - - - Other non IEAs 69,998 199,898 201,897 203,916 205,955 Total assets 1,188,152 1,776,276 2,236,337 2,700,170 3,175,074 Customer deposits 945,835 1,341,927 1,744,505 2,131,469 2,582,980 Bank deposits, CDs, debentures 122,525 298,024 342,484 377,490 381,740 Other interest bearing liabilities - - - - - Total interest bearing liabilities 1,068,360 1,639,951 2,086,989 2,508,960 2,964,721 Non interest bearing liabilities 24,131 28,072 28,172 28,283 28,283 Total liabilities 1,092,491 1,668,023 2,115,162 2,537,242 2,993,004 Minority interest 3 4,210 4,252 4,295 4,338 Common stock 39,033 39,033 39,033 47,620 47,620 Preferred stock - (1) - - - Retained earnings 7,776 14,504 23,750 37,618 54,512 Proposed dividends 2,088 3,435 6,779 8,271 10,060 Other equity 46,761 47,072 47,361 65,122 65,540 Shareholders' equity 95,658 104,043 116,923 158,632 177,732 Total liabilities and equity 1,188,152 1,776,276 2,236,337 2,700,170 3,175,074 Non-performing assets (RMB) 9,046 10,157 11,091 12,792 14,700
Balance sheet ratios (%) Loans to deposits 70.3 79.4 74.6 74.3 73.7 Stable asset quality Equity to assets 8.1 5.9 5.2 5.9 5.6
Asset quality & capital NPAs/gross loans (%) 1.4 1.0 0.9 0.8 0.8 Bad debt charge/gross loans (%) 0.81 0.25 0.50 0.64 0.64 Loss reserves/assets (%) 1.14 0.85 0.76 0.84 0.94 Loss reserves/NPAs (%) 150.0 149.4 152.2 176.7 203.5 Tier 1 capital ratio (%) 12.3 9.2 8.3 9.2 8.6 Total capital ratio (%) 14.3 10.1 10.2 11.1 10.4
Growth (%) Loan growth 15.1 61.3 22.3 21.6 20.0 Interest earning assets 26.6 41.2 29.3 22.8 19.0 Interest bearing liabilities 17.1 53.5 27.3 20.2 18.2 Asset growth 17.5 49.5 25.9 20.7 17.6 Deposit growth 20.2 41.9 30.0 22.2 21.2
Per share Reported EPS (RMB) 0.34 0.43 0.50 0.55 0.60 Norm EPS (RMB) 0.34 0.43 0.50 0.55 0.60 Fully diluted norm EPS (RMB) 0.34 0.43 0.50 0.50 0.60 DPS (RMB) 0.05 0.09 0.17 0.17 0.21 PPOP PS (RMB) 0.62 0.62 0.82 0.96 1.06 BVPS (RMB) 2.45 2.67 3.00 3.33 3.73 ABVPS (RMB) 2.45 2.67 3.00 3.33 3.73 NTAPS (RMB) 2.40 2.61 3.00 3.33 3.73 Source: Nomura estimates
Nomura 130 14 January 2011 131
China Minsheng Bank - H 1988 HK
FINANCIALS/BANKS | HONG KONG Maintained NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] Donger Wang +852 2252 1590 [email protected] NEUTRAL \
Action Closing price on 7 Jan HK$6.59 Price target HK$7.40 Trading at 1.31x and 8.5x FY11F P/B and P/E respectively, Minsheng’s valuation is (s et on 22 Oc t 10) at the lower end of the sector range. Given its relatively high proportion of demand Upside/downside 12.3% deposits and LDR ratio, we believe Minsheng will benefit the most from China Difference from consensus -18.9% entering into an interest hike cycle. However, frequent capital raising puts downside pressure on ROE. We maintain NEUTRAL with a price target of HK$7.40. FY11F net profit (RMBmn) 20,121 Difference from consensus -12.3% Catalysts Source: Nomura We see further rounds of rate hikes as a catalyst for sector NIM expansion. Nomura vs consensus Anchor themes Our forecasts are lower than The operating environment remains favourable for Chinese banks in 2011F, but consensus because of our lower negative sentiment from uncertainties over policies and asset quality continues to assumption on loan yields and higher weigh on valuations. Better visibility on regulatory policies (capital and provisioning) assumption on funding costs. could trigger a re-rating in the near term.
Ongoing capital raising pressures Key financials & valuations 31 Dec (RMBmn) FY09 FY10F FY11F FY12F ROE PPOP 20,963 24,930 31,692 38,713 Reported net profit 12,104 16,100 20,121 24,544 Earnings raised by 6.5-8.1%; PT stays at HK$7.40 Normalised net profit 12,104 16,100 20,121 24,544 Normalised EPS (RMB) 0.63 0.62 0.64 0.78 We raise our earnings estimates 8.1%, 7.1% and 6.5% for FY10F, Norm. EPS growth (%) 51.2 (2.8) 4.1 22.0 FY11F and FY12F, respectively, to reflect our expectation of rapid Norm. P/E (x) 9.1 9.2 8.5 6.6 NIM expansion in an interest hike cycle. We believe this will boost Price/adj. book (x) 1.46 1.52 1.31 1.15 Minsheng’s FY11E and FY12E NIM by 4.8bps and 5.1bps Price/book (x) 1.461.521.311.15 Dividend yield (%) 0.9 2.1 2.4 3.1 respectively. However, we maintain our price target of HK$7.40, given ROE (%) 17.1 17.3 17.9 18.7 a lower long-term ROE assumption of 14.34% (from 15.74%). We ROA (%) 0.98 1.00 1.00 1.00 believe frequent capital raising has put downward pressure on the Earnings revisions Previous norm. net profit 14,894 18,780 23,040 bank’s ROE. We reaffirm our NEUTRAL rating. Change from previous (%) 8.1 7.1 6.5 Shang Dai Tong loan yield to exceed 10% in FY11F Previous norm. EPS (RMB) 0.57 0.70 0.86 Source: Company, Nomura estimates By end-3Q10, Minsheng recorded a total outstanding Shang Dai Tong loan balance of RMB120tn, representing an increase of 167.8% from Share price relative to MSCI HK the beginning of 2010, or 12.1% of total loans outstanding. According (HK$) Price 7.9 Rel MSCI HK 110 to management, Minsheng targets to further expand the Shang Dai 105 Tong loan to RMB250tn by end-FY11F, or 40% of its total loans. 7.4 100 95 Given that the average loan yield of Shang Dai Tong is 25% above 6.9 90 85 the benchmark rate (average loan yield of 10% in 2010), we estimate 6.4 80 75 that Minsheng’s FY10 NIM will be boosted by 10-12bps to 2.91%. We 5.9 70 expect the Shang Dai Tong loan yield to further rise in FY11F on the Jul10 Jan10 Mar10
back of further interest rate hikes. May10 Sep10 Nov10 1m 3m 6m A-share private placement dilutes ROE by 1.8pp Absolute (HK$) (5.2) (9.1) (4.9) On 7 Jan 2011, Minsheng announced an A-share private placement Absolute (US$) (5.2) (9.3) (4.7) Relative to Index (9.0) (16.4) (37.2) plan to issue not more than 4,700mn A-shares at RMB4.57 per share. Market cap (US$mn) 18,872 We estimate that a maximum of RMB21.5bn will be raised, boosting Estimated free float (%) 26.0 FY11F T1 CAR and CAR by 1.5pp to 9.3% and 13.1%, respectively. 52-week range (HK$) 7.59/6.06 3-mth avg daily turnover (US$mn) 15.86 Meanwhile, we estimate that FY11F EPS and ROE will be diluted by Stock borrowability Easy 14.3% and 1.8pp to RMB0.6 and 17%, respectively. Minsheng has Major shareholders (%) raised capital more than 10 times over the past 10 years, resulting in New Hope 5.0 China Life 4.0 a relatively low average ROE of 15.6% when compared with peers. Source: Company, Nomura estimates Hence, we think it will be difficult for Minsheng to be a high-ROE bank given the resulting ROE dilution.
Nomura 131 14 January 2011
China Minsheng Bank - H Lucy Feng
Exhibit 170. Minsheng: earning revisions New Old Difference (%) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 42,576 50,759 59,116 40,878 48,872 57,000 4.2 3.9 3.7 Non-interest income 6,871 8,940 11,633 6,871 8,940 11,633 0.0 0.0 0.0 Operating income 49,446 59,699 70,749 47,749 57,813 68,633 3.6 3.3 3.1 Operating expenses (24,516) (28,007) (32,037) (24,427) (27,908) (31,926) 0.4 0.4 0.3 PPOP 24,930 31,692 38,713 23,322 29,905 36,707 6.9 6.0 5.5 Provisions (3,464) (4,864) (5,987) (3,464) (4,864) (5,987) 0.0 0.0 0.0 Operating pre-tax 21,466 26,828 32,725 19,858 25,040 30,720 8.1 7.1 6.5 Profit tax (5,367) (6,707) (8,181) (4,965) (6,260) (7,680) 8.1 7.1 6.5 Profits attributable to equity holders 16,100 20,121 24,544 14,894 18,780 23,040 8.1 7.1 6.5 Source: Company data, Nomura research estimates
Valuation methodology Our price target of HK$7.4 is based on 1.49x P/BV applied to our FY11F BVPS forecast as well as a sustainable ROE of 14.34%. This is to reflect our estimation of ROE dilution due to frequent capital raising. We use the Gordon Growth Model [target P/BV = (sustainable ROE – long-term growth)/(cost of equity – long-term growth)] to derive our fair P/BV, assuming a cost of equity of 12.0% and a terminal growth rate of 7.17%. We derive our terminal growth rate by applying a 50% payout ratio to our long- term sustainable ROE.
Investment risks Downside risks: severer-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth. Upside risks: A strong NIM rebound amid the interest rate hike cycle.
Nomura 132 14 January 2011
China Minsheng Bank - H Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 56,311 53,441 71,560 85,384 100,018 Interest expense (25,931) (21,201) (28,984) (34,626) (40,902) Net interest income 30,380 32,240 42,576 50,759 59,116 Net fees and commissions 4,461 4,664 6,598 8,618 11,253 Trading related profits 169 5,133 273 322 380 Other operating revenue 164 - - - 0 Non-interest income 4,794 9,797 6,871 8,940 11,633 Operating income 35,174 42,037 49,446 59,699 70,749 Depreciation Amortisation Operating expenses (18,168) (21,074) (24,516) (28,007) (32,037) Employee share expense Op. profit before provisions 17,006 20,963 24,930 31,692 38,713 Provisions for bad debt (6,518) (5,307) (3,464) (4,864) (5,987) Other provision charges Operating profit 10,488 15,656 21,466 26,828 32,725 Other non-operating income Associates & JCEs - - - - - Pre-tax profit 10,488 15,656 21,466 26,828 32,725 Income tax (2,595) (3,548) (5,367) (6,707) (8,181) Net profit after tax 7,893 12,108 16,100 20,121 24,544 Minority interests (8) (4) - - - Other items Preferred dividends Normalised NPAT 7,885 12,104 16,100 20,121 24,544 Extraordinary items Reported NPAT 7,885 12,104 16,100 20,121 24,544 Dividends (1,506) (1,113) (3,220) (4,024) (4,909) Strong NIM growth Transfer to reserves 6,379 10,991 12,880 16,097 19,635
Valuation and ratio analysis FD normalised P/E (x) 14.3 9.1 9.2 8.5 6.6 FD normalised P/E at price target (x) 16.0 10.2 10.3 9.5 7.4 Reported P/E (x) 14.3 9.1 9.2 8.5 6.6 Dividend yield (%) 1.3 0.9 2.1 2.4 3.1 Price/book (x) 2.0 1.5 1.5 1.3 1.2 Price/adjusted book (x) 2.0 1.5 1.5 1.3 1.2 Net interest margin (%) 3.40 2.59 2.91 3.03 3.09 Yield on interes t earning as sets (%) 6.31 4.29 4.89 5.11 5.23 Cost of interest bearing liabilities (%) 2.85 1.80 2.09 2.22 2.33 Net interest spread (%) 3.46 2.49 2.80 2.88 2.90 Non-interest/operating income (%) 13.6 23.3 13.9 15.0 16.4 Cost to income (%) 51.7 50.1 49.6 46.9 45.3 Effective tax rate (%) 24.7 22.7 25.0 25.0 25.0 Dividend payout (%) 19.1 9.2 20.0 20.0 20.0 ROE (%) 15.2 17.1 17.3 17.9 18.7 ROA (%) 0.80 0.98 1.00 1.00 1.00 Operating ROE (%) 20.2 22.1 23.1 23.9 25.0 Operating ROA (%) 1.06 1.26 1.33 1.34 1.34
Growth (%) Net interest income 34.5 6.1 32.1 19.2 16.5 Non-interest income 72.4 104.4 (29.9) 30.1 30.1 Non-interest expenses 30.9 16.0 16.3 14.2 14.4 Pre-provision earnings 48.2 23.3 18.9 27.1 22.2 Net profit 24.5 53.5 33.0 25.0 22.0 Normalised EPS (4.3) 51.2 (2.8) 4.1 22.0 Normalised FDEPS (4.3) 51.2 (2.8) 4.1 22.0 Source: Nomura estimates
Nomura 133 14 January 2011
China Minsheng Bank - H Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents 17,648 66,312 157,591 272,035 378,120 Inter-bank lending 17,095 73,015 87,618 91,999 96,599 Deposits with central bank 181,878 221,590 265,908 292,499 321,749 Total securities 129,254 156,491 177,108 202,909 232,574 Other interest earning assets 35,313 - - - - Gross loans 658,360 882,979 1,081,993 1,327,470 1,630,423 Less provisions (11,885) (15,241) (23,377) (31,504) (40,227) Net loans 646,475 867,738 1,058,616 1,295,966 1,590,195 Long-term investments - - - - - Fixed assets 6,496 8,068 9,278 10,670 12,270 Goodwill Other intangible assets Other non IEAs 20,191 33,178 38,155 43,878 50,460 Total assets 1,054,350 1,426,392 1,794,273 2,209,956 2,681,967 Customer deposits 785,786 1,127,938 1,441,505 1,773,051 2,180,853 Bank deposits, CDs, debentures 154,836 166,188 207,735 249,282 299,138 Other interest bearing liabilities 42,012 23,060 23,060 33,061 33,061 Total interest bearing liabilities 982,634 1,317,186 1,672,300 2,055,394 2,513,052 Non interest bearing liabilities 17,045 20,310 23,898 28,201 33,277 Total liabilities 999,679 1,337,496 1,696,198 2,083,594 2,546,329 Minority interest 792 860 - - - Common stock 18,823 22,262 26,714 31,414 31,414 Preferred stock Retained earnings 3,359 11,390 14,979 20,981 29,373 Proposed dividends 1,506 1,113 3,220 4,024 4,909 Other equity 30,192 53,271 53,163 69,942 69,942 High LDR ratio a concern Shareholders' equity 53,879 88,036 98,076 126,362 135,638 Total liabilities and equity 1,054,350 1,426,392 1,794,273 2,209,956 2,681,967 Non-performing assets (RMB) 7,921 7,397 10,344 14,561 19,737
Balance sheet ratios (%) Loans to deposits 83.8 78.3 75.1 74.9 74.8 Equity to assets 5.1 6.2 5.5 5.7 5.1
Asset quality & capital NPAs/gross loans (%) 1.2 0.8 1.0 1.1 1.2 Bad debt charge/gross loans (%) 0.99 0.60 0.32 0.37 0.37 Loss reserves/assets (%) 1.13 1.07 1.30 1.43 1.50 Loss reserves/NPAs (%) 150.0 206.0 226.0 216.4 203.8 Tier 1 capital ratio (%) 6.7 8.9 8.2 9.4 9.2 Total capital ratio (%) 9.2 10.8 11.4 13.2 12.8
Growth (%) Loan growth 18.1 34.2 22.0 22.4 22.7 Interest earning assets 13.7 30.6 20.5 18.5 19.0 Interest bearing liabilities 14.9 34.0 27.0 22.9 22.3 Asset growth 14.7 35.3 25.8 23.2 21.4 Deposit growth 17.1 43.5 27.8 23.0 23.0
Per share Reported EPS (RMB) 0.42 0.63 0.62 0.64 0.78 Norm EPS (RMB) 0.42 0.63 0.62 0.64 0.78 Fully diluted norm EPS (RMB) 0.42 0.63 0.62 0.64 0.78 DPS (RMB) 0.08 0.05 0.12 0.13 0.16 PPOP PS (RMB) 0.90 1.10 0.95 1.01 1.23 BVPS (RMB) 2.86 3.95 3.67 4.02 4.32 ABVPS (RMB) 2.863.953.674.024.32 NTAPS (RMB) 2.86 3.95 3.67 4.02 4.32 Source: Nomura estimates
Nomura 134 14 January 2011
Shanghai Pudong Development Bank 600000 CH FINANCIALS/BANKS | CHINA Maintained NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] NEUTRAL Donger Wang +852 2252 1590 [email protected]
Action Closing price on 7 Jan RMB13.23 The CBRC has approved SPDB’s plan to give China Mobile a 20% stake in Price target RMB14.65 exchange for RMB39.8bn. We expect the capital injection to boost SPDB’s FY10F (from RMB15.84) T1 CAR/ total CAR to 10%/14%, although we expect FY10F/11F net profit to Upside/downside 10.8% Difference from consensus -37.7% reduce by 30%/17% if the new LGFV policy is applied. We maintain a NEUTRAL rating, with our PT revised to RMB14.65 to reflect our earnings revisions. FY11F net profit (RMBmn) 23,972 Difference from consensus -17.6% Catalysts Source: Nomura We see further rounds of rate hikes as a catalyst to expand the sector’s NIM. Nomura vs consensus Anchor themes Our earnings forecasts are lower The operating environment remains favourable for Chinese banks in 2011F, but than consensus, we think owing to negative sentiment from uncertainties over policies and asset quality continues to our lower NIM and higher credit cost weigh on valuations. Better visibility on regulatory policies (capital and provisioning) assumptions. could trigger a re-rating in the near term.
New risk weighting policy leads Key financials & valuations 31 Dec (RMBmn) FY09F FY10F FY11F FY12F to moderate drop in capital base PPOP 20,278 29,333 36,996 46,514 Reported net profit 13,214 19,539 23,972 27,248 Normalised net profit 13,214 19,539 23,972 27,248 Maintain NEUTRAL, PT revised down to RMB14.65 Normalised EPS (RMB) 1.50 1.43 1.75 1.99 We have raised our FY10-11F earnings forecasts for SPDB by 8.92% Norm. EPS growth (%) (32.3) (4.6) 22.7 13.7 and 8.71%, respectively, but lowered our PT to RMB14.65 to reflect Norm. P/E (x) 8.8 9.3 7.6 6.6 Price/adj. book (x) 1.72 1.44 1.22 1.24 our lower long-term ROE assumption of 14.96% (from 16.52%). We Price/book (x) 1.721.441.221.24 reiterate our NEUTRAL rating. Dividend yield (%) 1.1 1.1 1.3 0.0 ROE (%) 24.1 20.2 17.5 18.6 ROA (%) 0.90 1.08 1.08 1.02 FY10F net profit reported to increase by 44.33% y-y Earnings revisions On 5 Jan 2011, SPDB announced its FY2010 earnings preview on Previous norm. net profit 17,939 22,051 24,943 SHEX’s website. According to the preview, SPDB’s net profit reached Change from previous (%) 8.9 8.7 9.2 Previous norm. EPS (RMB) 1.31 1.61 1.82 RMB19.08 bn, up 44.33% y-y. We expect SPDB to further benefit Source: Company, Nomura estimates from expected interest hikes in FY2011, with NIM and net profits to be boosted by 15.2bps and 9.4%, respectively. However, if the new Share price relative to MSCI China
LGFV classification method and risk weighting policy is adopted, we (RMB) Price 19 Rel MSCI China 120 estimate SPDB’s CAR and T1 CAR would be reduced by 1.96pct and 18 1.36pct to 13.81% and 9.6%, respectively. 17 110 16 100 15 14 90 Mobile banking only to benefit fee income in long run 13 80 12 By end-3Q10, SPDB recorded fee income of RMB976mn, up 0.3% q- 11 70 q and 93.6% y-y. Fee income of SPDB accounted for 7.4% of total Jul10 Apr10 Oct10 Jun10 Jan10 Feb10 Mar10 May10 operating income during that period, one of the lowest among its Aug10 Sep10 Nov10 Dec10 peers. On 25 November 2010, SPDB and China Mobile signed an 1m 3m 6m Absolute (RMB) 1.3 2.1 (3.9) agreement of cooperation in areas of mobile finance and mobile Absolute (US$) 1.7 2.8 (1.8) e-commerce. The two companies will also cooperate in mobile phone Relative to Index 1.5 1.2 (19.1) on-site and remote payment, as well as sharing customer services Market cap (US$mn) 17,620 Estimated free float (%) 63.5 and channels resources. Given the 575mn mobile phone subscribers 52-week range (RMB) 17.72/12.31 of China Mobile, we see significant growth potential for SPDB’s fee 3-mth avg daily turnover (US$mn) 221.3 income in the medium to long term. However, we do not expect the Stock borrowability Hard strategic cooperation on mobile banking to boost fee income in the Major shareholders (%) Shanghai International Group 21.2 short run. Shanghai International Trust and Investment 6.5 Source: Company, Nomura estimates
Nomura 135 14 January 2011
Shanghai Pudong Development Bank Lucy Feng
Exhibit 171. SPDB: earning revisions New Old Change (%) Profit & loss (RMBmn) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 44,603 54,988 67,812 42,407 52,354 64,650 5.18 5.03 4.89 Non-interest income 4,339 5,138 6,091 4,339 5,138 6,091 0.00 0.00 0.00 Operating income 48,941 60,127 73,903 46,746 57,492 70,741 4.70 4.58 4.47 Operating expenses (19,609) (23,131) (27,388) (19,506) (23,007) (27,240) 0.53 0.54 0.54 PPOP 29,333 36,996 46,514 27,240 34,484 43,501 7.68 7.28 6.93 Provisions (3,791) (5,660) (10,896) (3,791) (5,660) (10,896) 0.00 0.00 0.00 Operating pre-tax 25,542 31,336 35,619 23,449 28,825 32,606 8.92 8.71 9.24 Profit tax (6,002) (7,364) (8,370) (5,511) (6,774) (7,662) 8.92 8.71 9.24 PROFITS attributable to equity holders 19,539 23,972 27,248 17,939 22,051 24,943 8.92 8.71 9.24 Source: Nomura estimates
Valuation methodology Our new price target of RMB14.65 is based on a P/BV of 1.4x applied to FY10F BVPS and is on the back of a revised sustainable ROE of 16.5% (previously 17.7%). We use a Gordon Growth model (target P/BV = (sustainable ROE – long-term growth)/(cost of equity – long-term growth)) to derive our fair P/BV range, assuming a cost of equity of 12% and a terminal growth rate of 8.3% (methodology unchanged). We derive our terminal growth rate by applying a 50% payout ratio to our long-term sustainable ROE.
Risks to our investment view Upside risks: 1) Smaller-than-expected equity amount raised and 2) a strong NIM rebound amid an interest rate hiking cycle.
Downside risks: Worse-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth.
Nomura 136 14 January 2011
Shanghai Pudong Development Bank Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec FY08 FY09F FY10F FY11F FY12F Interest income 55,721 60,190 78,366 106,753 142,732 Interest expense (24,187) (26,652) (33,763) (51,765) (74,920) Net interest income 31,534 33,538 44,603 54,988 67,812 Net fees and commissions 1,795 2,207 3,082 3,758 4,574 Trading related profits 754 443 485 531 582 Other operating revenue 436 730 772 850 935 Non-interest income 2,984 3,380 4,339 5,138 6,091 Operating income 34,519 36,919 48,941 60,127 73,903 Depreciation Amortisation Operating expenses (15,798) (16,640) (19,609) (23,131) (27,388) Employee share expense Op. profit before provisions 18,721 20,278 29,333 36,996 46,514 Provisions for bad debt (3,471) (3,053) (3,791) (5,660) (10,896) Other provision charges - - - - - Operating profit 15,250 17,226 25,542 31,336 35,619 Other non-operating income Associates & JCEs 54 70 - - - Pre-tax profit 15,303 17,296 25,542 31,336 35,619 Income tax (2,788) (4,081) (6,002) (7,364) (8,370) Net profit after tax 12,516 13,215 19,539 23,972 27,248 Minority interests (0) (1) - - - Other items Preferred dividends Normalised NPAT 12,516 13,214 19,539 23,972 27,248 Extraordinary items Reported NPAT 12,516 13,214 19,539 23,972 27,248 Dividends (697) (1,325) (1,954) (2,397) - Transfer to reserves 11,819 11,889 17,585 21,575 27,248
Valuation and ratio analysis NIM rebound FD normalised P/E (x) 6.0 8.8 9.3 7.6 6.6 FD normalised P/E at price target (x) 6.6 9.8 10.3 8.4 7.4 Reported P/E (x) 6.0 8.8 9.3 7.6 6.6 Dividend yield (%) 0.9 1.1 1.1 1.3 - Price/book (x) 1.8 1.7 1.4 1.2 1.2 Price/adjusted book (x) 1.8 1.7 1.4 1.2 1.2 Net interest margin (%) 3.05 2.30 2.60 2.73 2.86 Yield on interes t earning as sets (%) 5.39 4.13 4.58 5.30 6.02 Cost of interest bearing liabilities (%) 2.32 1.67 1.81 2.39 2.96 Net interest spread (%) 3.06 2.46 2.76 2.92 3.06 Non-interest/operating income (%) 8.6 9.2 8.9 8.5 8.2 Cost to income (%) 45.8 45.1 40.1 38.5 37.1 Effective tax rate (%) 18.2 23.6 23.5 23.5 23.5 Dividend payout (%) 5.6 10.0 10.0 10.0 - ROE (%) 35.8 24.1 20.2 17.5 18.6 ROA (%) 1.13 0.90 1.08 1.08 1.02 Operating ROE (%) 43.6 31.4 26.3 22.9 24.3 Operating ROA (%) 1.37 1.17 1.41 1.41 1.33
Growth (%) Net interest income 30.4 6.4 33.0 23.3 23.3 Non-interest income 76.9 13.3 28.3 18.4 18.5 Non-interest expenses 36.0 5.3 17.8 18.0 18.4 Pre-provision earnings 31.4 8.3 44.6 26.1 25.7 Net profit 127.7 5.6 47.9 22.7 13.7 Normalised EPS 75.2 (32.3) (4.6) 22.7 13.7 Normalised FDEPS 75.2 (32.3) (4.6) 22.7 13.7 Source: Nomura estimates
Nomura 137 14 January 2011
Shanghai Pudong Development Bank Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09F FY10F FY11F FY12F Cash and equivalents 3,096 3,825 104,035 197,891 295,365 Inter-bank lending 77,773 167,676 171,030 174,451 177,940 Deposits with central bank 159,505 201,294 248,706 298,447 358,136 Total securities 81,016 123,640 139,369 157,345 177,926 Other interest earning assets 171,472 53,057 68,975 89,667 116,567 Gross loans 697,564 928,855 1,107,127 1,315,425 1,564,760 Less provisions (16,298) (18,347) (22,138) (27,798) (38,694) Net loans 681,267 910,508 1,084,989 1,287,627 1,526,065 Long-term investments 538 603 724 869 1,042 Fixed assets 6,969 8,048 8,852 9,738 10,711 Goodwill Other intangible assets Other non IEAs 127,790 154,066 184,880 221,856 266,227 Total assets 1,309,426 1,622,718 2,011,559 2,437,890 2,929,980 Customer deposits 947,294 1,295,342 1,554,411 1,865,293 2,238,352 Bank deposits, CDs, debentures 232,974 209,710 272,623 354,410 460,733 Other interest bearing liabilities 44,482 20,113 20,244 20,389 20,547 Total interest bearing liabilities 1,224,750 1,525,165 1,847,278 2,240,091 2,719,632 Non interest bearing liabilities 42,974 29,465 38,305 49,797 64,736 Total liabilities 1,267,724 1,554,631 1,885,583 2,289,888 2,784,367 Minority interest 23 134 - - - Common stock 5,661 8,830 13,687 13,687 13,687 Preferred stock Retained earnings 11,195 15,892 26,504 43,753 39,428 Proposed dividends 697 1,325 1,954 2,397 - Other equity 24,127 41,907 83,832 88,165 92,498 Shareholders' equity 41,680 67,953 125,977 148,002 145,613 Total liabilities and equity 1,309,426 1,622,718 2,011,559 2,437,890 2,929,980 Non-performing assets (RMB) 8,467 7,460 8,478 10,295 13,895
Balance sheet ratios (%) Loans to deposits 73.6 71.7 71.2 70.5 69.9 Equity to assets 3.2 4.2 6.3 6.1 5.0
Asset quality & capital NPAs/gross loans (%) 1.2 0.8 0.8 0.8 0.9 Bad debt charge/gross loans (%) 0.50 0.33 0.34 0.43 0.70 Loss reserves/assets (%) 1.24 1.13 1.10 1.14 1.32 Loss reserves/NPAs (%) 192.5 245.9 261.1 270.0 278.5 Tier 1 capital ratio (%) 5.0 6.9 10.1 9.8 8.2 Total capital ratio (%) 9.1 10.3 14.4 13.9 10.5
Growth (%) Loan growth 27.2 33.6 19.2 18.7 18.5 Interest earning assets 31.3 24.3 17.6 17.2 17.4 Interest bearing liabilities 43.1 24.5 21.1 21.3 21.4 Asset growth 43.1 23.9 24.0 21.2 20.2 Deposit growth 24.1 36.7 20.0 20.0 20.0
Per share Reported EPS (RMB) 2.21 1.50 1.43 1.75 1.99 Norm EPS (RMB) 2.21 1.50 1.43 1.75 1.99 Fully diluted norm EPS (RMB) 2.21 1.50 1.43 1.75 1.99 DPS (RMB) 0.12 0.15 0.14 0.18 - PPOP PS (RMB) 3.31 2.30 2.14 2.70 3.40 BVPS (RMB) 7.36 7.70 9.20 10.81 10.64 ABVPS (RMB) 7.36 7.70 9.20 10.81 10.64 NTAPS (RMB) 7.36 7.70 9.20 10.81 10.64 Source: Nomura estimates
Nomura 138 14 January 2011
Shenzhen Development Bank 000001 CH
FINANCIALS/BANKS | CHINA Maintained NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] Donger Wang +852 2252 1590 [email protected] NEUTRAL
Action Closing price on 7 Jan RMB16.41 Currently trading at 1.5x FY11F PB, we reiterate our Neutral stance on SZDB as it Price target RMB16.64 continues to move closer to being part of the Ping An Group, which we doubt is (from RMB18.73) likely to bring any material benefits to SZDB minorities, at least in the near term. Upside/downside 1.4% Difference from consensus -44.0% However, we do think the stock will have valuation support from here as the market prices in the possibility of privatisation. FY11F net profit (RMBmn) 8,326 Difference from consensus 10.0% Catalysts Source: Nomura We see further rounds of rate hikes as a catalyst to expand the sector’s NIM. Nomura vs consensus Anchor themes Our net profit forecast is above The operating environment remains favourable for Chinese banks in 2011F, but consensus estimates due to our negative sentiment from uncertainties over policies and asset quality continues to higher NIM and lower credit cost weigh on valuations. Better visibility on regulatory policies (capital and provisioning) assumptions. could trigger a re-rating in the near term.
Further development still subject Key financials & valuations 31 Dec (RMBmn) FY09 FY10F FY11F FY12F to integration progress PPOP 7,747 10,498 12,802 15,242 Reported net profit 5,031 6,577 8,326 9,915 Normalised net profit 5,031 6,577 8,326 9,915 PT revised to RMB16.64; NEUTRAL rating maintained Normalised EPS (RMB) 1.62 1.97 2.32 2.77 We have revised our PT to RMB16.64 based on a new PB multiple, Norm. EPS growth (%) 612.2 21.4 18.2 19.1 Norm. P/E (x) 10.1 8.3 7.1 5.9 with our estimates rolling over to FY11F. We think SZDB will continue Price/adj. book (x) 2.49 1.74 1.49 1.26 to benefit under the rising rate environment. However, the integration Price/book (x) 2.491.741.491.26 with Ping An Insurance is still pending, which is still an overhang on Dividend yield (%) 0.0 1.1 1.4 1.7 ROE (%) 27.3 24.3 22.8 23.0 the bank’s performance. Currently trading at 1.5x FY11F PB, we ROA (%) 0.95 0.99 1.04 1.03 reiterate our NEUTRAL rating. Earnings revisions Previous norm. net profit 6,220 8,037 9,583 Improving NIM with overhang on credit costs Change from previous (%) 5.7 3.6 3.5 Previous norm. EPS (RMB) 1.86 2.24 2.67 SZDB’s LDR has been below 75% since 2Q10, versus 79% and even Source: Company, Nomura estimates over 80% in 2009. Given strong deposit growth of 26.6% in 9M10, LDR stood at 74.2% as of 30 September 2010. NIM stood at 2.55% in Share price relative to MSCI China 3Q10 and we expect it to expand further in 2011 under a rising rate (RMB) Price 26 Rel MSCI China 120 environment. Based on our sensitivity test, assuming 25bps hike for 24 110 each quarter in 2011, SZDB’s FY11F NIM and NPAT would be raised 22 100 by 14.9bps and 9.2%, respectively. However, we believe pressure on 20 90 credit costs from the 2.5% loan-loss provision requirement and the 18 80 16 70 new LGFV loans classification method would drag down SZDB’s 14 60 performance in 2011F. Jul10 Apr10 Oct10 Jan10 Mar10 Jun10 Feb10 Aug10 Sep10 Nov10 Dec10 May10 Further development subject to integration progress 1m 3m 6m Absolute ( RMB) (1.9) 1.2 (6.3) SZDB’s management aims to make good use of the 55mn retail Absolute ( US$) (1.5) 1.9 (4.3) customer base of Ping An to develop its business through cross- Relative to Index (1.8) 0.3 (21.6) Market cap (US$mn) 7,686 selling, including wealth management, credit cards and trade finance. Estimated free float (%) 79.6 However, the integration with PAB, although already approved by 52-week range (RMB) 23.85/15.67 shareholders of both SZDB and Ping An, is still subject to approval by 3-mth avg daily turnover (US$mn) 113.1 the regulator. Synergies from the deal are still pending, in our view. Stock borrowability Hard Major shareholders (%) Given SZDB’s relatively low FY11F CAR and T1 CAR at 10.1% and China PingAn 29.9 7.5% and the new risk weighting requirement on LGFV loans, we CEIEC 2.5 think capital raising by itself or injection by Ping An group is highly Source: Company, Nomura estimates possible for SZDB’s further growth.
Nomura 139 14 January 2011
Shenzhen Development Bank Lucy Feng
Exhibit 172. SZDB: earnings revisions New Old % change Profit & loss (RMBmn) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 16,647 19,747 22,964 15,947 19,179 22,303 4.4 3.0 3.0 Fee income 1,594 2,072 2,694 1,594 2,072 2,694 0.0 0.0 0.0 Non-interest income 2,685 3,368 4,235 2,685 3,368 4,235 0.0 0.0 0.0 Operating income 19,332 23,115 27,200 18,632 22,548 26,538 3.8 2.5 2.5 Operating expenses (8,833) (10,314) (11,958) (8,799) (10,286) (11,926) 0.4 0.3 0.3 PPOP 10,498 12,802 15,242 9,832 12,262 14,612 6.8 4.4 4.3 Provisions (1,910) (1,977) (2,373) (1,708) (1,812) (2,174) 11.8 9.1 9.1 Operating pre-tax 8,541 10,813 12,876 8,077 10,438 12,446 5.7 3.6 3.5 Profit tax (1,965) (2,487) (2,962) (1,858) (2,401) (2,863) 5.7 3.6 3.5 Profits attributable to equity holders 6,577 8,326 9,915 6,220 8,037 9,583 5.7 3.6 3.5 Source: Company data, Nomura research
Valuation methodology Our revised PT of RMB16.64 is based on 1.5x P/B applied our FY11F BVPS forecast. We use a sustainable ROE of 14.4% (previously: 16.9%). We use a Gordon Growth model (target P/BV = sustainable ROE – long-term growth) / (cost of equity –long-term growth) to derive our fair P/B range, assuming a cost of equity of 13% and a terminal growth rate of 7.2% (previously: 8.5%). We derive our terminal growth by applying a 50% payout ratio to our long-term sustainable ROE.
Investment risks Downside risks: We believe that more severe-than-expected macro tightening could result in a sharp rise in bad debt costs. A slowing economy would have negative implications for loan growth, in our view. The concept of market and operation-related risks has only been introduced to the bank over the past few years. The bank’s improved risk management techniques, introduced over the past decade, have never been stress-tested in a severe economic downturn. Upside risks: 1) Synergies achieved after the integration with Ping An Bank and 2) better expense control that cuts the cost/income ratio.
Nomura 140 14 January 2011
Shenzhen Development Bank Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 26,465 21,986 27,633 34,232 40,300 Interest expense (13,867) (9,001) (10,986) (14,485) (17,335) Net interest income 12,598 12,984 16,647 19,747 22,964 Net fees and commissions 851 1,181 1,594 2,072 2,694 Trading related profits 927 802 963 1,155 1,386 Other operating revenue 103 160 128 141 155 Non-interest income 1,882 2,143 2,685 3,368 4,235 Operating income 14,480 15,128 19,332 23,115 27,200 Depreciation Amortisation Operating expenses (6,376) (7,380) (8,833) (10,314) (11,958) Employee share expense Op. profit before provisions 8,104 7,747 10,498 12,802 15,242 Provisions for bad debt (6,973) (1,441) (1,910) (1,977) (2,373) Other provision charges (361) (135) (67) (34) (17) Operating profit 770 6,172 8,521 10,791 12,852 Other non-operating income Associates & JCEs 23 18 20 22 24 Pre-tax profit 793 6,191 8,541 10,813 12,876 Income tax (179) (1,160) (1,965) (2,487) (2,962) Net profit after tax 614 5,031 6,577 8,326 9,915 Minority interests - - - - - Other items Preferred dividends Normalised NPAT 614 5,031 6,577 8,326 9,915 NIM rebound Extraordinary items Reported NPAT 614 5,031 6,577 8,326 9,915 Dividends (61) - (658) (833) (991) Transfer to reserves 553 5,031 5,919 7,493 8,923
Valuation and ratio analysis FD normalised P/E (x) 72.1 10.1 8.3 7.1 5.9 FD normalised P/E at price target (x) 73.1 10.3 8.5 7.2 6.0 Reported P/E (x) 72.1 10.1 8.3 7.1 5.9 Dividend yield (%) 0.1 - 1.1 1.4 1.7 Price/book (x) 3.1 2.5 1.7 1.5 1.3 Price/adjusted book (x) 3.1 2.5 1.7 1.5 1.3 Net interest margin (%) 3.02 2.48 2.62 2.68 2.67 Yield on interest earning assets (%) 6.34 4.20 4.35 4.65 4.68 Cost of interest bearing liabilities (%) 3.17 1.78 1.83 2.05 2.14 Net interest spread (%) 3.17 2.41 2.52 2.59 2.54 Non-interest/operating income (%) 13.0 14.2 13.9 14.6 15.6 Cost to income (%) 44.0 48.8 45.7 44.6 44.0 Effective tax rate (%) 22.5 18.7 23.0 23.0 23.0 Dividend payout (%) 10.0 - 10.0 10.0 10.0 ROE (%) 4.2 27.3 24.3 22.8 23.0 ROA (%) 0.15 0.95 0.99 1.04 1.03 Operating ROE (%) 5.2 33.5 31.5 29.5 29.9 Operating ROA (%) 0.19 1.16 1.29 1.34 1.34
Growth (%) Net interest income 31.1 3.1 28.2 18.6 16.3 Non-interest income 50.4 13.9 25.3 25.5 25.7 Non-interest expenses 26.7 15.8 19.7 16.8 15.9 Pre-provision earnings 39.1 (4.4) 35.5 21.9 19.1 Net profit (76.8) 719.3 30.7 26.6 19.1 Normalised EPS (81.8) 612.2 21.4 18.2 19.1 Normalised FDEPS (81.8) 612.2 21.4 18.2 19.1 Source: Nomura estimates
Nomura 141 14 January 2011
Shenzhen Development Bank Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents 982 779 857 943 1,037 Inter-bank lending 30,737 15,593 17,931 20,621 23,714 Deposits with central bank 38,786 53,465 67,900 82,159 100,234 Total securities 78,388 72,623 79,886 87,874 96,662 Other interest earning assets 34,733 40,923 45,016 49,517 54,469 Gross loans 283,741 359,517 449,397 539,276 647,131 Less provisions (2,027) (3,955) (5,479) (7,118) (9,148) Net loans 281,715 355,563 443,918 532,158 637,983 Long-term investments - - - - - Fixed assets 1,915 2,034 2,238 2,462 2,708 Goodwill Other intangible assets Other non IEAs 7,183 46,831 76,563 97,090 129,706 Total assets 474,440 587,811 734,309 872,825 1,046,513 Customer deposits 359,359 454,635 577,387 698,638 852,338 Bank deposits, CDs, debentures 43,443 81,710 89,881 98,869 108,756 Other interest bearing liabilities 46,880 23,196 24,569 26,080 27,742 Total interest bearing liabilities 449,682 559,541 691,837 823,587 988,836 Non interest bearing liabilities 8,357 7,800 8,769 9,834 11,032 Total liabilities 458,039 567,341 700,606 833,421 999,868 Minority interest - - - - - Common stock 3,105 3,105 3,583 3,583 3,583 Preferred stock Retained earnings 890 4,386 8,708 14,605 21,932 Proposed dividends 61 - 658 833 991 Other equity 12,344 12,978 20,754 20,383 20,139 Shareholders' equity 16,401 20,470 33,703 39,404 46,645 Total liabilities and equity 474,440 587,811 734,309 872,825 1,046,513 Non-performing assets (RMB) 1,928 2,444 2,848 3,837 5,201
Balance sheet ratios (%) Stable asset quality Loans to deposits 79.0 79.1 77.8 77.2 75.9 Equity to assets 3.5 3.5 4.6 4.5 4.5
Asset quality & capital NPAs/gross loans (%) 0.7 0.7 0.6 0.7 0.8 Bad debt charge/gross loans (%) 2.46 0.40 0.43 0.37 0.37 Loss reserves/assets (%) 0.43 0.67 0.75 0.82 0.87 Loss reserves/NPAs (%) 105.1 161.8 192.4 185.5 175.9 Tier 1 capital ratio (%) 5.3 5.5 7.5 7.5 7.4 Total capital ratio (%) 8.6 8.9 10.3 10.1 9.1
Growth (%) Loan growth 31.0 26.2 24.8 19.9 19.9 Interest earning assets 34.9 15.9 21.6 18.0 18.2 Interest bearing liabilities 35.7 24.4 23.6 19.0 20.1 Asset growth 34.6 23.9 24.9 18.9 19.9 Deposit growth 28.3 26.5 27.0 21.0 22.0
Per share Reported EPS (RMB) 0.23 1.62 1.97 2.32 2.77 Norm EPS (RMB) 0.23 1.62 1.97 2.32 2.77 Fully diluted norm EPS (RMB) 0.23 1.62 1.97 2.32 2.77 DPS (RMB) 0.02 - 0.18 0.23 0.28 PPOP PS (RMB) 3.00 2.49 3.14 3.57 4.25 BVPS (RMB) 5.28 6.59 9.41 11.00 13.02 ABVPS (RMB) 5.28 6.59 9.41 11.00 13.02 NTAPS (RMB) 5.28 6.59 9.41 11.00 13.02 Source: Nomura estimates
Nomura 142 14 January 2011
Industrial Bank 601166 CH
FINANCIALS/BANKS | CHINA Maintained NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected] Donger Wang +852 2252 1590 donger,[email protected] BUY
Action Closing price on 7 Jan RMB26.52 At 1.32x and 6.6x FY11F P/BV and P/E, respectively, Industrial Bank’s valuation is Price target RMB33.00 largely on par with the sector. We have revised our PT to RMB 33.00 based on a (f rom RMB 3 4. 00 ) new PB multiple, with our estimates rolling over to FY11F. We maintain our BUY Upside/downside 24.4% rating, based on the expectation of marginal impact from LGFV loans and potential Difference from consensus -24.8% synergies from the co-operation with China Unicom. FY11F net profit (RMBmn) 23,160 Catalysts Difference from consensus 15.2% Source: Nomura We see further rounds of rate hikes as a catalyst to expand the sector’s NIM.
Anchor themes Nomura vs consensus The operating environment remains favourable for Chinese banks in 2011F, but Our forecasts are higher than negative sentiment from uncertainties over policies and asset quality continues to consensus, mainly owing to our weigh on valuations. Better visibility on regulatory policies (capital and provisioning) higher NIM assumptions and lower could trigger a re-rating in the near term. estimates of funding costs.
Key financials & valuations Higher intermediary income from 31 Dec (RMBmn) FY09 FY10F FY11F FY12F PPOP 17,704 26,190 31,759 37,569 mobile banking business Reported net profit 13,282 19,411 23,160 27,131 Normalised net profit 13,282 19,411 23,160 27,131 Normalised EPS (RMB) 2.66 3.61 4.03 4.72 A-share top pick; maintain BUY with a PT of RMB 33 Norm. EPS growth (%) 16.7 35.9 11.5 17.1 We revised our PT to RMB 33.00 based on a revised long-term ROE Norm. P/E (x) 10.0 7.3 6.6 5.6 of 15.6% and target PB multiple of 1.66x, with our estimates rolling Price/adj. book (x) 2.22 1.61 1.32 1.09 Price/book (x) 2.221.611.321.09 over to FY11F. We have raised our FY10F and FY11F earnings Dividend yield (%) 1.9 1.3 1.5 1.8 estimates for Industrial Bank by 15% and 14.5% on the back of further ROE (%) 24.5 25.2 22.0 21.2 NIM expansion of 3bp to 2.69% and 2.81% respectively. We expect ROA (%) 1.13 1.32 1.32 1.29 Earnings revisions Industrial Bank’s ROA and ROE in FY10F to reach 1.32% and 25.2% Previous norm. net profit 16,884 20,226 23,686 on a fully diluted basis. The shares are trading at an undemanding Change from previous (%) 15.0 14.5 14.5 1.32x and 6.6x FY11F P/BV and P/E. Reiterate BUY rating. Previous norm. EPS (RMB) 3.14 3.52 4.12 Source: Company, Nomura estimates Marginal impact from LGFV loans Share price relative to MSCI China According to our channel checks, Industrial Bank had a LGFV loan (RMB) Price balance of RMB 149bn at end-3Q10, of which 70%, 20%, 8% and 2% 37 Rel MSCI China 110 35 100 are classified in the full, basic, partial and no coverage categories 33 31 90 respectively. Management stated that if the five-category loan 29 80 classification is applied, 99.93% and 0.07% would be normal and 27 70 25 special mentioned loans and there would be no NPL. We understand 23 60 from management that most of these LGFV loan borrowers are at the 21 50 city or provincial levels with sound financial capability. We do not Jul10 Apr10 Oct10 Jun10 Jan10 Feb10 Mar10 May10 Aug10 Sep10 Nov10 Dec10 expect significant impact from the new arrangement on LGFV loans. 1m 3m 6m Absolute (RMB) 6.6 14.7 13.6 Cooperate with China Unicom to boost fee income Absolute (US$) 7.1 15.5 16.1 Relative to Index 6.8 13.9 (1.2) On 30 November 2010, Industrial Bank signed a strategic agreement Market cap (US$mn) 20,000 with China Unicom. The two sides will further strengthen their Estimated free float (%) 61.8 comprehensive cooperation in underlying communications, financial 52-week range (RMB) 35.71/22.41 3-mth avg daily turnover (US$mn) 234.1 services, mobile Internet applications and joint innovation, marketing, Stock borrowability Hard mobile payments and mobile banking businesses. In 9M10, Industrial Major shareholders (%) Bank reported intermediary fee income of RMB3.4bn, up by 72.1% y-y. Fuji an Pr ov ince Financ e Bureau 20.8 Hang Seng Bank 12.8 In light of the increasing number of mobile phone users in China, we Source: Company, Nomura estimates expect the strategic cooperation with China Unicom to further boost intermediary fee income in the medium to long term.
Nomura 143 14 January 2011
Industrial Bank Lucy Feng
Exhibit 173. Industrial Bank: earnings revisions New Old % change Profit & loss (RMBmn) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 38,126 46,364 55,335 34,747 42,409 50,698 9.7 9.3 9.1 Fee income 4,207 5,258 6,573 4,207 5,258 6,573 0.0 0.0 0.0 Non-interest income 5,413 6,492 7,838 5,413 6,492 7,838 0.0 0.0 0.0 Operating income 43,539 52,856 63,172 40,160 48,901 58,536 8.4 8.1 7.9 Operating expenses (17,349) (21,098) (25,604) (17,207) (20,931) (25,408) 0.8 0.8 0.8 PPOP 26,190 31,75937,569 22,953 27,970 33,128 14.1 13.513.4 Provisions (981) (1,680)(2,334) (1,025) (1,702) (2,367) (4.3) (1.3)(1.4) Operating pretax 25,209 30,078 35,235 21,928 26,268 30,761 15.0 14.5 14.5 Profit tax (5,798) (6,918) (8,104) (5,043) (6,042) (7,075) 15.0 14.5 14.5 Profits attributable to equity holders 19,411 23,160 27,131 16,884 20,226 23,686 15.0 14.5 14.5 Source: Nomura estimates
Valuation methodology Our revised price target of RMB 33.00 is based on 1.7x P/BV applied to our FY11F BVPS forecast on the back of sustainable ROE of 15.6%. We use a Gordon Growth model (target P/BV = sustainable ROE – long-term growth)/(cost of equity – long-term growth)) to derive our fair P/BV range, assuming a cost of equity of 12.5% and a terminal growth rate of 7.8%. We derive our terminal growth by applying a 50% payout ratio to our long-term sustainable ROE.
Risks to our investment view Downside risks: More severe-than-expected macro tightening would result in a sharp rise in bad debt costs. Specifically, IB has large loan exposure to the property market compared with its peers, making its asset quality more vulnerable to any property market correction. In addition, a slowing economy would have negative implications for loan growth.
Nomura 144 14 January 2011
Industrial Bank Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 52,525 50,039 66,222 82,071 100,613 Interest expense (26,332) (22,837) (28,096) (35,707) (45,279) Net interest income 26,192 27,202 38,126 46,364 55,335 Net fees and commissions 2,624 3,116 4,207 5,258 6,573 Trading related profits 839 253 278 306 337 Other operating revenue 98 928 928 928 928 Non-interest income 3,561 4,297 5,413 6,492 7,838 Operating income 29,754 31,499 43,539 52,856 63,172 Depreciation Amortisation Operating expenses (12,305) (13,795) (17,349) (21,098) (25,604) Accelerated net fee and Employee share expense commission income growth Op. profit before provisions 17,449 17,704 26,190 31,759 37,569 Provisions for bad debt (3,238) (559) (981) (1,680) (2,334) Other provision charges (179) 41 - - - Operating profit 14,032 17,186 25,209 30,078 35,235 Other non-operating income Associates & JCEs 5 44 - - - Pre-tax profit 14,037 17,230 25,209 30,078 35,235 Income tax (2,652) (3,948) (5,798) (6,918) (8,104) Net profit after tax 11,385 13,282 19,411 23,160 27,131 Minority interests - - - - - Other items Preferred dividends Normalised NPAT 11,385 13,282 19,411 23,160 27,131 Extraordinary items Reported NPAT 11,385 13,282 19,411 23,160 27,131 Dividends (2,250) (2,500) (1,941) (2,316) (2,713) Transfer to reserves 9,135 10,782 17,470 20,844 24,418
Valuation and ratio analysis FD normalised P/E (x) 11.6 10.0 7.3 6.6 5.6 FD normalised P/E at price target (x) 14.5 12.4 9.1 8.2 7.0 Reported P/E (x) 11.6 10.0 7.3 6.6 5.6 Dividend yield (%) 1.7 1.9 1.3 1.5 1.8 Price/book (x) 2.7 2.2 1.6 1.3 1.1 Price/adjusted book (x) 2.7 2.2 1.6 1.3 1.1 Net interest margin (%) 2.67 2.25 2.69 2.81 2.87 Yield on interes t earning as sets (%) 5.35 4.13 4.67 4.97 5.22 Cost of interest bearing liabilities (%) 4.26 3.37 3.51 3.76 4.02 Net interest spread (%) 1.10 0.76 1.16 1.20 1.20 Non-interest/operating income (%) 12.0 13.6 12.4 12.3 12.4 Cost to income (%) 41.4 43.8 39.8 39.9 40.5 Effective tax rate (%) 18.9 22.9 23.0 23.0 23.0 Dividend payout (%) 19.8 18.8 10.0 10.0 10.0 ROE (%) 25.9 24.5 25.2 22.0 21.2 ROA (%) 1.22 1.13 1.32 1.32 1.29 Operating ROE (%) 31.9 31.6 32.7 28.6 27.5 Operating ROA (%) 1.50 1.46 1.72 1.71 1.68
Growth (%) Net interest income 25.6 3.9 40.2 21.6 19.3 Non-interest income 192.0 20.7 26.0 19.9 20.7 Non-interest expenses 29.9 12.1 25.8 21.6 21.4 Pre-provision earnings 38.6 1.5 47.9 21.3 18.3 Net profit 32.6 16.7 46.1 19.3 17.1 Normalised EPS 19.3 16.7 35.9 11.5 17.1 Normalised FDEPS 19.3 16.7 35.9 11.5 17.1 Source: Nomura estimates
Nomura 145 14 January 2011
Industrial Bank Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents 2,307 2,904 46,714 76,791 113,935 Inter-bank lending 109,923 56,049 58,851 61,794 64,884 Deposits with central bank 125,517 169,000 213,611 262,819 323,166 Total securities 157,872 197,598 227,187 261,273 300,472 Other interest earning assets 117,275 195,884 215,473 237,020 260,722 Gross loans 499,387 701,597 834,361 1,003,582 1,208,265 Less provisions (9,401) (9,635) (10,415) (11,891) (14,015) Net loans 489,986 691,963 823,946 991,692 1,194,250 Long-term investments 306 335 335 335 335 Fixed assets 5,442 6,283 7,225 8,309 9,556 Goodwill Other intangible assets 351 323 323 323 323 Other non IEAs 11,919 11,823 12,323 13,372 14,525 Total assets 1,020,899 1,332,162 1,605,989 1,913,728 2,282,168 Customer deposits 632,426 900,884 1,081,061 1,297,274 1,556,728 Bank deposits, CDs, debentures 195,632 238,776 286,531 343,837 412,604 Other interest bearing liabilities 123,238 114,879 124,061 135,079 148,302 Total interest bearing liabilities 951,296 1,254,539 1,491,653 1,776,190 2,117,634 Non interest bearing liabilities 20,581 18,025 19,828 21,811 23,992 Total liabilities 971,877 1,272,564 1,511,481 1,798,000 2,141,626 Minority interest Common stock 5,000 5,000 5,750 5,750 5,750 Preferred stock Retained earnings 14,292 23,354 40,824 61,668 86,086 Proposed dividends 2,250 2,500 1,941 2,316 2,713 Other equity 27,480 28,743 45,993 45,993 45,993 Shareholders' equity 49,022 59,597 94,508 115,727 140,542 Total liabilities and equity 1,020,899 1,332,162 1,605,989 1,913,728 2,282,168 Non-performing assets (RMB) 4,149 3,779 3,850 5,819 8,239
Balance sheet ratios (%) Stable asset quality Loans to deposits 79.0 77.9 77.2 77.4 77.6 Equity to assets 4.8 4.5 5.9 6.0 6.2
Asset quality & capital NPAs/gross loans (%) 0.8 0.5 0.5 0.6 0.7 Bad debt charge/gross loans (%) 0.65 0.08 0.12 0.17 0.19 Loss reserves/assets (%) 0.92 0.72 0.65 0.62 0.61 Loss reserves/NPAs (%) 226.6 255.0 270.5 204.3 170.1 Tier 1 capital ratio (%) 9.0 7.9 16.1 16.5 16.7 Total capital ratio (%) 11.3 10.0 18.4 18.6 18.7
Growth (%) Loan growth 24.7 41.2 19.1 20.4 20.4 Interest earning assets 19.9 31.0 17.4 17.9 18.1 Interest bearing liabilities 18.9 31.9 18.9 19.1 19.2 Asset growth 19.9 30.5 20.6 19.2 19.3 Deposit growth 25.1 42.4 20.0 20.0 20.0
Per share Reported EPS (RMB) 2.28 2.66 3.61 4.03 4.72 Norm EPS (RMB) 2.28 2.66 3.61 4.03 4.72 Fully diluted norm EPS (RMB) 2.28 2.66 3.61 4.03 4.72 DPS (RMB) 0.45 0.50 0.34 0.40 0.47 PPOP PS (RMB) 3.49 3.54 4.87 5.52 6.53 BVPS (RMB) 9.80 11.92 16.44 20.13 24.44 ABVPS (RMB) 9.80 11.92 16.44 20.13 24.44 NTAPS (RMB) 9.73 11.85 16.38 20.07 24.39 Source: Nomura estimates
Nomura 146 14 January 2011
Huaxia Bank 600015 CH
FINANCIALS/BANKS | CHINA Maintained NOMURA INTERNATIONAL (HK) LIMITED
Lucy Feng +852 2252 2165 [email protected]
Donger Wang +852 2252 1590 [email protected] REDUCE
Action Closing price on 7 Jan RMB11.46 After revising our earnings estimates for FY10F-FY12F, Huaxia’s return is still at Price target RMB8.71 the low end of its peers. Trading at 1.3x FY11F PB, 12x FY11F PE, we maintain (from RMB8.03) our REDUCE rating. Although SME business could still back up its profitability, we Upside/downside -24.0% Difference from consensus -15.4% believe the overhang on LGFV loans will have a potential impact given they accounted for 15.5% of total loans. We roll over our PT to RMB 8.71 for FY11F. FY11F net profit (RMBmn) 6,430 Difference from consensus -22.5%
Catalysts Source: Nomura We see further rounds of rate hikes as a catalyst to expand the sector’s NIM. Nomura vs consensus Anchor themes Our forecasts are lower than The operating environment remains favourable for Chinese banks in 2011F, but consensus, likely because we negative sentiment from uncertainties over policies and asset quality continues to assume lower loan yields and higher weigh on valuations. Better visibility on regulatory policies (capital and provisioning) funding costs. could trigger a re-rating in the near term.
Low return with overhang on Key financials & valuations 31 Dec (RMBmn) FY09 FY10F FY11F FY12F PPOP 8,205 11,703 14,204 17,300 LGFV loans Reported net profit 3,760 5,358 6,430 7,704 Normalised net profit 3,760 5,358 6,430 7,704 REDUCE maintained; PT revised to RMB8.71 Normalised EPS (RMB) 0.75 0.90 0.94 1.12 We revise our PT to RMB 8.71 based on a revised long-term ROE of Norm. EPS growth (%) 12.8 20.1 3.7 19.8 Norm. P/E (x) 15.2 12.7 12.2 10.2 13.0% and PB multiple of 1.0x, with our estimates rolling over to Price/adj. book (x) 1.88 1.45 1.31 1.18 FY11F. We have revised up Huaxia’s earning estimates by 2.4-4.7% Price/book (x) 1.881.451.311.18 in FY10F-FY12F to reflect our revised NIM assumptions, which Dividend yield (%) 1.1 1.0 1.2 1.5 incorporate our expectations of increasing loan yield in 2H10F and ROE (%) 13.0 12.7 11.3 12.2 FY11F given our expectation of multiple interest hikes. However, ROA (%) 0.48 0.58 0.60 0.62 Earnings revisions FY11F ROA and ROE forecasts of 0.6% and 11.3% are still at the low Previous norm. net profit 5,119 6,234 7,520 end among peers. We reiterate our REDUCE rating. Change from previous (%) 4.7 3.1 2.4 Previous norm. EPS (RMB) 0.86 0.91 1.10 SME a medium-term focus; limited contribution to Source: Company, Nomura estimates profitability Share price relative to MSCI China Huaxia’s SME loans exceeded RMB88.4bn in 3Q10 (17.4% of total (RMB) Price loans). By end-3Q10, its SME loan growth had reached 38% y-y, 14 Rel MSCI China 120 almost double total loan growth of 20% y-y. We expect total SME loans 14 115 13 110 to reach RMB 100bn by end-2010, representing roughly 20% of total 13 105 12 100 loans outstanding. In light of the substantial growth of the SME 12 95 business and higher yields on SME loans, we expect SME business to 11 90 11 85 boost the bank’s overall loan yield in the medium term, although the 10 80 contribution to short-term margin expansion will likely be limited. Jul10 Apr10 Oct10 Jun10 Jan10 Feb10 Mar10 May10 Aug10 Sep10 Nov10 Dec10 Overhang on LGFV and real estate loans remains 1m 3m 6m Absolute (RMB) 1.1 6.1 5.1 By the end of 3Q10, the growth rate of Huaxia’s real estate loan had Absolute (US$) 1.4 6.9 7.5 declined by 12% y-y. New loans in 3Q10 were mainly extended to Relative to Index 1.3 5.2 (9.9) developed cities, such as Beijing, Chongqing, Hangzhou and Wuhan Market cap (US$mn) 8,626 and to large/medium-sized state-owned real estate enterprises. We Estimated free float (%) 54.0 52-week range (RMB) 13.73/10.43 understood from management that the quality of real estate loans has 3-mth avg daily turnover (US$mn) 78.1 been improving, although the overall loan amount has increased Stock borrowability Hard slightly. Meanwhile, we noticed that by end 1H10, Huaxia had LGFV Major shareholders (%) loans amounting to RMB79.1bn, or 15.5% of total loans. We estimate Deutsche Bank 14.7 that with the implementation of the new LGFV loans risk weighting Shougang Group 14.0 Source: Company, Nomura estimates policies, the bank’s FY11F CAR and T1 CAR will be reduced by 2.35pct and 1.68pct respectively.
Nomura 147 14 January 2011
Huaxia Bank Lucy Feng
Exhibit 174. Huaxia: earnings revisions New Old Change % Profit & loss (RMBmn) 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F Net interest income 20,405 24,895 30,421 20,075 24,680 30,212 1.6 0.9 0.7 Fee income 1,374 1,612 1,887 1,374 1,612 1,887 0.0 0.0 0.0 Non-interest income 1,719 1,981 2,287 1,719 1,981 2,287 0.0 0.0 0.0 Operating income 22,124 26,876 32,708 21,794 26,661 32,499 1.5 0.8 0.6 Operating expenses (10,421) (12,672) (15,408) (10,409) (12,663) (15,400) 0.1 0.1 0.1 PPOP 11,703 14,204 17,300 11,385 13,997 17,099 2.8 1.5 1.2 Provisions (4,559) (5,631) (7,028) (4,559) (5,685) (7,072) 0.0 (0.9) (0.6) Operating pre-tax 7,143 8,573 10,272 6,826 8,312 10,027 4.7 3.1 2.4 Profit tax (1,786) (2,143) (2,568) (1,706) (2,078) (2,507) 4.7 3.1 2.4 Profits attributable to equity holders 5,358 6,430 7,704 5,119 6,234 7,520 4.7 3.1 2.4 Source: Nomura estimates
Valuation Methodology Our new price target of RMB 8.71 is based on a 1.0x P/B multiple applied to FY11F BVPS on the back of sustainable ROE of 13.0%. We use a Gordon Growth model (target P/BV = (sustainable ROE – long-term growth)/(cost of equity – long-term growth)) to derive our fair P/BV range (methodology unchanged), assuming a cost of equity of 13.5% and a terminal growth rate of 6.5%. We derive our terminal growth by applying a 50% payout ratio to our long-term sustainable ROE.
Risks to our investment view Upside risks: a strong NIM rebound amid the interest rate hike cycle. Downside risks: worse-than-expected macro tightening might result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth.
Nomura 148 14 January 2011
Huaxia Bank Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F Interest income 37,370 32,488 41,159 55,110 72,481 Interest expense (20,910) (16,699) (20,754) (30,215) (42,061) Net interest income 16,460 15,788 20,405 24,895 30,421 Net fees and commissions 823 1,024 1,374 1,612 1,887 Trading related profits 185 204 234 269 310 Other operating revenue 107 123 111 100 90 Non-interest income 1,115 1,351 1,719 1,981 2,287 Operating income 17,575 17,140 22,124 26,876 32,708 Depreciation Amortisation - - - - - Operating expenses (8,674) (8,935) (10,421) (12,672) (15,408) Employee share expense Op. profit before provisions 8,901 8,205 11,703 14,204 17,300 Provisions for bad debt (4,507) (3,330) (4,559) (5,631) (7,028) Other provision charges (387) (47) - - - Operating profit 4,007 4,828 7,143 8,573 10,272 Other non-operating income - - - - - Associates & JCEs - - - - - Pre-tax profit 4,007 4,828 7,143 8,573 10,272 Income tax (936) (1,067) (1,786) (2,143) (2,568) Net profit after tax 3,071 3,760 5,358 6,430 7,704 Minority interests - - - - - Other items - - - - - Preferred dividends - - - - - Normalised NPAT 3,071 3,760 5,358 6,430 7,704 Extraordinary items - - - - - Reported NPAT 3,071 3,760 5,358 6,430 7,704 Dividends (649) (649) (695) (964) (1,156) Transfer to reserves 2,422 3,111 4,663 5,465 6,549
Valuation and ratio analysis NIM rebound FD normalised P/E (x) 17.1 15.2 12.7 12.2 10.2 FD normalised P/E at price target (x) 13.0 11.6 9.6 9.3 7.7 Reported P/E (x) 17.1 15.2 12.7 12.2 10.2 Dividend yield (%) 1.1 1.1 1.0 1.2 1.5 Price/book (x) 2.1 1.9 1.5 1.3 1.2 Price/adjusted book (x) 2.1 1.9 1.5 1.3 1.2 Net interest margin (%) 2.47 2.01 2.22 2.33 2.44 Yield on interest earning assets (%) 5.61 4.13 4.49 5.16 5.81 Cost of interest bearing liabilities (%) 3.49 2.24 2.41 3.04 3.67 Net interest spread (%) 2.12 1.89 2.07 2.11 2.14 Non-interest/operating income (%) 6.3 7.9 7.8 7.4 7.0 Cost to income (%) 49.4 52.1 47.1 47.1 47.1 Effective tax rate (%) 23.4 22.1 25.0 25.0 25.0 Dividend payout (%) 21.1 17.3 13.0 15.0 15.0 ROE (%) 15.0 13.0 12.7 11.3 12.2 ROA (%) 0.46 0.48 0.58 0.60 0.62 Operating ROE (%) 19.6 16.7 16.9 15.1 16.3 Operating ROA (%) 0.61 0.61 0.78 0.80 0.82
Growth (%) Net interest income 21.7 (4.1) 29.2 22.0 22.2 Non-interest income 61.3 21.2 27.2 15.3 15.4 Non-interest expenses 26.6 3.0 16.6 21.6 21.6 Pre-provision earnings 20.9 (7.8) 42.6 21.4 21.8 Net profit 46.2 22.4 42.5 20.0 19.8 Normalised EPS 33.6 12.8 20.1 3.7 19.8 Normalised FDEPS 33.6 12.8 20.1 3.7 19.8 Source: Nomura estimates
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Balance Sheet (RMBmn) As at 31 Dec FY08 FY09 FY10F FY11F FY12F Cash and equivalents 1,589 1,824 26,532 42,478 61,238 Inter-bank lending 22,904 32,363 33,982 35,681 37,465 Deposits with central bank 124,844 89,248 106,205 126,384 150,397 Total securities 92,189 83,193 91,512 100,663 110,729 Other interest earning assets 135,342 209,952 230,947 254,042 279,446 Gross loans 355,477 430,226 510,051 600,967 712,627 Less provisions (9,809) (10,773) (12,512) (14,810) (17,897) Net loans 345,668 419,452 497,539 586,157 694,731 Long-term investments - - - - - Fixed assets 4,545 4,968 5,067 5,169 5,272 Goodwill - - - - - Other intangible assets - - - - - Other non IEAs 4,518 4,595 4,825 5,066 5,319 Total assets 731,599 845,595 996,609 1,155,639 1,344,597 Customer deposits 485,350 581,678 692,197 823,715 980,221 Bank deposits, CDs, debentures 118,572 112,247 126,835 146,278 169,610 Other interest bearing liabilities 85,987 107,759 109,914 112,112 114,354 Total interest bearing liabilities 689,909 801,684 928,946 1,082,105 1,264,184 Non interest bearing liabilities 14,085 13,530 13,665 13,801 13,939 Total liabilities 703,994 815,214 942,611 1,095,906 1,278,124 Minority interest - - - - - Common stock 4,991 4,991 4,991 4,991 4,991 Preferred stock - - - - - Retained earnings 802 1,621 6,284 11,749 18,298 Proposed dividends 649 649 695 964 1,156 Other equity 21,164 23,121 42,029 42,029 42,029 Shareholders' equity 27,605 30,381 53,998 59,733 66,473 Total liabilities and equity 731,599 845,595 996,609 1,155,639 1,344,597 Non-performing assets (RMB) 6,487 6,457 7,633 9,021 10,992
Balance sheet ratios (%) Loans to deposits 73.2 74.0 73.7 73.0 72.7 Equity to assets 3.8 3.6 5.4 5.2 4.9
Asset quality & capital NPAs/gross loans (%) 1.8 1.5 1.5 1.5 1.5 Bad debt charge/gross loans (%) 1.27 0.77 0.89 0.94 0.99 Loss reserves/assets (%) 1.34 1.27 1.26 1.28 1.33 Loss reserves/NPAs (%) 151.2 166.8 163.9 164.2 162.8 Tier 1 capital ratio (%) 7. 5 6.8 10.6 10.1 9.7 Total capital ratio (%) 11.4 10.2 15.1 14.2 13.3
Growth (%) Loan growth 15.8 21.3 18.6 17.8 18.5 Interest earning assets 23.7 15.7 15.1 14.9 15.4 Interest bearing liabilities 20.9 16.2 15.9 16.5 16.8 Asset growth 23.5 15.6 17.9 16.0 16.4 Deposit growth 10.6 19.8 19.0 19.0 19.0
Per share Reported EPS (RMB) 0.67 0.75 0.90 0.94 1.12 Norm EPS (RMB) 0.67 0.75 0.90 0.94 1.12 Fully diluted norm EPS (RMB) 0.67 0.75 0.90 0.94 1.12 DPS (RMB) 0.13 0.13 0.12 0.14 0.17 PPOP PS (RMB) 1.94 1.64 1.98 2.07 2.53 BVPS (RMB) 5.53 6.09 7.88 8.72 9.70 ABVPS (RMB) 5.53 6.09 7.88 8.72 9.70 NTAPS (RMB) 5.53 6.09 7.88 8.72 9.70 Source: Nomura estimates
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Any Authors named on this report are Research Analysts unless otherwise indicated Analyst Certification We, Lucy Feng and Donger Wang, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
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Distribution of ratings (Global) Nomura Global Equity Research has 2027 companies under coverage. 48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 38% of companies with this rating are investment banking clients of the Nomura Group*. 38% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Nomura Group*. 12% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 13% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 December 2010. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc.
STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex- Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.
SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.
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Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target - Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies.
SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein.
SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%.
SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Price targets Price targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
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