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Banks | CHINA 2011 Outlook NOMURA INTERNATIONAL (HK) LIMITED 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] Donger Wang Stock picks: rural players immune to tighter new policies +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 ABC-H (1288 HK) BUY 3.99 4.80 better earnings visibility for 2011. 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 CMB-H (3968 HK) BUY 20.20 26.86 look for in 1H11F, but negative sentiment from ongoing policy overhang still weighs 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 Nomura 2 14 January 2011 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).
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