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Over the long term, CIO expects larger banks and retail banks to outperform their peers. (Keystone)

Equities How to position in Chinese banks

23 September 2019, 09:03 am HKT, written by Daisy Tseng

China has taken another step in interest rate reform recently as Beijing aims to lower borrowing costs. This is negative for banks in the near term, but CIO sees some opportunities in longer term mainly driven by continued retail business shift.

China's ongoing loan rate liberalization and supply side banks should also continue to gain share in both assets and reform are set to see the banking stocks underperform liabilities from small banks. in the near term, according to UBS CIO Global Wealth Management. CIO expects a 5-10bps drop in NIM at big banks, compared with 10-15bps at smaller banks. The recent move by the People's Bank of China to replace its benchmark lending rate with a loan price rate (LPR) implies However, CIO does not think the market has priced in a potential loan rate cut. CIO sees this as inevitable as the potential near-term risks from margin pressure, and China's regulator aims to lower borrowing costs and ensure therefore expects a correction of 10-15% in share prices of better credit access for private corporates. Chinese banks. But with deposit rates unchanged, what it means is that it Longer term, the continuous shift of focus from corporate will put pressure on banks' net interest margins (NIMs), in to retail banking will see retail banks outperform. particular for smaller banks whose funding costs are higher. Historically, all Chinese banks were corporate banks with "Assuming 10-20bps of rate cuts in loans, NIMs [at smaller most loans lent to state-owned enterprises. But in recent banks] are likely to decrease by 10-15bps overall. This will years, the retail business has been on a clear uptrend, led by lead to an around 10% decline in net profits," CIO noted joint stock banks, mainly due to the slowdown in corporate in its latest report on Chinese equities. loans and the increased capital requirement under Basel III. Big banks, on the other hand, are likely to fare better CIO added that the shift will occur through increased given their stronger funding base and pricing power. Big product cross-selling and retail services (such as wealth UBS Investment Insights For UBS marketing purposes

management) and not a continued expansion of credit card or low-quality consumer loans.

"We expect to see strong growth in retail banking. Their margins should be supported by strong deposit franchises. High margins, strong fees and high credit growth should allow retail banks to trade at more than 60% premiums to their peers in the long run," CIO said.

What about virtual banks? Traditional banks have been taking defensive action against the competition as a substantial number of virtual banks are revolutionizing banking.

CIO expects to see more banks cooperate with tech companies, which offers a win-win situation for both sides.

"Traditional banks can provide offline channels and full financial service while the technology and data traffic offered by tech companies can beef up risks controls, lower product pricing, and lead to greater innovation. This will create a new competitive landscape that tilts toward retail- focused, asset-light, and cost-efficient business models," CIO said.

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