We visited banks, regulators and real estate companies last week in
Beijing and Shanghai, and focused on risks such as soaring loan
growth leading to asset quality issues in future, the end-use of all that
lending, a sharp slowdown in lending, margin compression, etc.
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China provides the best macro environment in Asia for banks despite
the expected soft patch. Aggressive fiscal stimulus and monetary policy
have underpinned growth. The stress level for banks based on CS
Banking Pressure Index is moderate and below most markets in Asia.
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Chinese banks are among the most profitable and least vulnerable to
asset quality stress in Asia. Banks said NIMs have already compressed
around 50 bp in 1Q09 and expect improvement in 2H09. Banks clarified
that SMEs/exporters were under pressure since early 2008 and most
problem cases surfaced last year. Banks also expect loan growth to
decelerate and stabilise at lower levels for the rest of the year.
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Regulators told us they have instructed the banks to check the viability
of infrastructure projects in their own right (without government
support) and asked banks to track the end-use of all that lending.
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Prima facie, Chinese banks do not look cheap on a P/B basis – but with
the second highest ROEs in Asia and with a big discount to five-year
average P/B, valuations are attractive. According to our GEM strategist
Sakthi Siva’s P/B-ROE model, Chinese banks come up as the second
most attractive. We remain OVERWEIGHT Chinese banks within the
Asian financials context with ICBC and CCB as our top picks.