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Annual short report of China banking sector in 2008——The banks of China the promised land in the storm

Friday, April 17, 2009

4822

Annual short report of China banking sector in 2008

Recommendation on 17 April 2009
Recommendation	Buy

Weekly Special - 175 Geely

Summary

Currently, mainly domestic banks have released their 2008 annual reports or performance announcements, according to their data, under the background with natural disasters and global financial crisis, the scale of assets and profits of most banks still maintain stable growth.

The business of China's banking sector has experienced the obviously changes, the volume of bank's business increased rapidly, especially for the intermediary business, meanwhile the profitability of banks have improved as well.

The scale of deposits of the listed banks increased rapidly, and the growth of the loans decreased due to the downward of China's economy in 2008.

In all, the listed banks still gained the large profits in 2008, and their performances met with our expectation. In 2009Q1, the loans of the banks have increased largely, which benefited from the economic stimulus plans released by Chinese central government. We estimate the performance of the listed banks will outperform the market in 2009, and we give Buy rating to domestic banking sector.

The expanding of the scale of assets

As at the end of 2008, according to the data from CBRC, total assets of domestic portfolios of both domestic and foreign currencies of the banking institutions achieved to RMB62.4 trillion, up 18.6% yoy. The portion of total assets of state-owned commercial banks to all financial institutions was over 50% to RMB31.8 trillion, increased 13.7% yoy.

Total liabilities of domestic portfolios of both local and foreign currencies of the banking institutions increased 18.2% yoy to RMB58.6 trillion. Total liabilities of SOCBs were RMB29.9 trillion, up 13% yoy.

However, according to the latest data from CBRC, by the end of March 2009, total assets of domestic portfolios in both local and foreign currencies of the banking institutions closed to RMB70 trillion, up 25.1% yoy.

The changes of total liabilities of the banking institutions are very similar as the changes of its total liabilities. We noted that both the assets and liabilities of domestic banks have rebound since September 2008, especially for SOCBs, its rebound was much stronger than joint-stock commercial banks (JSCBs) and city commercial banks (CCBs), by contrast, the year-on-year growth rate of the assets and liabilities of non-bank financial institutions (NBFIs) were cut.

This is because the central government released a series of economic stimulus plans at the beginning of 2008Q4, and SOCBs have the obviously advantages in the relationship with the governments and the institutional clients, which caused the assets and liabilities of SOCBs to increase rapidly.

In detail we find that the annual growth rates of total assets of SOCBs are lower than such rates of JSCBs. The main reason is although the scales of JSCBs are much smaller, they have more flexible business structures, and the base of their assets are smaller as well, which can achieve the higher growth relatively.

Stable growth of the profits but the year-on-year growth rate declined

Due to the decrease of China's economy in 2008, the profits of most listed banks declined, the main reason was the decrease of intermediary business, which caused net fee and commission incomes of banks to decline rapidly.

However, the yoy growth rates of JSCBs` profits were slightly higher than SOCBs, it is worthy of noting that SPD Bank is the only listed bank to achieve the high growth of net profit among the listed banks until now, which benefits from the fast growth of its revenue, and the sharply decrease of the tax.

Both the deposits and net interest margin increased

The deposits of individuals and institutions maintained the stable growth due to the decrease in macro-economy and stock market in 2008. Among domestic listed banks who released the annual reports, the scale of deposits of ICBC, BOC and BoCom maintained the growth except CCB.

In addition, benefited from the large increase of the loans in the second half year of 2008, interest incomes of the listed banks also rose, and made their net interest margin increase as well.

Both the capabilities of cost and risk control improved continually

There are several reasons help the listed banks to increase their profits, which not only does benefit from the increase of the revenues but the improvement of the abilities of cost and risk control of the listed banks.

As at the end of 2008, we noted that SOCBs had the stronger abilities in cost control, and cost to income ratios of SOCBs decreased year by year. By contrast, cost to income ratios of JSCBs increased at the same time. For instance, cost to income ratio of SPD Bank rose since 2005, and still kept in the high level in 2008 even the ratio was slightly down.

In addition, the loans of the listed banks maintained the stable growth in 2008. By the end of 2008, loan to deposit ratios of middle and large-sized listed banks kept in quite stable level. ICBC and CCB have the stronger abilities in risk control, and loan to deposit ratios of both banks decreased year by year.

The improvement of the quality of assets

Benefited from the increase of the profits and improvement of the capabilities of risk control, the qualities of the assets of listed banks are becoming better in recent years. The non-performing loans (NPL) ratios of these banks have decreased, especially for ICBC, the quality of its assets improved obviously after the financial restructure in 2004. The NPL ratio of ICBC sharply declined from 21.16% in 2004 to 2.29% in 2008.

In addition, the capital adequacy rate (CAR) of the listed banks increased year by year. By the end of 2008, the CARs of all listed banks were much higher than 8%, the lowest requirement of the regulation. We noted that the CARs of SOCBs were higher than JSCBs, and the CARs of BOC and CCB were much higher than the peers, achieved 13.43% and 13.47% respectively.

Risks

In all, we have optimistic views about the growth of the profits and the qualities of the assets of domestic listed banks. However, we noted that the loans of the banking institutions were up rapidly after 2008Q3. In 2009Q1, the newly added loans of Chinese financial institutions achieved amazing RMB4.58 trillion.

Now, the CBRC is starting to investigate the flows of the newly added loans, and the government wants to ensure if the distributions of these loans are reasonable and benefit to the real economy.

The growth rate of the newly added loans in 2009Q1 is much higher than our estimation so far, and total newly added loans might over RMB6 trillion in 2009. Combined with the strong rebound in both domestic stock and property market in 2009Q1, we remain prudent for the flows of the loans. For the listed banks, the risks of the large increased loans are rising in the middle and long term, which bring more unstable factors to affect their performance in the future.

Valuation

However, although there are the higher risks from the large increased loans, and the NPLs might up in the future, we also note that the newly added loans of the listed banks are mainly putting into the government-driven projects, such as the projects in infrastructure, which have the better qualities than other smaller projects. Meanwhile, the increased loans will also bring more interest incomes for the banks, and have the positive effects for the performances of the listed banks in the short run.

In all, SOCBs have the obviously advantages in the scale of assets and the abilities of risk control, and JSCBs are more specialize in expanding the business flexibly and increasing the growth of the profits. We forecast the performances of domestic banks will be better than the market expectation in the coming quarterly reports.

Therefore, we hold the optimistic view for the prospects of the banking sector in China, and give Buy rating to the sector. We think the large SOCBs such as ICBC, CCB and so on will outperform the market due to the moderate capabilities of risk control, and the special advantages in present economic stimulus plans.

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