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Tuesday 5 July 2005
Banking on China
Takeaways from The Amazing Race
Key takeaways from ABN AMRO's recent China financials conference
were: mortgage growth is under pressure; asset quality is stable
but NPLs are set to rise; margin upside seems limited without a rate
hike. We maintain our cautious stance on the sector.
B'berg Rec. Price Price Target +/- PBV PER P/PPP Yield ROE
(Rmb) (Rmb) (%) (X) (X) (X) (%) (%)
CMB 600036 CH ADD 6.00 6.40 6.7 2.7 17.3 5.7 1.3 16.3
HXB 600015 CH SELL 3.68 3.10 -15.8 1.5 14.1 3.6 0.6 10.9
MBC 600016 CH SELL 4.70 3.90 -17.0 2.0 13.5 4.4 1.7 16.1
SPDB 600000 CH SELL 7.43 5.60 -24.6 2.1 14.7 3.3 1.4 14.5
SZDB 000001 CH SELL 5.84 4.50 -22.9 2.3 37.2 3.8 0.5 6.4
Source: Company data, ABN AMRO forecasts
Mortgage growth facing pressure
Most banks attending our conference are targeting 20% loan growth this year.
Although slower than last year, this pace of growth is still brisk. Mortgages will likely
be the highest growth sector, as almost every bank plans to grow aggressively in
this area. But banks are facing near-term pressures on mortgages due to the sharp
drop in property deals and rising instances of early repayments, as many investors
look to exit the property market.
Asset quality broadly stable, but NPLs set to rise
Banks say they have so far seen no significant deterioration in asset quality from
anti-speculative measures the government imposed earlier this year on the property
market. The consensus among banks is that property prices are unlikely to fall
sharply because the government wants to maintain stable and sustainable growth
and will not allow a collapse in prices. Despite this, the absolute level of NPLs is set
to rise due to the government's austerity measures.
Near-term margin upside seems limited without a rate hike
Despite the relaxation of the lending rate ceiling in October 2004, banks have been
unable to lend at higher rates. They still have very limited pricing power over
existing customers. This reflects the petition among Chinese banks for
high-quality corporate clients. It also seems unlikely that banks will significantly
adjust their customer mix in the short term. Market-driven interest rates (inter-bank,
government yields, discounted bills) have all been falling this year and will partially
offset margin gains from the PBOC's October 2004 rate hike.
Cautious sector view maintained
We believe there are significant NPL risks going forward given the uncertainties in
the property market and deteriorating corporate cash flows from excess capacity.
However, our meetings confirm our view that China Merchants Bank (CMB) is one of
the best managed banks in the sector. CMB is also the only stock in the sector on Analyst
which we have a positive rating.