China Banks:New loans &total social financing both surprised on the downside in October,echoing weak

New loans significantly missed on an all-round retreat in Oct.

    New loans came in lower than expected at RMB514bn in October, down 51% MoM or6% YoY. Bill financingsurged to RMB184bn in Octobervs RMB28bn in September, accounting for36% of total new loans in October vs 3% in September, as effective demand for bank lending remained sluggish due to slowing economy.Medium & long term enterprise new loans retreated57% MoM or32% YoY to RMB152bn in October after a short-livedrebound in September, suggesting reduced interests in increasing capex by enterprises given cooling real economy. Long term new loans for householdsslipped 39% MoMto RMB200bnin October, followed by strong readings in the previous months, as property sales moderated in the month.

    TSF reported at less than half of consensus on lower bank lending and shrinking off-balance credit in Oct.

    TSF dropped 63% MoM or30% YoY to RMB477bn in October, far below the consensus of RMB1.05tn. Shadow banking credit recorded a contraction of RMB251bn stemming from a substantial decline in bank acceptance bill (-RMB369bn) and weaker trust loans (-RMB20bn). Corporate bond financing also eased to RMB252bnin Octoberfrom RMB373bn in September, accounting for 53% of total TSF.

    Catalysts and valuation .

    Further loosening monetary policies, favorable fiscal policies to further dispose of potential credit risks on LGFV loans, any progress in mixed-ownership reform as well as potential approval on mixed-business operation for China banks couldbe positive catalysts for share prices.Trading at 0.77x FY15E P/B and 5.02x FY15E P/Ewith FY15E dividend yield of 6.07%, the sector’s valuation isundemandingcompared to historical average of 1.21x P/B and 6.98x P/E. Remaincautiously positive on the sector and reiterate OVERWEIGHT rating with BOC asour top pick.