China banks:Time to party

Event

    The PBOC released monthly credit data showing a sharp increase in Januaryloan growth. Interestingly, the aggressive expansion comes a day after theCBRC’s quarterly disclosures on commercial banks’ balance sheets showedyet another quarter of asset quality deterioration.

    Impact

    System loans expanded by 2.5% MoM / 14.1% YoY. RMB loans jumped+3.3% MoM / +16.0% YoY in Jan, a sharp acceleration from the +0.8% MoM /+14.6% YoY pace in Dec 2015. RMB retail loans grew 2.2% MoM / 17% YoY,with the bulk attributable to MLT loans (largely mortgages). But MLT corporateRMB loans (+3.1% MoM / 46%YoY) were the biggest single growth driver.

    Total deposits expanded by 1.6% MoM / 12.3% YoY. RMB deposit growthalso recovered from flat Dec performance to post a more sedate growth paceof 1.5% MoM / 12.3% YOY in Jan. This is the first meaningful YoY comp sincethe PBOC widened its definition of deposits in Jan 2015, creating the sharpshifts in the deposit growth and LDR charts at left.

    LDR ticks higher yet again. The redefinition of deposits caused a 331bpdecline in the system LDR a year ago, but the LDR trend has continuedpersistently higher, especially since June 2015. Under the new definition, thesystem LDR has reached 71.7% with RMB LDR at 70.0%. While that appearsto indicate a high level of bank balance-sheet liquidity, it is crucial to be awarethat only around half of China banks’ IEAs are classified as “loans”.

    Credit quality continues to worsen. A single month is not a trend andChinese New Year creates a lot of distortion in Jan-Feb economic data. But asustained rapid pace of corporate loan growth could lead to further pain later,in our view, as outlined by yesterday’s CBRC asset quality data.