China banks:Moderation in loan expansion in April

Event

    Today’s PBOC data release indicates a reduction in April from the fast loanexpansion of 1Q16. Total loans expanded by just +0.5% MoM, the slowestsequential pace since Oct 2015. Total loans have now expanded by RMB4.9trillion YTD, which is 9.7% lower than the RMB5.4trn in Jan-Apr 2015. Evenstripping out FX loans, total loans YTD increased RMB5.2 trillion, +1.7% YoY.

    Impact

    System loans expanded +0.5% MoM / 13.0% YoY. RMB loans grew +0.6%MoM / +14.5% YoY in April, slightly slower than the Jan-Mar levels. RMBretail loans remain strong, (+1.5% MoM / +6.2% YTD / 17.9% YoY), with MLTloans (largely mortgages), growing +2.2% MoM / +8.4% YTD / +23.5% YoY. Total deposits expanded by 0.6% MoM / 12.6% YoY. RMB deposit growth(+0.6% MoM / +12.9% YoY) also continued to outpace FX deposits.

    LDR declined again, but by less than March. Total LDR was 71.3% (-8bpMoM / +28bp YoY) and 69.4% for the RMB book (flat MoM / +100bp YoY).

    Outlook

    Limited upside for banks in our view. The slowdown in loans and overallTSR in April is in line with indications from authorities that the credit ramp of1Q16 needed to be curtailed. We see this as a wise and prudent policy. Butrealistically the market is not likely to get excited about the bank stocks asloan growth slows down. Moreover, the system NPL ratio (1Q16: 1.75%, +8bpQoQ / +36bp YoY) could start to increase more quickly in 2Q16 as a result ofthe slowing gross loan denominator. Recognizing the reality of asset qualitydeterioration is positive, but not likely to boost sentiment.

    We prefer CCB-H as our top sector pick for investors who require China bankexposure, mainly due to its sector-high CET1 ratio of 13.46% at 1Q16, as wellas relatively stable asset quality vs ICBC, the other sector bellwether, whichhas seen NPLs rise more rapidly and has allowed its loan loss coverage todecline below the erstwhile regulatory minimum.