UOB maintains China BANKS at ‘market weight’
UOB Kay Hian said it is maintaining its ‘market weight’ call on Mainland Chinese banks.
It also said small and medium sized businesses (SMEs) in the PRC will get a boost from a recent move by the country’s banking watchdog to allow bond issuances for the purpose of SME lending.
“The CBRC (China Banking Regulatory Commission) announced a new policy allowing banks to issue bonds for the sole purpose of SME lending. Banks that have SME lending growth equal or exceeding overall loan growth and also surpassing last year's y-o-y growth are qualified to apply for issuing SME lending bonds," UOB said.
CBRC also restated that SME lending amounts below five mln yuan to a single borrower could be excluded in the calculation of Loan-to-Deposit ratio (LDR), and the risk weighting for SME lending will be equal to retail lending, which is at 75%.
“This is another punch from CBRC to address the SME liquidity issue and private lending. Combined with the other two policies released earlier, 1) excluding loans under Rmb5m from the calculation of LDR and 2) a 75% risk weighting, the approval of issuing bonds for the purpose of SME lending will greatly relieve the liquidity shortage situation that has been plaguing SMEs.
“This policy is also seen as a measure to fight the unhealthy growth of the private lending sector (as most of their ultimate clients are SMEs),” UOB said.
Higher return comes with higher risk The move is "generally favorable" for banks under UOB's coverage as most of them should reach the requirement (growth of SME loans equal or exceeding overall loan growth) for applying for such bond issuances.
"SME loans are known for their high return in compensation for their relatively higher risk," UOB added.
Clearing off-balance sheet loans Another function for this policy is also to transfer some off-balance sheet entrusted loans back onto balance sheets.
“Banks currently use entrusted loans as a way to bypass the lending regulations. However, under this policy, banks no longer need to use entrusted loans since they can obtain funding by issuing bonds (serving SME lending purposes only) and lend them out themselves, receiving the entire sum of interest income instead of only a small part of it.
“From the risk perspective, they are now also transferred to the banks. Using entrusted loans, bank do not bear the default risk while the corporate lending the sum bears all default risk. But issuing bonds and in turn lending them out will put all burden on the banks,” UOB said.
CMB and Minsheng to benefit most "Although we see such a policy favorable for all banks, we believe China Merchants Bank and Minsheng Bank will again be the major beneficiaries as both of them are well known and well connected to SMEs and can, therefore, obtain the better quality SME loans,” UOB added.
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UOB Kay Hian says PRC premier’s credit stance to help SMEs
During the economic conference held in Tianjin recently, PRC Premier Wen Jiabao released signals on selective easing.
He said government macro-policies and regulations should maintain a reasonable level of flexibility to keep steady growth of the monetary base and credit levels, UOB said.
Wen also stressed credit policies and industrial policies should ensure the funding needs of key government projects, while fiscal expenditure should put the livelihood of the people as a priority.
He also mentioned affordable housing projects and that SMEs should be helped and supported by future government policy.
“Inline with our discussion in our previous emails, we believe that macro-tightening policies have come to an end (indicated by the sharp drop in bank acceptance discount rates and the rebound in central government investment),” UOB said.
Photo: Courage Marine
Since Wen called for flexibility of the credit tightening policies, the progressive policy-easing in some specific areas becomes highly likely at the current stage. This pro-growth statement from top leaders could further improve the market sentiment on investment-related sectors including railways, affordable housing and water conservancy segment.
“Cement makers and other investment related sectors could face selling pressure following Anhui Conch’s 3Q results and overseas macro uncertainties. However, investors can wait for better entry points for investment-related stocks given that Beijing is about to release easing policies.
“On the building materials side, we still like CNBM (HK: 3323) and CR Cement (HK: 1313). We remain positive on CSR (HK: 1766), Times Electric (HK: 3898), CCC (HK: 1800) and CSCI (HK: 3311) as better construction plays."
Other potential beneficiaries
Construction machinery makers such as Zoomlion (HK: 1157) and Lonking (HK: 3339) and paper manufacturers including NDP (HK: 2689) and Lee & Man Paper (HK: 2314) should all benefit from new pro SME credit policies, UOB said.
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