Banks
CBRC considers excluding some subdebt in
regulatory CAR calculations: not really relevant to
credit tightening - ALERT
• Potential exclusion of sub-debt in regulatory capital: Domestic
newspaper China Securities Journal reported that CBRC is considering
excluding subordinated debt sold to other banks by portion or even in total
from capital calculation, aiming to discourage the cross-holding of these
subordinated debts among the banks. While we understand CBRC's concern
on systemic risk, we believe such rule would be an ultra-conservative one,
as globally subordinated debt is counted as tier-2 capital.
• This indeed has little to do with intention to curb loans growth. While
excluding sub-debt would reduce capital and thus indirectly increase core
capital need for loan growth, we believe this indeed is irrelevant to investors'
fear about tightening, because 1) this has little impact on bigger banks’
ability to grow loans in near-term given their high tier-1 ratio, and 2) this is
not a measure that regulator may roll out anytime soon, so it has nothing to
do with well-expected loan slowdown from an unsustainably strong level.
Also it’s worth noting that subdebt is still included as tier-2 in the latest draft
CAR calculation guideline for BASEL II implementation.
• The impact is far bigger on smaller banks than bigger banks. Given that
subdebts account for much bigger portion in total capital for smaller banks
which generally have much lower tier-1 and thus are all planning for equity
raising in near-term, such new rule will likely have little impact on bigger
banks, especially before end of 2010.
• Our bullish earnings forecasts are built on expected loan growth
slowdown to mid-teens. We believe many investors over-emphasize on the
monthly new loan figures and get lost. They are worried about big surge in
June loans and they are disappointed on a “low” July new loans. In our view,
despite slowdown FY09 growth will exceed all expectations, and sequential
slowdown is well-expected partly due to seasonality, as more loans come to
maturity in 2H (including the bills) and few new projects start in winter.
Moreover, banks are planning for a sequential slowdown. While we are
bullish on 2010 earnings, we expect loan growth to slow down to 15% for
2010 as we believe 2009 represent a peak year in new project starts.
• Investors have over-reacted. Summer weaknesses are buy opportunities
for strong performance in Autumn. We are fully aware of potential
consolidation in share prices due to weaker sentiment in near-term amid the
tightening illusion, and little positive surprise in the steady 2Q09 earnings.
We believe fundamentals remain intact and operating trend is improving.
We believe in 3 months investors will turn positive when they see through
policies and hopefully get more upbeat trend in 3Q09 earnings. We
recommend investors buy on weakness and our preferred holdings are still
BOC-H and BoComm-H among bigger banks.