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雷达卡
Riding the twin dragons
China and US monetary policies are ultra-accommodating, causing animal spirits to return to China/HK asset markets (property, stocks). We do not believe China can stop its pursuit of growth through credit (+$1.1tn 1H09 or 25% of GDP) and this will hurt sustainable ROAs for China banks over time. However, limited credit risk in HK, better HK loan spreads and China growth will help HK banks sustain high RoRWAs, raise dividend payouts and boost valuations.
Stocks for Action
TargetCompanyTickerRatingPricePriceBank of China HK2388 HKBuy16.2020.00BEA23 HKBuy27.2030.40CCB939 HKBuy6.046.50ICBC1398 HKBuy5.636.30ICBC Asia349 HKBuy16.1616.10Bank of China3988 HKHold3.953.90China Citic998 HKHold4.795.00Hang Seng Bank11 HKHold111.30110.00BoCom3328 HKReduce9.488.00CMB3968 HKReduce17.3815.60HSBC5 HKReduce82.0569.00Standard Chartered 2888 HKReduce174.70152.00
Price as of September 4 close; prices in HK$
Price performance (%)
1-wk1m3mYTDBank of China HK7.311.917.890.0BEA8.610.4-3.084.4CCB5.17.018.544.7ICBC9.313.117.741.7ICBC Asia5.115.019.997.8Bank of China8.812.615.293.4China Citic4.70.27.984.5Hang Seng Bank1.8-3.2-5.210.2BoCom5.09.224.271.7CMB3.90.95.758.8HSBC1.2-0.826.421.8Standard Chartered 0.6-1.111.190.7
Source: Company data, Mirae Asset Research
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China’s shift toward high credit growth will hurt ROA
We estimate China’s economy grew by 88% from 2004-07 in nominal terms, but only grew bank credit by 47% showing a high return on capital deployed. However, we believe the next 3-4 years will see credit growth averaging 15-20% per annum, higher loan/GDP, lower incremental margins and rising credit risk thus eroding sustainable ROAs toward 0.5-1.1%, down from 1.0-1.5% in 2007-2008.
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HK banks to show high RoRWAs over next 2-3 years
Credit risk and Lehman mini-bonds issues are no longer a concern for HK banks. Rather we believe PPOP margins for HK banks have bottomed and credit costs should be very low for next 2-3 years so RoRWAs should improve for the sector helping banks to raise dividends and invest in China operations. HSBC will face more pressure from competitors in HK given its ROIC of ~35% and profit are 4x bigger than Standard Chartered and 3x bigger than BOC HK.
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HSBC strongest in China, but weak incremental value
We estimate HSBC can create $10.6bn in incremental value from China over the next 5-10 years, $6.3bn for SCB and $4-6 for Hang Seng Bank, BOC HK and BEA. Compared to their market cap this represents incremental value of 5-6% for HSBC, 10-14% for SCB, 15-22% for HSB, 19-28% for BOC HK and 65-100% for BEA.
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Top picks: BOC HK, BEA, ICBC and CCB
Our top picks in HK are BOC HK (growing yield play +6% and upside from China) and BEA (inexpensive at 1.5x P/B and China listing catalyst in 2010). For China our top picks are ICBC/CCB as they are best positioned to adjust to policy changes in China given their strong deposit mix, strong fee income, low costs and competitive strength in infrastructure lending with ROA 20-30 bps higher than peers.
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