China banks:Underlying loan growth picks up

Event

Total loans in China grew at a slower sequential clip than in July while depositgrowth stalled, according to the latest credit data released by the PBOC. Ex-National Service effects, underlying momentum picked up.

Impact

Loan growth slowed a bit. Total loans / RMB loans increased by 1.1% MoM/ 0.9% MoM, slowing from the same 1.7% pace in July. Year-over-yearcomparisons have been distorted by the inclusion of interbank loans at thebeginning of the year and on a YTD basis, total loans / RMB loans are up 11.8%/ 10.8%. The moderation in credit growth was related to (less) NationalTeam borrowing. In July, the banks were called into “National Service” byproviding funding for the so-called stock market "rescue" plan, as reflected inthe RMB 886bn in new interbank loans in July. In August, however, thissegment dropped by RMB 55bn.

Underlying loan growth looks stable. By segment, consumer loans rose1.4% MoM / 18% YoY (vs 1.1% MoM / 17%YoY in July), helped by the longtermborrowings (mainly mortgages) which were up another 1.7% MoM lastmonth. The strong trend supports our property team’s expectations of furtherrecovery in the housing market. Corporate loans were up 0.7% MoM / 13.1%in August with new loans concentrated in bills financing which was up 6.1%MoM / 64.2% YoY. The appetite for mid- and long-term credit remains tepidas total loans in this category only grew 0.4% MoM / 13.1% YoY.

Slow growth in deposits in August was likely due to the stock marketmeltdown. Interbank deposits, including custody money and settlement funds,were down RMB 796bn MoM as investors shifted money from brokerageaccounts. As a result, residential deposits rose 0.4% MoM / 6.4% YTD after asmall dip in July. In the same month, corporate deposits were also up 1.7%MoM and 6.6% YTD, after a 0.5% MoM drop in July.

Liquidity tight but PBOC loosening. With loan growth surpassing depositgrowth, LDR inched up again to 70.2%, the highest since April. In a sign offurther easing monetary policy, the PBOC released a communiquéannouncing the adoption of more flexible rules in reserve requirements. In aseparate statement, the PBOC explains the change in mythology (from dailybasis to average basis) is aimed to “provide buffer for liquidity management atthe banks and smooth out abrupt money market volatility.”Outlook

Bank fundamentals are weak given weak underlying solvency, structuralNIM compression and rising provisions.

But we think the trade -- and it IS a trade -- is to go long. As discussed inChina banks: 2Q15 review, we have switched to a more positive trading viewon the Chinese bank stocks given historical trough valuations and ourexpectations for a moderate macro recovery from the current trough headinginto yearend. ICBC and CCB are our top picks. For more beta, we suggestCQRC Bank. We favour H-Shares over A-Shares for all dual-listed names.