Monday, May 17, 2010

>CHINESE BANKS: Property Correction: Why We Are Not Too Worried

25% property correction manageable — We expect China’s property tightening will see prices fall 25% from recent peak (back to late 09 levels) and volumes contract 25%. We believe credit quality will be little affected in this scenario given: 1) only property lending in 1Q10 is at risk, which we estimate is 14% of mortgages, 19% of developer loans; 2) conservative LTVs; 3) property prices have been on a rising trend; & 4) developers’ relatively strong financial positions.

But a 30-40% correction would be more severe — In this scenario, the risks will spread into the 2009 vintage as well, which accounts for the bulk (estimated 40-45%) of property loans following the lending surge in 2009. We estimate average LTV for 2009 mortgages to be ~60%, so there is still a buffer.

Volumes will be hit — Mortgage volumes will suffer from a double whammy of lower transaction volumes and lower LTVs. We expect system mortgages to grow 23% in 2010, down from 60% in 2009, and vs. 12% YTD growth.

NIM slightly positive — Most banks have revised up mortgage rates for 1st homes by ~90bps (from 0.7x to 0.85x benchmark rate); we think this will only benefit NIM by ~1bps given the expected slowdown in new mortgage volumes.

Pressure on UDIV loans — An indirect result is the impact on local governments given their dependence on land sale revenues. It is yet unclear how much extra provisions the CBRC will require banks make on UDIV loans (~11% of total loans), but surplus provisions in the sector are rising (~40bps of loans 1Q10) & we think will help meet any extra provision requirements later this year.

Prefer big banks — We believe property tightening/correction will be a near-term overhang despite inexpensive valuations/solid fundamentals. We prefer big banks; top picks CCB, ICBC. Note ICBC is the worst-performing big bank YTD.

To read the full report: CHINESE BANKS