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Deutsche Bank Markets Research

Asia

Hong Kong

Banking / Finance

Banks

Industry

Chinese banks

Date

20 November 2017

Breaking News

Asset Management Guideline – Reshaping China’s shadow banking

Long-awaited asset management guidance, a long-term positive for China

________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. THE CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE’S REPUBLIC OF CHINA (“THE PRC”) (EXCEPT IN COMPLIANCE WITH THE APPLICABLE LAWS AND REGULATIONS OF PRC), EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAU.

Hans Fan, CFA

Research Analyst

(+852 ) 2203 6353

[email protected]

Jacky Zuo

Research Analyst

(+852 ) 2203 6255

[email protected]

Edward Du

Research Associate

(+852 ) 2203 6185

[email protected]

Top picks

Bank of China (3988.HK),HKD3.78 Buy

Agri. Bank of China (1288.HK),HKD3.62 Buy

China Construction Bank (0939.HK),HKD6.81

Buy

Source: Deutsche Bank

Companies Featured

ICBC (1398.HK),HKD6.19 Buy

China Construction Bank (0939.HK),HKD6.81

Buy

Agri. Bank of China (1288.HK),HKD3.62 Buy

Bank of China (3988.HK),HKD3.78 Buy

Bank of Communications (3328.HK),HKD5.82

Buy

China Merchants Bank (3968.HK),HKD31.30

Hold

China CITIC Bank (0998.HK),HKD5.02 Hold

China Minsheng Bank (1988.HK),HKD7.51 Hold

CEB (6818.HK),HKD3.66 Sell

Chongqing Rural Bank (3618.HK),HKD5.31 Hold

Huishang Bank (3698.HK),HKD3.95 Sell

Bank of Chongqing (1963.HK),HKD6.16 Sell

Shanghai Pudong Bank (600000.SS),CNY12.78

Hold

Ping An Bank (000001.SZ),CNY13.18 Hold

Industrial Bank (601166.SS),CNY17.35 Sell

Bank of Beijing (601169.SS),CNY7.44 Buy

Bank of Nanjing (601009.SS),CNY8.13 Sell

Bank of Ningbo (002142.SZ),CNY17.90 Sell


We value Chinese banks using a three-

stage GGM (PV= (ROE-g)/(COE-g)), with

target prices based on 2017E book

values. Downside risks: large-scale DES

on government intervention, over-

tightening and property price correction.

Upside risks: SOE reforms and removal

or softening of GDP targeting.

China released the consultative draft for The Guideline on Asset Management Businesses. Targeting the fast-growing asset management sector, an essential part of shadow banking, it proposes capping leverage, reducing duration mismatch, cutting down SPV layers and removing implicit guarantees. We view it as a vital step in continuing financial deleveraging. Near term, we see limited impact on liquidity, as the regulations are largely expected and there is a 19m grace period. But, we see it as a L/T positive, as it raises transparency and caps the growth in shadow banking. We expect divergent impact on banks, as it favours big banks while adding pressure to smaller ones.

How big is the asset management sector and what are the key risks? China’s asset management sector includes asset management plans issued by different financial institutions. According to the PBOC, total AUM amounted to Rmb102tr as of 2016 (or 137% of GDP), or 50% CAGR since 2011. We estimate the credit channeled through the asset management sector has contributed 80% of shadow banking credit, or c.18% of system credit. While it supported economic growth, the proliferation of the asset management sector does come at a cost, with key risks including: 1) liquidity risks due to duration mismatch; 2) contagion risks given multiple layers of SPVs and rising leverage; 3) under-capitalization and under-provisioning; and 4) implicit guarantees, which lift the actual risk free rate and deepen moral hazard issues. What are the proposed measures to reduce risks? This new regulation standardizes product classifications regardless of regulatory regimes, splitting asset management products into publicly-raised and privately-raised ones. Next, based on the new product classification, the regulation stipulates: 1) stop asset-pool operation and lengthen duration of funding; 2) to cap leverage in both borrowed money and product tranches; 3) to cap layers of SPVs; 4) to limit investment in non-standard credit assets by publicly-raised funds; 5) to strengthen capital and provision charge requirement; 6) to encourage NAV-type products and prohibit implicit guarantees. This is a high-level guideline; we expect more detailed regulations. What are the implications for the entire financial system? This is the first regulation targeting the entire asset management sector and is issued post establishment of the Financial Stability Development Committee. So, it suggests that regulatory coordination has been strengthened, which should help curb the regulatory arbitrage of shadow banking by closing loopholes and reducing regulatory competition. This may lead to slower shadow banking growth and reduce the murkiness. Also, it should drive down banks’ WMP yield, which help lower the actual risk free rate. This is why we see it as a long-term positive. In the near/medium term, we expect: 1) credit growth to moderate, slowing system leverage build-up; 2) banks’ WMP and NBFIs’ AUM to slow or shrink; and 3) banks’ asset growth to slow. What are the implications for individual banks? With elevated shadow banking exposure and lower degree of compliance, smaller banks are likely to face persistent capital and earnings risks. As WMP yield might fall, it would become harder for them to grow deposits thus adding funding pressure. In contrast, big banks should benefit from better loan demand and stable deposit growth. We prefer big banks over the smaller ones.

Distributed on: 19/11/2017 20:45:33 GMT

0bed7b6cf11c

20 November 2017

Banks

Chinese banks

Deutsche Bank AG/Hong Kong

Asset Management Guideline – Reshaping China’s shadow banking

Overview of China’s asset management sector

After market close on 17 November 2017, China’s five regulators, including

PBOC, CBRC, CIRC, CSRC and SAFE, jointly released the long-awaited

consultative draft for The Guideline on Regulating Asset Management

Businesses of Financial Institutions. It aims to standardize the regulatory

requirements across various asset management products, to contain financial

risks and to direct lending to support the real economy. We believe this

regulation is going to reshape China’s shadow banking

How big is the asset management sector?

According to PBOC, China’s asset management industry includes: (1) banks’

on & off balance sheet wealth management products; (2) brokers’ asset

management schemes; (3) trust investment schemes; (4) public mutual funds;

(5) fund and fund subsidiaries’ investment schemes; (6) private funds; and (7)

insurance investment funds. What differentiates China’s asset management

sector from others is that it is an essential part of shadow banking in China.

Total AUM of asset management industry came to Rmb102tr as of end-2016

(or 137% of GDP), or Rmb60-70tr if stripping out the overlap among these

subsectors, e.g. banks’ entrusted some of their assets from WMP to brokers’

investment schemes to invest in some other non-standard assets. We

calculated total AUM of asset management industry posted a CAGR of 50% in

2011-2016, as shown in Figure 1. This is much faster than total system loan

CAGR of 14% in the same period. Among those assets, banks’ WMPs made up

a meaningful weighting of 27% of total AUM in 1H17, followed by trust

investment schemes (18%) and brokers’ asset management schemes (17%).

Figure 1: Asset management industry AUM CAGR came to 50% in 2011-16

4.6

7.1 10.2 15.0

23.5 29.0 28.4

0.3 1.9

5.2

7.9

11.9

17.6 18.1

4.8 7.0

10.3

13.0

14.7

17.5 19.6

1.6 2.3

3.2

4.5

8.4

9.2 10.1

1.2 2.1

3.5

5.9

12.60

16.9 14.9

0.6

0.8

0.9

1.2

1.4

1.7 1.9

0.2

0.4 1.0

2.1

5.1

10.2 9.5

-

20.0

40.0

60.0

80.0

100.0

120.0

2011 2012 2013 2014 2015 2016 1H17

Private funds

Insurance Investment Fund

Fund and fund subsidiaries'

investment schemes

Public mutual fund

Trust investment schemes

Brokers asset management

schemes

Banks' WMPs

Asset management industry AUM

CAGR at 50% in 2011-2016

13.321.5

34.3

49.7

77.6

102 106

2011-16 CAGR

119%

21%

69%

42%

29%

129%

45%

Breakdown in 1H17

13%

2%

14%

9%

18%

17%

27%

Source: Deutsche Bank estimates, PBOC, CBRC, CSRC, AMAC, Trust Association, CIRC, Caixin

20 November 2017

Banks

Chinese banks


Who are the funding providers and how are the funds used?

We have collected financial data of funding sources and underlying assets for

each type of asset management product.

Fundingwise, as of year-end 2016, financial institutions provided 51%

of funding, the majority of which we believe are commercial banks.

This is followed by individual investors (31%) and corporates (18%).

Underlying asset wise, non-standard credit asset represented 36% of

total AUM, which are mostly loan-like fixed income assets. Bonds

represented 29% of total investment, followed by deposits and money

market funds (15%), equity and other securities (7%) and mutual fund

(2%).

Putting this into context of the entire system, if we account non-standard

assets and bonds as credit, then China’s asset management sector

contributed more than 80% of shadow banking credit, or approximately 18%

of total system non-financial credit.

Figure 2: Funding source versus underlying asset of asset management sector

Brokers' AM

schemes

(Rmb17.6trn)Trust investment

schemes

(Rmb17.5trn)

Public

mutual fund

(Rmb9.2trn)

Fund and fund

subsidiaries'

investment

schemes

(Rmb16.9trn)

Privatefunds

(Rmb10.2t

rn)

Retail investors (31%)

Corporates (18%)

Financial institutions (51%) Non-standard asset (36%)

Mutual fund (2%)

Others (11%)

Deposit and money market fund (15%)

Bond (29%)

Equity and other securities (7%)

Funding Source Underlying Asset

Bank's WMP

(Rmb29trn)

Insurance

investment

schemes (1.7trn)

Total asset management industry AUM at Rmb102trn as of end-2016; or

Rmb60-70trn if stripping out overlap.

China's asset management sector

Source: Deutsche Bank estimates, PBOC, AMAC, Trust Association, CIRC, CBRC, “Blue Book of Asset Management 2017” Note: The size of squares represents the size of AUM.

How did we get here, with such a notable asset management sector size?

In our view, the root cause of the proliferation of asset management AUM

was mainly due to GDP targeting and fragmented regulatory framework.

With a difficult to achieve targets of a certain level of GDP growth,

local governments and banks have strong incentives to grow loan

books. However, the fast-growing lending contradicts the tight

regulations faced by banks, including capital rules, loan quota and a

cap on loan-to-deposit ratio. This creates rising “financial innovation”

via various asset management plans to bypass those regulations.

The regulatory framework in China has been fragmented, as there has

been a lack of sufficient communications and coordination among the

four financial regulators in the past, as shown in Figure 3. As such

there were loopholes, which allowed financial institutions to conduct

20 November 2017

Banks

Chinese banks


regulatory arbitrage activities. In some instances, there was even

competition between regulators, leading to aggressive expansion in

some asset management products.

Figure 3: China’s fragmented regulatory framework in the past

CBRC CSRC CIRC

Banks’ WMP(Rmb28tr)

Trust plans

(Rmb20tr)

Brokers’ AMPs

(Rmb18tr)

Public mutual fund

(Rmb10tr)

Fund and fund subs’ AMPs(Rmb15tr)

Private funds(Rmb9.5tr)

Insurance investment

funds(Rmb1.9tr)

PBOC

• Monetary policy• Macro-prudential assessment

China’s regulatory framework on asset management

businesses (in the past)

Source: Deutsche Bank, CBRC, CSRC, CIRC, PBOC Note: The size of squares represents the size of AUM

A little history of shadow banking – “Hide-and-seek”

The Chinese regulators were not unaware of the growing shadow credit.

Actually they have rolled out several regulations to tighten the risk controls

in previous years. However, the underlying root causes we mentioned above

were not addressed. So, at each new announcement, banks were always able

to come up with new ways to circumvent the then-existing rules. We

summarize previous regulations in below:

Circular 237 on interbank entrusted payment (August 2012): The

typical model of interbank entrusted payment is that banks book non-

standardized credit assets (NSCAs) under interbank assets with letters

of credit issued by other banks as collateral. As such, they could

charge only 20% risk weights and bypass the loan quota. In August

2012, the CBRC released Circular 237, which requires the entrusted

bank to book interbank entrusted payments under the loan category

and thus the risk weighting became 100% from 20% and the business

became subject to loan quota control.

Circular 8 on WMP (March 2013): Banks started to move their NSCAs

to off-b/s WMPs after the regulators cracked down on interbank

entrusted payments. In March 2013, the CBRC released Circular 8 to

curb the aggressive expansion of off-b/s credit-type WMPs. The

document clarifies the definition of NSCA and sets a cap at the lesser

of 35% of total WMPs and 4% of total assets.

Circular 127 on interbank assets (May 2014). As expansion of non-

standard WMPs was curbed by Circular 8, banks moved their NSCA

20 November 2017

Banks

Chinese banks


back to on-b/s interbank assets backed by trust beneficiary rights (TBR)

or bills. The majority of them are under the reserve repo category. In

May 2014, the CBRC released Circular 127 to tighten controls on on-

b/s interbank assets. The key points are: 1) reverse repo collateralized

by TBR are completely prohibited; 2) banks should charge provisions

and capital according to the nature of underlying assets. The rule

increases the cost of regulatory arbitrage through holding NSCA on

balance sheet.

Circular 82 on receivable investments (May 2016). Circular 127

effectively drove banks to move NSCA to receivable investments. As a

result, the receivable investment balance has increased strongly since

end-2014. Through deliberately structured transactions, banks still

manage to charge lower provisions and capital than required. The

latest Circular 82, which was released on 28 April, aims to tighten

oversight on NSCA transferred to off-b/s and encourages banks to

register their credit asset transfer on a centralized platform (Yindeng

Center) monitored by the CBRC. However, in our view, Circular 82 is

narrow in scope for now and we expect further regulations to contain

risks associated with rising shadow credit.

What are the key risks and proposed measures to lower those risks?

From the PBOC's perspective as highlighted in its 2017 financial stability report,

the key risks for the asset management sector include:

Liquidity risks due to duration mismatch

Contagion risks given multiple SPV layers

Under-capitalization and under-provisioning due to lack of proper

oversight on shadow banking

Implicit guarantees, which lift the actual risk free rate and deepen

moral hazard.

We hereby read into the PBOC’s new asset management rules from these four

key risks, and see how the central bank proposes to tackle the issues. We

summarize our findings in Figure 4.

20 November 2017

Banks

Chinese banks


Figure 4: Asset Management Guideline mainly targets four key risks

Key risks Measures in new PBOC asset management (AM) business consultative guidance Impact

No asset pool operation; independent book management for each asset management product Lower product yield; increase transparency

Product issuance on a rolling basis to transfer risk and reward among different investors would be treated as

implicit guarantee behaviors

Lower product yield

Public raised product (e.g. bank WMP selling to mass market) should mainly invest in high liquidity fixed income

assets

Lower product yield

Only close-end product can invest in unlisted equity with product maturity longer than exit day of the unlisted

equity investment

Lower product yield; longer duration

Maturity of non-standardized credit invested should be no longer than maturity of close-end product or next open

day of open-end product

Longer product duration

Close-end product term should no shorter than 90 days Longer product duration

140%/200% leverage cap for open-end public fund/close-end public fund & private fund; 140% leverage cap for

tranched private funds

Lower product yield; lower leverage

For tranched private fund, senior tranche:equity tranche should below 3:1/2:1/1:1 for fixed income/mixed/equity

products

Lower product yield; lower leverage

Products under one asset manager cannot invest in a single listed stock exceeding 30% of its total free float;

Rmb30bn cap for investing in a single asset

Less liquidity risk

Allow a grace period until June 2019 for this new AM rules with no impact on existing products Less liquidity risk

AM product can invest in another AM product but only one layer is allowed (except for public raised mutual

funds)

Lower financing cost; lower credit growth

Asset managers cannot provide channel business for other financial institutions for regulatory & leverage

arbitrage

Lower financing cost; lower credit growth

Treat all asset managers in a fair manner to avoid regulatory arbitrage Lower financing cost

Financial institutions can entrusted an asset manager to invest on their behalf but the asset manager cannot invest

in AM products issued by others institutions (except public raised mutual funds)

Lower financing cost

Set up unified AM product information system; asset managers need to report their products to PBOC and

relevant regulators upon set up/expiry and on a monthly basis

Increase transparency; less regulatory arbitrage

Financial regulators should supervise asset managers by product type instead of institution type and identify

ultimate investor and underlying asset of each product

Increase transparency; less regulatory arbitrage

Clean up violation in asset management for non-financial institutions (e.g. internet companies) Lower financing cost; lower credit growth

Investment in non-standardized credit assets are under quota restriction, risk reserve requirement and liquidity

requirement

Lower product yield; lower credit growth

AM products cannot invest in restricted industry and areas Lower product yield; lower credit growth

Prohibit inappropriate connect transactions Lower product yield; lower credit growth

No implicit guarantee; all AM products should be managed based on NAV; at least weekly NAV report for public

fund

Less liquidity risk; lower product yield

Implicit guarantee activities by deposit-taking asset managers will be punished by paying equivalent deposit

required reserves, deposit insurance fees and penalties

Lower product yield; higher yield volatilities

No on-balance sheet AM business Deposit pressure for banks with high on-B/S WMP

Asset manager needs to set up risk reserves equal to 10% management fees until reaching 1% AUM Better investor protection

Clear classification of AM product type & qualified investors Better investor education

Independent AM operation from non-AM business More independence of bank WMP business

Third-party independent custodian account Better investor protection

Liquidity risks with asset pool

operation

Contagion risks given multiple

SPV layers

Shadow banking risks

Implicit guarantees risks

Source: Deutsche Bank, PBOC

First step – standardize product categorization

We think a vital area of progress in this new regulation is to standardize

classification of asset management products regardless of regulatory regimes.

The PBOC refers to asset management as financial institutions’ off-balance

sheet business to manage assets on behalf of customers, without any principle

or return guarantee. The new guidance covers asset management businesses

conducted by banks, trust companies, brokers, fund houses, future companies,

insurers, etc. It also specifies that financial institutions cannot conduct on-

balance sheet asset management business so on-B/S WMP will probably

transform into structured deposits, we think.

The PBOC broadly categorizes asset management products by investors into: 1)

publicly raised, and 2) privately raised. For the latter, only qualified investors

with a certain level of financial assets can invest and it requires a minimum

investment amount. Public funds are open to the mass market, which mainly

invest in low risk, high liquid fixed-income assets and listed stocks. Banks’

publicly raised WMPs should mainly invest in fixed income assets, and those

investing in equities and alternatives will need approval from CBRC (though no

approval is required for investing in debt-to-equity swap). Both public and

private funds need to report NAV on a regular basis and comply with leverage

cap. We summarize this product classification in Figure 5.

20 November 2017

Banks

Chinese banks


Figure 5: PBOC broadly classifies asset management products into two types, simplifying the product categorization

Currernt product classification - fragmented

and complicated

Product classification

under the new rulesInvestors Minimum investment Investment targets

Information

disclosure

Leverage cap

(asset/net asset)

Pubic raised product Mass market NA

Mainly low risk, high

liquidity fixed income

assets and listed

stocks

At least weekly NAV

report

140%/200% for open-

ended/closed ended

products

Private raised product Qualified investor*

Rmb300k/400k/1mn

for fixed

income/mixed/other

products

No constraintsAt least quarterly NAV

report

140%/200% for

tranchned/untranched

products

Brokers' AM

schemes

(Rmb17.6trn)Trust investment

schemes

(Rmb17.5trn)

Public

mutual fund

(Rmb9.2trn)

Fund and fund

subsidiaries'

investment

schemes

(Rmb16.9trn)

Privatefunds

(Rmb10.2t

Bank's WMP

(Rmb29trn)

Insurance

investment

schemes (1.7trn)

Source: Deutsche Bank, PBOC *Qualified investor definition” 1) Individuals with household financial assets >= Rmb5mn or annual income >= Rmb400k in recent 3 years with 2 years of investment experience; 2) Corporate entity with >= Rmb10mn net assets in recent 1 year.

Risk #1: Liquidity risks with asset pool operations

Asset pool operation refers to asset managers issuing products on a rolling

basis on a pool of investment assets without matching duration and pricing. In

many cases, short-term funds are used to invest in long-term non-standardized

credit or equities, leading to notable liquidity risks, not to mention the multiple

SPV layers and leverage involved in such products. One market expert

previously estimated that more than 50% current bank WMPs are operated

under asset pool (see our report: Financial deleveraging - takeaways from an

expert conference call dated on 19 July 2017).

In the guidance, asset pool operation is forbidden. Each asset management

product must manage the investment book independently by matching

duration of assets and funding. Maturity of non-standardized credit assets and

exit day of unlisted equity should be earlier than fund maturity date. Close-end

asset management product term should be no shorter than 90 days. In

addition, the document also specifies a leverage limit for asset management

products: 1) 140%/200% leverage cap for open-end public fund/close-end

public fund & private fund, 140% leverage cap for tranched private funds; 2)

for tranched private fund, senior tranche to equity tranche ratio should be

below 3:1/2:1/1:1 for fixed income/mixed/equity type products. The

requirement on leverage could potentially drive down leverage (Figure 6 & 7).

Figure 6: Overall leverage in NBFIs’ asset management

products have been rising…

Figure 7: … as has the interbank bond market

131.5% 131.6%

130.5%

135.3%

134.0%

134.7%

136.3%

127.0%

128.0%

129.0%

130.0%

131.0%

132.0%

133.0%

134.0%

135.0%

136.0%

137.0%

2014 1H15 2015 1H16 2016 1Q17 2Q17

Asset management overall leverage

(AUM of AM industry/(AUM - banks' credit to NBFIs)

1.08

1.37

1.12

1.77

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

(x)

Banks Insurance companies Funds Total Broker

Leverage in interbank bond market

Source: Deutsche Bank estimates, PBOC, CBRC, CSRC, AMAC

Source: Deutsche Bank estimates, PBOC, Chinabond.com.cn

20 November 2017

Banks

Chinese banks


Risk #2: Contagion risks given multiple SPV layers

Banks would use other asset managers (e.g. trust, brokers, funds and insurers)

as SPV channels to achieve regulatory or leverage arbitrage, as banks cannot

invest own funds into equities and their credit deployment has many

restrictions (e.g. lending to local governments and property developers). This

creates contagion risks given the complex product structure and lack of

property due diligence.

The PBOC’s new guidance specifies that asset management products can

invest in other product but with only one layer allowed (except for investing in

publicly raised mutual funds), and no channel business can be provided.

Financial institutions are allowed to entrust other asset managers to invest on

their behalf. On the reporting front, the PBOC has opted to set up a unified

asset management product information system and requires asset managers

to report product information to the PBOC and relevant regulators upon set

up/expiry and on a monthly basis. On the regulation front, each financial

regulator should supervise asset managers by product type instead of

institution type and identify ultimate investor and underlying asset of each

product to minimize regulatory arbitrage.

How to measure the layers of SPVs in the financial system? We believe one

should look at financial assets to M2 ratio, where financial assets include all

banking assets and NBFI’s asset management product AUM. On a stock basis,

China’s total financial assets accounted for 2.1x M2, suggesting there are

slightly more than two layers to package the financing in China (Figure 8). On a

flow basis (Figure 9), the layers of SPVs to package new credit once surged to

4.3x in 2016, citing every 1 dollar M2 creation would need incremental 4.3

dollars of financial assets. However, post a series of tightening regulatory

treatment since 2H16, this has come down notably to only 1.1x in 2Q17. We

illustrate in detail in Appendix A of this report why the financial assets to M2

ratio is a good indicator for layers of SPVs in China.

Figure 8: Financial assets, including banking assets and

NBFIs AUM, have grown faster than M2, suggesting a

lengthening chain of financing…

Figure 9: … but financing chains have started to shorten

since 1Q17 due to tighter regulations

1.8x

1.8x

1.9x

2.0x

2.1x 2.1x2.1x

1.6x

1.7x

1.7x

1.8x

1.8x

1.9x

1.9x

2.0x

2.0x

2.1x

2.1x

2.2x

-

50

100

150

200

250

300

350

400

2014 1H15 2015 1H16 2016 1Q17 2Q17

Rm

b t

r

Total financial assets (banking assets + NBFI AUM)

M2

Financial assets/M2 (x, RHS)

2.53x

3.93x

3.09x

4.26x

1.99x

1.10x

0.60x

1.10x

1.60x

2.10x

2.60x

3.10x

3.60x

4.10x

4.60x

1H15 2015 1H16 2016 1Q17 2Q17

Δ (banking asset + asset management plans) / ΔM2 (x)

??

(x)

Source: Deutsche Bank, CBRC, PBOC, CSRC, AMA

Source: Deutsche Bank, CBRC, PBOC, CSRC, AMA

Risk #3: Shadow banking risks

Due to lack of effective and coordinated regulation, shadow banking activities,

which mean lending through non-loan and non-bond channels, have been very

active in the asset management industry. Banks are incentivized to lend off-

balance credit to avoid capital & provision rules and lending restrictions, which

20 November 2017

Banks

Chinese banks


are so called non-standardized credit assets. To lend out shadow credit, banks

cooperate with other asset managers to design asset management products

with complex SPV layers. Besides getting off-balance sheet WMP funding,

banks (especially smaller banks) also purchase non-standardized credit

products on balance sheet. In our study, we estimated shadow credit (mostly

in the form of receivable investment and off-B/S WMP products) accounted for

17% of non-big four listed banks’ total assets as of 1H17, which will trim their

CET-1 ratio by 1.1ppt in a stress testing scenario if lifting capital risk weight

and provision coverage on these assets.

Figure 10: Smaller banks have higher shadow banking

exposure

Figure 11: Non-big four banks could see 1.1ppt hit to

CET-1 ratio if lifting capital risk weight and provision on

shadow banking assets

3533

2926

24

20 20 19 18 18 18 17

12

53 3 2 1

2

17

8

0

5

10

15

20

25

30

35

40

(% of assets)Listed banks' exposure to shadow credit - 1H17

Off B/S NSCA in WMPs Reverse repo backed by bills/TBRs

Negligible

exposure at big-

four banks

6.9 6.6 6.7 6.68.3 8.3 7.8 7.7 7.7 7.4 7.5

11.4

7.3

10.7

12.912.811.4

10.311.9

8.310.4

8.6 8.6 8.88.3

9.8 9.9

8.98.5 8.6

8.2 8.4

12.4

8.3

11.0

13.0 12.9

11.410.4

12.0

9.4

10.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

(%) Impact on CET-1 ratio Adjusted CET-1 ratio

Mini. capital requirement

Source: Deutsche Bank, company data

Source: Deutsche Bank estimates, company data

In the PBOC’s new guidance, asset management products’ investment in non-

standardized credit assets are under quota restriction, risk reserve requirement

and liquidity requirement, and investments in restricted industries/areas are

prohibited. The current CBRC requirement (in Circular No. 8 issued in 2013) is

that non-standardized credit assets should not exceed 35% of WMP balance or

4% of total assets (whichever is lower). We cannot exclude the possibility that

the CBRC will issue stricter regulation to further contain off-balance sheet

shadow banking activities in the upcoming documents.

Risk #4: Implicit guarantee risks

Implicit guarantee is a widely discussed issue in China’s financial system,

especially in banks’ WMP business. In many cases, banks use own capital or

asset pool operation to provide guarantee on principal and return of issued

WMPs, which actually lifts the risk free rate in the system and pushes up the

social financing cost. This also deepens the moral hazard risk as WMP buyers

generally expect implicit guarantee from banks.

20 November 2017

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Chinese banks


Figure 12: WMP yield effectively became the actual risk free rate

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Feb-09 Nov-09 Aug-10 May-11 Feb-12 Nov-12 Aug-13 May-14 Feb-15 Nov-15 Aug-16 May-17

DR007 3M WMP yield 10-year treasury yield Benchmark deposit rate - 1 year(%)

Source: Deutsche Bank, WIND, CEIC, PBOC

In the PBOC’s new guidance, it clearly states no implicit guarantee is allowed

and all products should be managed on NAV basis. It defines implicit

guarantee as either of the following cases: 1) asset managers promise principal

or return guarantee; 2) risks associated with current products are transferred to

other investors by issuing products on a rolling basis; and 3) financial

institutions use own capital or third party’s capital to compensate investment

loss. In addition, it also requires financial institutions to separate asset

management business from other non-asset management business to achieve

independent operation and account custodian. Finally, all asset managers need

to set aside risk reserves equivalent to 10% of management fees (until reserve

balance to 1% AUM) to compensate investors in case of wrong conduct.

What are the implications for the entire financial system?

In the near term, we do not expect any notable impact on system liquidity,

as the guidance allows a grace period of 19 months until June 2019 to

implement and the new rules during this period are only applied to new

products. In addition, there have been a couple of news reports and also the

PBOC has shed light in July 2017 in its Financial Stability Report 2017, so that

these regulations are largely in line with expectations.

But, in the near-to-medium term, as it suggests financial deleveraging will

continue, we expect the following changes:

System credit growth to moderate (Figure 13), so slowing the build-up

in financial leverage (Figure 14)

Shadow banking balance to shrink, especially for those regulatory

arbitrage activities (Figure 15 and 16)

Banking asset growth to stay low (Figure 17), and highly-levered

banks may continue to shrink balance sheet (Figure 18)

Borrowerwise, better-quality borrowers may enjoy lower funding costs,

as the layers of SPVs will be reduced. But, weaker borrowers are likely

to see funding costs increase.

20 November 2017

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Figure 13: Credit growth is likely to further moderate Figure 14: The leverage built-up is likely to slow

13.0%

14.9%

10%

15%

20%

25%

30%

35%

40%TSF stock yoy TSF stock (adj.) yoy

206%

140%

150%

160%

170%

180%

190%

200%

210%

220%M2 / 12M rolling GDP



Figure 15: Shadow banking has been shrinking, including

1) banks’ WMP AUM…

Figure 16: … and 2) banks’ on-B/S shadow banking

exposure (i.e. receivable investment)

2.7 4.67.1

10.215.0

23.5

29.1 29.1 28.4 28.4

3.7%

5.6%

7.5%

9.5%

12.8%

16.8%

18.7%18.0% 17.5% 17.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Oustanding WMP balance As % of total deposits (RHS)(Rmb trn)

-3,000

2,000

7,000

12,000

17,000

22,000

Rmb bn Receivable investment balance by banks

Big-4 CDB+PSBC+BOCOM Medium/small banks

Source: Deutsche Bank, CBRC


Figure 17: China banking assets growth to slow down… Figure 18: … driven mainly by smaller banks

15.7%

10.2%10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

China banking assets yoy growth

8.5%

6.7%

16.2%

11.3%

14.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Banking assets yoy growth by typeLarge commercial bank Joint-stock commercial bank

City commercial bank Rural financial institutions

Policy banks & other FIs


Source: Deutsche Bank, PBOC, CBRC

However, we see the new regulation as a long-term positive for the entire

financial system

This is the first regulation to target the entire asset management

sector and to be issued after the establishment of Financial Stability

Development Committee, the new committee that is at higher level

20 November 2017

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Chinese banks


than the central bank. So it suggests that regulatory coordination has

been strengthened, which should address the root cause of strong

growth in China’s shadow banking. We expect the new committee to

curb the regulatory arbitrage of shadow banking by closing loopholes

and reducing regulatory competition (Figure 19). This, in our view,

should contain the growth and reduce the murkiness of China’s

shadow banking system.

Figure 19: China’s regulatory framework is shifting towards being more coordinated, as the new committee has been

set up on top of all current regulators

CBRC CSRC CIRC


Trust plans

(Rmb20tr)

Brokers’ AMPs

(Rmb18tr)

Public mutual fund

(Rmb10tr)




funds(Rmb1.9tr)

PBOC


China’s regulatory framework on asset management

businesses (in the past)

CBRC CSRC CIRC


Trust plans

(Rmb20tr)

Brokers’ AMPs

(Rmb18tr)

Public mutual fund

(Rmb10tr)




funds(Rmb1.9tr)

PBOC


China’s regulatory framework (at present)

Financial Stability and Development Committee

Source: Deutsche Bank, PBOC, CBRC, CIRC, CSRC Note: The size of squares represents the size of AUM

We expect banks’ wealth management businesses to transform into

something similar to close-end mutual funds, investing in low-risk,

high-liquid assets with longer duration. In this process, banks’ WMP

yield would gradually come down, as the WMPs invest low-risk assets

with less duration mismatch. This should help lower the actual risk

free rate and strengthen risk pricing and monetary policy transmission,

thus improving the capital allocation in the system.

Figure 20: WMP yield is likely to fall over the long run

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Feb-09 Nov-09 Aug-10 May-11 Feb-12 Nov-12 Aug-13 May-14 Feb-15 Nov-15 Aug-16 May-17

DR007 3M WMP yield 10-year treasury yield Benchmark deposit rate - 1 year(%)

Source: Deutsche Bank estimates, WIND, CEIC, PBOC

20 November 2017

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What are the implications for individual banks?

With elevated shadow banking exposure and lower degree of compliance,

smaller banks are likely to face persistent capital and earnings risks. As WMP

yield might fall, it would become harder for them to grow deposits thus adding

funding pressure. In contrast, big banks should benefit from better loan

demand and stable deposit growth.

As shown in Figure 21, listed banks’ non-standard asset exposure combined

with their on- & off- B/S wealth management products accounted for c.20% of

total asset in 1H17, where large banks’ exposure to these highly-scrutinized

products only represented high single to low teens of total assets. On the flip

side, smaller banks saw 24-57% asset exposure, which are highly likely to

suffer from the stricter regulatory treatment on asset management industry.

Figure 21: Banks’ NSCA and on & off B/S as % of total asset (1H17)

57 54

45 44 44 43 41 38 38 38 37 34

24

11 10 8 7

9

38

20

0

10

20

30

40

50

60

(% of assets) Listed banks' exposure to NSCA and WMPs (on & off) 1H17

Off B/S WMPs On B/S WMPs On B/S NSCA in reverse repo and receivable investment

Less exposure at

big-four banks

Source: Deutsche Bank, company data

20 November 2017

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Chinese banks


Appendix A – Layers of SPVs

One of the factors driving the strong growth in banking assets and NBFI’s

AUM in past years is the lengthening of financing chains, i.e. the funds to the

real economy have been packaged via multiple channels or SPVs. The

regulators have made themselves very clear in targeting the cutting off of

these excessive layers.

We illustrate below how the financing chains work:

Example 1: Three layers of financing channels

Large bank borrows Rmb1 from the PBOC, booked as borrowing from

the PBOC in liability and then lends it out to smaller banks, booked as

lending to banks.

Smaller bank booked it as interbank liability and then lends it out to an

NBFI, booked as credit to NBFI.

NBFI follows to lend the Rmb1 to a corporate, who will book it as bank

debt in liability. However, corporates sometimes may not have the

need for FAI, it just saves the money with large banks as deposit.

In this case, total financial assets, including the big bank, smaller bank

and NBFI, should total Rmb4. However, there is only Rmb1 deposit.

Example 2: Four layers of financing channels

The process goes the same as for example 1 in the first two steps. As

NBFI A receives Rmb1 from the small bank, it may lend it out to NBFI

B, booked as borrowing from banks.

NBFI B may consider a) lending the money to corporate, and then the

money will return to the banks as deposit, or b) lending to other

smaller banks or NBFIs.

Above option a) will create at 4x leverage, or above 4x if it chooses to

lend the money to other smaller banks/NBFIs. The money will keep

circulating in the financial sector, creating leverage with less real

benefit to real economy.

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Figure 22: Two scenarios illustrating the lengthening financing chains

Layer #1 Layer #2 Layer #3

Large bank Smaller bank NBFI A (e.g. trust) Croporates

Asset Liabil ities Asset Liabil ities Asset Liabil ities Asset Liabil ities

Lending to banks 1 Borrow from PBOC 1 Credit to NBFI 1 Due from banks 1 Loans 1 Due from banks 1 Deposit 1 Loans 1

Cash 1 Deposit 1 (Receivable investment)

Layer #1 Layer #2 Layer #3 Layer #4

Large bank Smaller bank NBFI A (e.g. trust) NBFI A (e.g. brokers) Croporates

Asset Liabil ities Asset Liabil ities Asset Liabil ities Asset Liabil ities Asset Liabil ities

Lending to banks 1 Borrow from PBOC 1 Credit to NBFI 1 Due from banks 1 Credit to 1 Due from banks 1 Loans 1 Borrowing from 1 Deposit 1 Loans 1

Cash 1 Deposit 1 (Receivable investment) NBFI NBFI

Financial institutions (banks and NBFIs) balance sheet

Example 1: Three layers created $4 financial assets Example 2: Four layers created $5 financial assets

Asset 4 Liabil ities 4 Asset 5 Liabil ities

Lending to banks 1 Borrow from PBOC 1 Lending to banks 1 Borrow from PBOC 1

Credit to NBFI 1 Due from banks 2 Credit to NBFI 2 Due from banks 2

Cash 1 Deposit 1 Cash 1 Deposit 1

Loans 1 Loans 1 Borrowing from NBFI 1

Three layers Four layers

Financial assets : deposits = 4 :1 Financial assets : deposits = 5 :1 ``

1

1 2

2


To put this into a formula to quantify layers of SPVs, we can calculate as below:

We believe this is a good method to assess the financial sector by factoring in

the layer effect in circulating funds. Based on the results, we believe the

expanding circulating chain was the main reason for leverage-up in the

financial sector. The layers of SPVs to package new credit surged to 4.3x in

2016, citing every 1 dollar M2 creation would need incremental 4.3 dollars of

financial assets. However, post a series of tightening regulatory treatment

since 2H16, this has come down notably to only 1.1x in 2Q17.

This unwinding of multiple layers of channels should help reduce the funding

cost of underlying borrowers. However, the leveraged banks and NBFIs would

be hurt due to lower earnings.

20 November 2017

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Chinese banks


Valuation and risks

Valuation of Chinese banks

We value Chinese banks using a three-stage Gordon Growth Model (PV= (ROE-

g)/(COE-g)), with target prices based on 2017E book values.

Our valuations of the Chinese banks under our coverage assume a near-term

(2016-18E) ROE of 11.5-16.9%, a medium-term (2019-21E) ROE of 10.5-14.0%

and a terminal ROE of 8.0-12.0%, with a COE of 11.5-14.0%. In Figure 23, we

highlight our valuation comparison of the listed banks.

In our estimates, H-share/A-share listed Chinese banks are trading at 2017E

P/B of 0.83x/0.97x and 2017E P/E of 6.18x/7.24x.

Figure 23: Chinese banks’ valuation summary

Ticker Rating TP Price Upside Mkt. Cap

LC LC (%) (US$mn) 16A 17E 18E 16A 17E 18E 16A 17E 18E 16A 17E 18E 16A 17E 18E 16A 17E 18E

ICBC-H 1398.HK Buy 6.52 6.19 5.3% 314,138 7.1 6.6 6.3 1.0 0.9 0.8 4.3 3.9 3.5 15.2% 14.3% 13.6% 1.20% 1.15% 1.11% 4.3% 4.6% 4.9%

CCB-H 0939.HK Buy 7.68 6.81 12.8% 219,712 6.5 6.0 5.7 1.0 0.8 0.8 3.9 3.4 3.1 15.5% 14.7% 13.9% 1.18% 1.13% 1.10% 4.6% 5.0% 5.3%

ABC-H 1288.HK Buy 4.10 3.62 13.3% 176,672 5.8 5.3 5.0 0.8 0.7 0.7 3.3 2.9 2.6 15.1% 14.5% 13.8% 0.99% 0.96% 0.94% 5.3% 5.9% 6.1%

BOC-H 3988.HK Buy 4.78 3.78 26.5% 165,155 6.2 5.6 5.3 0.7 0.7 0.6 3.2 2.9 2.5 12.5% 12.2% 12.0% 0.94% 0.91% 0.89% 5.0% 5.5% 6.0%

BCOM-H 3328.HK Buy 6.53 5.82 12.2% 62,931 5.8 5.4 5.2 0.7 0.6 0.5 3.3 3.0 2.7 12.2% 11.4% 10.9% 0.87% 0.81% 0.77% 5.3% 5.5% 5.8%

CMB-H 3968.HK Hold 26.27 31.30 -16.1% 109,865 11.2 9.6 8.5 1.7 1.5 1.3 4.8 4.2 3.8 16.3% 16.2% 16.4% 1.09% 1.12% 1.17% 2.7% 3.1% 3.5%

CITIC Bank-H 0998.HK Hold 4.67 5.02 -7.0% 41,067 5.2 5.0 4.8 0.6 0.6 0.5 2.0 1.9 1.8 12.6% 11.7% 11.0% 0.75% 0.69% 0.68% 4.8% 3.0% 3.1%

Minsheng-H 1988.HK Hold 7.80 7.51 3.9% 44,754 5.1 4.7 4.5 0.7 0.6 0.6 2.4 2.3 2.1 15.1% 13.9% 13.0% 0.94% 0.82% 0.82% 4.2% 3.2% 3.3%

CEB-H 6818.HK Sell 3.24 3.66 -11.5% 27,792 5.2 4.9 4.8 0.7 0.6 0.5 2.4 2.2 2.0 13.8% 12.7% 11.6% 0.85% 0.74% 0.70% 3.0% 0.0% 0.0%

CRCB 3618.HK Hold 6.05 5.31 13.9% 6,322 5.5 4.8 4.4 0.8 0.7 0.6 3.3 2.7 2.3 16.0% 15.7% 15.0% 1.05% 1.05% 1.04% 4.3% 4.2% 4.5%

Huishang 3698.HK Sell 3.14 3.95 -20.5% 5,587 5.6 5.0 4.7 0.8 0.7 0.6 2.5 2.3 2.2 15.8% 15.1% 14.1% 0.99% 0.96% 0.95% 1.8% 2.0% 2.1%

BOCQ 1963.HK Sell 5.65 6.16 -8.3% 2,466 4.9 4.3 4.0 0.7 0.6 0.5 2.4 2.0 1.9 15.5% 15.2% 14.6% 1.01% 1.00% 1.00% 5.3% 6.1% 6.5%

H-share sector mean 6.8 6.2 5.8 1.0 0.8 0.8 3.7 3.3 3.0 14.7% 14.0% 13.4% 1.07% 1.02% 1.00% 4.5% 4.7% 5.0%

ICBC-A 601398.SS Buy 5.98 6.03 -0.8% 314,138 7.8 7.6 7.2 1.1 1.0 0.9 4.8 4.4 4.0 15.2% 14.3% 13.6% 1.20% 1.15% 1.11% 3.9% 4.0% 4.2%

CCB-A 601939.SS Buy 7.04 6.99 0.7% 219,712 7.6 7.3 6.9 1.1 1.0 0.9 4.5 4.1 3.8 15.5% 14.7% 13.9% 1.18% 1.13% 1.10% 4.0% 4.1% 4.4%

ABC-A 601288.SS Hold 3.75 3.66 2.5% 176,672 6.6 6.3 6.0 1.0 0.9 0.8 3.8 3.4 3.1 15.1% 14.5% 13.8% 0.99% 0.96% 0.94% 4.6% 4.9% 5.1%

BOC-A 601988.SS Buy 4.38 3.92 11.7% 165,155 7.3 6.9 6.4 0.9 0.8 0.7 3.7 3.5 3.1 12.5% 12.2% 12.0% 0.94% 0.91% 0.89% 4.3% 4.5% 4.9%

BCOM-A 601328.SS Hold 5.98 6.22 -3.9% 62,931 7.0 6.8 6.5 0.8 0.7 0.7 4.0 3.8 3.4 12.2% 11.4% 10.9% 0.87% 0.81% 0.77% 4.4% 4.4% 4.6%

CMB-A 600036.SS Hold 24.06 29.38 -18.1% 109,865 11.9 10.7 9.4 1.8 1.6 1.4 5.1 4.7 4.2 16.3% 16.2% 16.4% 1.09% 1.12% 1.17% 2.5% 2.8% 3.2%

CITIC Bank-A 601998.SS Sell 4.28 6.13 -30.2% 41,067 7.2 7.1 6.9 0.9 0.8 0.7 2.8 2.7 2.6 12.6% 11.7% 11.0% 0.75% 0.69% 0.68% 3.5% 2.1% 2.2%

Minsheng-A 600016.SS Sell 7.15 8.54 -16.3% 44,754 6.5 6.4 6.1 0.9 0.8 0.7 3.1 3.1 2.8 15.1% 13.9% 13.0% 0.94% 0.82% 0.82% 3.3% 2.4% 2.5%

SPDB 600000.SS Hold 12.75 12.78 -0.2% 56,613 5.4 5.2 4.9 0.8 0.7 0.6 2.3 2.1 2.0 16.5% 14.7% 13.6% 0.94% 0.89% 0.86% 1.6% 1.6% 1.7%

Industrial Bank 601166.SS Sell 14.92 17.36 -14.1% 54,428 6.3 6.2 5.9 1.0 0.9 0.8 2.9 2.9 2.7 17.1% 15.5% 14.4% 0.89% 0.87% 0.87% 3.5% 1.6% 1.7%

CEB 601818.SS Sell 2.97 4.09 -27.4% 24,574 6.5 6.4 6.3 0.9 0.8 0.7 3.0 2.9 2.7 13.8% 12.7% 11.6% 0.85% 0.74% 0.70% 2.4% 0.0% 0.0%

Ping An Bank 000001.SZ Hold 9.48 13.18 -28.1% 34,154 10.0 9.6 9.1 1.2 1.1 1.0 3.0 2.8 2.7 13.1% 12.2% 11.5% 0.83% 0.81% 0.79% 1.2% 0.0% 0.0%

Bank of Beijing 601169.SS Buy 9.34 7.45 25.4% 20,517 6.4 7.1 6.5 0.9 1.0 0.9 3.3 3.6 3.2 14.9% 14.5% 14.1% 0.90% 0.91% 0.91% 3.4% 3.0% 3.3%

Bank of Nanjing 601009.SS Sell 5.65 8.13 -30.5% 10,408 6.1 7.8 7.1 0.9 1.2 1.0 2.6 3.6 3.2 16.2% 15.9% 15.0% 0.86% 0.79% 0.78% 3.2% 0.0% 0.0%

Bank of Ningbo 002142.SZ Sell 9.37 17.90 -47.7% 13,696 9.2 10.8 10.2 1.5 1.7 1.5 4.7 5.1 4.5 17.7% 17.1% 15.9% 0.98% 0.92% 0.89% 2.0% 1.7% 1.8%

A-share sector mean 7.5 7.2 6.8 1.1 1.0 0.9 4.0 3.7 3.4 14.7% 13.9% 13.3% 1.03% 0.99% 0.97% 3.6% 3.5% 3.7%

Div. Yield (%)ROAAROAEP/PPOPP/B (x)P/E (x)

Source: Deutsche Bank estimates, Bloomberg Finance LP; Note: market cap is sum of A and H shares; data as of 17 Nov 2017

Risks for Chinese banks

Key sector risks for Chinese banks Disorderly deleveraging: the government could place disorderly

deleveraging requirements on specific industries, which might

unexpectedly lead to a bank run and squeeze banks’ wholesale

funding.

Over-tightening in real estate and infrastructure: If both industries

saw unfavourable credit conditions, the overall banking system might

have little chance to avoid asset quality deterioration.

Significant property price corrections: NPL ratios usually surge

following an over-correction in property market prices, according to

historical experience. For example, Wenzhou’s NPL ratio surged by

20 November 2017

Banks

Chinese banks


4.3ppt to 4.7%, accompanying a 47% price correction in the city’s

property market.

CPI picks up and the PBOC is forced to hike benchmark rates: a

potential benchmark rate hike in the near term will likely be more

harmful to corporates (higher interest burden), which cannot be fully

offset by profitability recovery under better economic growth,

considering that corporates’ leverage ratio remains at a higher level, in

spite of the mild improvement recently.

Larger-than-expected DES size given potentially stronger

government invention. Without strict selection criteria on the viability

of target companies, it could potentially ‘evergreen’ the debts of

zombie companies, worsen capital allocation and raise investment risk

for banks.

Key upside risks for the sector:

Removal of the softening of GDP targets: In the long run, we think

this movement will likely be meaningfully positive for banks’ RoE/RoA,

as most of the legacy NPLs are disposed within the near term (two to

three years) and banks should have notably lighter credit cost burdens

in the future.

More aggressive SOE reform to push forward privatization: SOEs are

likely to be more market-oriented, profitability might be better and

asset quality will likely recover accordingly. As of now, we are seeing

improving conditions at industrial SOEs, while non-industrial SOEs still

seem to be struggling. We are closely tracking SOEs’ profitability and

ROE.

Pick-up in private investment by further deregulation and favourable

policies. Private companies in general are more productive and

efficient than SOEs. A leading indicator could be a pick-up in private

companies’ debt growth, which is muted for now.

The authors of this report wish to acknowledge the contribution made by Vivian

Xu, an employee of Evalueserve, a third-party provider to Deutsche Bank of

offshore research support services.

20 November 2017

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Appendix 1

Important Disclosures

*Other information available upon request

Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Hans Fan

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

56 %

33 %

11 %17 %17 % 11 %

0

100

200

300

400

500

600

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

20 November 2017

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sometimes have shorter-term trade ideas that may be inconsistent with Deutsche Bank's existing longer-term ratings.

Trade ideas for equities can be found at the SOLAR link at http://gm.db.com. A SOLAR idea represents a high-conviction

belief by an analyst that a stock will outperform or underperform the market and/or a specified sector over a time frame

of no less than two weeks and no more than six months. In addition to SOLAR ideas, analysts may occasionally discuss

with our clients, and with Deutsche Bank salespersons and traders, trading strategies or ideas that reference catalysts or

events that may have a near-term or medium-term impact on the market price of the securities discussed in this report,

which impact may be directionally counter to the analysts' current 12-month view of total return or investment return as

described herein. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a

recipient thereof if an opinion, forecast or estimate changes or becomes inaccurate. Coverage and the frequency of

changes in market conditions and in both general and company-specific economic prospects make it difficult to update

research at defined intervals. Updates are at the sole discretion of the coverage analyst or of the Research Department

Management, and the majority of reports are published at irregular intervals. This report is provided for informational

purposes only and does not take into account the particular investment objectives, financial situations, or needs of

individual clients. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in

any particular trading strategy. Target prices are inherently imprecise and a product of the analyst’s judgment. The

financial instruments discussed in this report may not be suitable for all investors, and investors must make their own

informed investment decisions. Prices and availability of financial instruments are subject to change without notice, and

investment transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is

denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the

investment. Past performance is not necessarily indicative of future results. Performance calculations exclude

transaction costs, unless otherwise indicated. Unless otherwise indicated, prices are current as of the end of the

previous trading session and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is also

sourced from Deutsche Bank, subject companies, and other parties.

The Deutsche Bank Research Department is independent of other business divisions of the Bank. Details regarding

organizational arrangements and information barriers we have established to prevent and avoid conflicts of interest with

respect to our research are available on our website under Disclaimer, found on the Legal tab.

http://gm.db.com/

20 November 2017

Banks

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Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise

to pay fixed or variable interest rates. For an investor who is long fixed-rate instruments (thus receiving these cash

flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a

loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the

loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse

macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation

(including changes in assets holding limits for different types of investors), changes in tax policies, currency

convertibility (which may constrain currency conversion, repatriation of profits and/or liquidation of positions), and

settlement issues related to local clearing houses are also important risk factors. The sensitivity of fixed-income

instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX

depreciation, or to specified interest rates – these are common in emerging markets. The index fixings may – by

construction – lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of

the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons

indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. Funding in a currency

that differs from the currency in which coupons are denominated carries FX risk. Options on swaps (swaptions) the risks

typical to options in addition to the risks related to rates movements.

Derivative transactions involve numerous risks including market, counterparty default and illiquidity risk. The

appropriateness of these products for use by investors depends on the investors' own circumstances, including their tax

position, their regulatory environment and the nature of their other assets and liabilities; as such, investors should take

expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this

publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the

high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the

amount of funds initially deposited – up to theoretically unlimited losses. Trading in options involves risk and is not

suitable for all investors. Prior to buying or selling an option, investors must review the "Characteristics and Risks of

Standardized Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to

access the website, please contact your Deutsche Bank representative for a copy of this important document.

Participants in foreign exchange transactions may incur risks arising from several factors, including: (i) exchange rates

can be volatile and are subject to large fluctuations; (ii) the value of currencies may be affected by numerous market

factors, including world and national economic, political and regulatory events, events in equity and debt markets and

changes in interest rates; and (iii) currencies may be subject to devaluation or government-imposed exchange controls,

which could affect the value of the currency. Investors in securities such as ADRs, whose values are affected by the

currency of an underlying security, effectively assume currency risk.

Deutsche Bank is not acting as a financial adviser, consultant or fiduciary to you or any of your agents with respect to

any information provided in this report. Deutsche Bank does not provide investment, legal, tax or accounting advice, and

is not acting as an impartial adviser. Information contained herein is being provided on the basis that the recipient will

make an independent assessment of the merits of any investment decision, and is not meant for retirement accounts or

for any specific person or account type. The information we provide is directed only to persons we believe to be

financially sophisticated, who are capable of evaluating investment risks independently, both in general and with regard

to particular transactions and investment strategies, and who understand that Deutsche Bank has financial interests in

the offering of its products and services. If this is not the case, or if you or your agent are an IRA or other retail investor

receiving this directly from us, we ask that you inform us immediately.

Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the

investor's home jurisdiction. Aside from within this report, important risk and conflict disclosures can also be found at

https://gm.db.com on each company’s research page and under the "Disclosures Lookup" and "Legal" tabs. Investors

are strongly encouraged to review this information before investing.

United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and

SIPC. Analysts located outside of the United States are employed by non-US affiliates that are not subject to FINRA

regulations, including those regarding contacts with issuer companies.

Germany: Approved and/or distributed by Deutsche Bank AG, a joint stock corporation with limited liability incorporated

in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized under

http://www.optionsclearing.com/about/publications/character-risks.jsp

https://gm.db.com/

20 November 2017

Banks

Chinese banks


German Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal

Financial Supervisory Authority.

United Kingdom: Approved and/or distributed by Deutsche Bank AG acting through its London Branch at Winchester

House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the

Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial

Conduct Authority. Details about the extent of our authorisation and regulation are available on request.

Hong Kong: Distributed by Deutsche Bank AG, Hong Kong Branch or Deutsche Securities Asia Limited.

India: Prepared by Deutsche Equities India Private Limited (DEIPL) having CIN: U65990MH2002PTC137431 and

registered office at 14th Floor, The Capital, C-70, G Block, Bandra Kurla Complex Mumbai (India) 400051. Tel: + 91 22

7180 4444. It is registered by the Securities and Exchange Board of India (SEBI) as a Stock broker bearing registration

nos.: NSE (Capital Market Segment) - INB231196834, NSE (F&O Segment) INF231196834, NSE (Currency Derivatives

Segment) INE231196834, BSE (Capital Market Segment) INB011196830; Merchant Banker bearing SEBI Registration

no.: INM000010833 and Research Analyst bearing SEBI Registration no.: INH000001741. DEIPL may have received

administrative warnings from the SEBI for breaches of Indian regulations. Deutsche Bank and/or its affiliate(s) may have

debt holdings or positions in the subject company. With regard to information on associates, please refer to the

“Shareholdings” section in the Annual Report at: https://www.db.com/ir/en/annual-reports.htm.

Japan: Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financial

instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA,

Type II Financial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks

involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by

multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to

losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional

losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories

of investment advice, products and services. Recommended investment strategies, products and services carry the risk

of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in

market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the

relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in

this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the

name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank

Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are

not disclosed according to the Financial Instruments and Exchange Law of Japan. Target prices set by Deutsche Bank's

equity analysts are based on a 12-month forecast period..

Korea: Distributed by Deutsche Securities Korea Co.

South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register

Number in South Africa: 1998/003298/10).

Singapore: This report is issued by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore

Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect

of any matters arising from, or in connection with, this report. Where this report is issued or promulgated by Deutsche

Bank in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in

the applicable Singapore laws and regulations), they accept legal responsibility to such person for its contents.

Taiwan: Information on securities/investments that trade in Taiwan is for your reference only. Readers should

independently evaluate investment risks and are solely responsible for their investment decisions. Deutsche Bank

research may not be distributed to the Taiwan public media or quoted or used by the Taiwan public media without

written consent. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and

is not to be construed as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited,

Taipei Branch may not execute transactions for clients in these securities/instruments.

https://www.db.com/ir/en/annual-reports.htm

20 November 2017

Banks

Chinese banks


Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre

Regulatory Authority. Deutsche Bank AG - QFC Branch may undertake only the financial services activities that fall

within the scope of its existing QFCRA license. Its principal place of business in the QFC: Qatar Financial Centre, Tower,

West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related

financial products or services are only available only to Business Customers, as defined by the Qatar Financial Centre

Regulatory Authority.

Russia: The information, interpretation and opinions submitted herein are not in the context of, and do not constitute,

any appraisal or evaluation activity requiring a license in the Russian Federation.

Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company (registered no. 07073-37) is regulated by the

Capital Market Authority. Deutsche Securities Saudi Arabia may undertake only the financial services activities that fall

within the scope of its existing CMA license. Its principal place of business in Saudi Arabia: King Fahad Road, Al Olaya

District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.

United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated

by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may undertake only the financial services

activities that fall within the scope of its existing DFSA license. Its principal place of business in the DIFC: Dubai

International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been

distributed by Deutsche Bank AG. Related financial products or services are available only to Professional Clients, as

defined by the Dubai Financial Services Authority.

Australia: Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product

referred to in this report and consider the PDS before making any decision about whether to acquire the product. Please

refer to Australia-specific research disclosures and related information at

https://australia.db.com/australia/content/research-information.html

Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian

Corporations Act and New Zealand Financial Advisors Act, respectively.

Additional information relative to securities, other financial products or issuers discussed in this report is available upon

request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent.

Copyright © 2017 Deutsche Bank AG

https://australia.db.com/australia/content/research-information.html

David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Global Chief Operating Officer

Research

Michael Spencer Head of APAC Research

Global Head of Economics

Steve Pollard Head of Americas Research

Global Head of Equity Research

Anthony Klarman Global Head of Debt Research

Paul Reynolds Head of EMEA

Equity Research

Dave Clark Head of APAC

Equity Research

Pam Finelli Global Head of

Equity Derivatives Research

Andreas Neubauer Head of Research - Germany

Spyros Mesomeris Global Head of Quantitative

and QIS Research

International locations

Deutsche Bank AG

Deutsche Bank Place

Level 16

Corner of Hunter & Phillip Streets

Sydney, NSW 2000

Australia

Tel: (61) 2 8258 1234

Deutsche Bank AG

Mainzer Landstrasse 11-17

60329 Frankfurt am Main

Germany

Tel: (49) 69 910 00

Deutsche Bank AG

Filiale Hongkong

International Commerce Centre,

1 Austin Road West,Kowloon,

Hong Kong

Tel: (852) 2203 8888

Deutsche Securities Inc.

2-11-1 Nagatacho

Sanno Park Tower

Chiyoda-ku, Tokyo 100-6171

Japan

Tel: (81) 3 5156 6770

Deutsche Bank AG London

1 Great Winchester Street

London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc.

60 Wall Street

New York, NY 10005

United States of America

Tel: (1) 212 250 2500

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