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capital and dividends at the same time owing to squeezed earnings. In this report,
we assume local gov. debt default risk will be limited as long as debt rollover is
permitted and net balances continue to increase, and assess the potential multi-year
margin loss of banks on the back of local gov. debt rollover due to lowering rates.
We look at nine questions that we think will be top of mind for investors and group
these questions under three broad themes.
The ,rst theme concerns the local gov. debt exposure on bank balance sheets, in
terms of size, mix and distribution. We conclude non-covered banks with 48% local
gov. debt to total assets (vs. 18% for covered banks) would face more challenges
with potential tail risk. Inferring from this, we expect six large banks with larger
balance sheets to step up and take on more local gov. debt.
The second theme is bank earnings risk, due to margin loss on local gov. debt. We
use a loss assumption of Rmb ~30tn (USD 4.5tn) gross addition of local gov. debt
and a ~30bps effective rate decrease each year, with banking system ROE
decreasing by ~100bps, and non-covered banks by ~150bps each year in 2023E-25E.
Based on this, we stress-test that a ~60bps rate cut per year on local gov. debt
would trigger non-covered banks to face recapitalization risk with ROE declining to
_
1.7%.
Our third theme assesses risk factors of local gov. debt widening the divergence of
individual banks. We highlight two sets of banks to see how these factors affect
divergence: 1) ABC (downgrade to Sell, from Neutral) and PSBC (upgrade to Buy,
from Sell) on the size of local gov. debt, and 2) ICBC (downgrade to Sell from Buy)
and CCB (maintain Buy) on the % of local gov. bonds.
For our investment views on each bank, please see the third report in this series,
Testing the ‘Impossible Trinity’ III: Increasing dividend risk; PSBC up to Buy,
ICBC/ABC/Industrial down to Sell.
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the ,rm may have a conaict 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. For Reg AC
certi,cation and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by non-US af,liates are not registered/quali,ed as research
analysts with FINRA in the U.S.
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1. What’s the size and mix of local gov. debt on bank balance sheets?
Based on our economists’ numbers, we estimate Rmb 34tn (USD 4.9tn) of local gov.
debt sits on the balance sheets of covered banks, which account for 61% of banking
assets. There are two elements to local gov. debt, namely loans (including shadow
credit) of Rmb 18tn (USD 2.6tn) and bonds of Rmb 16tn (USD 2.3tn), on our estimates.
We arrive at this by summing up loans with a tenor of more than 5 years (excluding
mortgages), and use the average portfolio share of ~48% for local gov. bonds held by
banks. We also include shadow credit in local gov. debt and summarize it as part of
loans.
Exhibit 1: We assess Rmb 34tn(USD 4.9tn) local gov. debt on Exhibit 2: BoCom/Huaxia have largest/smallest local gov. debt
balance sheets of covered banks, accouting for 61% of banking exposure (as % of IEA) at 29%/9%, with 16% avg. of covered banks.
assets, with loans (including shadow credit) of Rmb 18tn(USD 2.6tn) As of 2022, GSe
and bonds of Rmb 16tn(USD 2.3tn).
As of 2022, GSe
Local gov. loans Local gov. bonds Shadow banking Local gov. loan as % of IEA Local gov. bond as % of IEA Shadow banking as % of IEA
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
_
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Exhibit 3: Covered banks have Rmb 34tn(USD 4.9tn) local gov. debt, Exhibit 4: System local gov. debt exposure breakdown
18% of total assets, vs. Rmb 59tn(USD 8.5tn) and 48% of total assets As of 2022, GSe
for non-covered banks.
As of 2022, GSe
Local gov. debt exposure System local gov. debt exposure breakdown (2022)
120 60%
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
Exhibit 5: Six large banks total Rmb 29tn(USD 4.2tn) local gov debt, Exhibit 6: We expect large banks can support more local gov. debt
31% of estimated system total. growth on their large balance sheet, with local gov. debt as 18% of
As of 2022, GSe IEA, vs. 29% of system.
As of 2022, GSe
_
System local gov. debt exposure breakdown (2022) Local gov. debt as % of total assets
Smaller banks, Rmb 60%
5tn, 5%
50% 48%
40%
Non-covered banks,
20% 18%
Rmb 59tn, 64% 16%
10%
0%
Non-covered banks System Six large banks Smaller banks
Non-covered banks Large banks Smaller banks (covered) (covered)
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
4. What’s the gross and net addition of local gov. debt each year ?
We estimate Rmb ~30tn (USD 4.5tn) of gross addition of local gov. debt each year to
2025E, with Rmb 20tn (USD 3.0tn) rollover balance and Rmb 10tn (USD 1.5tn) net
addition.
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For the purposes of this analysis, we assume an average 5 year duration of local gov.
debt, and unchanged weights of local gov. debt on bank balance sheets. This would
mean 20% of local gov. debt rollover and ~10% balance growth each year.
Exhibit 7: We estimate Rmb 30/31/34tn(USD 4.2/4.4/4.8tn) gross local Exhibit 8: ...compared with new system credit growth addition of
gov. debt increase, with Rmb 19/21/23tn(USD 2.7/3.0/3.3tn) of Rmb 25/23/25tn(USD 3.5/3.3/3.5tn), assuming annual balance growth
rollover and Rmb 11/10/11tn(USD 1.5/1.4/1.5tn) of net increase in of ~10%.
2023E/24E/25E...
Gross increase of local gov. debt (system) Gross/net increase of local gov. debt vs. system credit
40
140 34
35
31
120 11
30 30
10
100 23
11 25
21
Rmb tn
19
80 20
Rmb tn
34
126 15 30 31
60 115
105 25 23 25
94 10
40
5 11 10 11
20
0
0 2023E 2024E 2025E
2022 2023E 2024E 2025E
Net increase of system credit Gross increase of local gov. debt Net increase of local gov. debt
Local gov. debt Rollover New increase Gross increase
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
We quantify the margin risk of both stock rollover and increased aows of local gov. debt,
assuming default risk is limited as long as rollover is allowed and net balances increase.
We expect lowering rates on both stock rollover and increases in local gov. debt aows
given the increasing size and dif,culty of preventing default risk. We assume a 1% rate
decrease on rollover debt each year and ~150 bps spread loss between local gov. debt
and the overall bank rate as opportunity cost to model the margin loss of local gov. debt.
_
This implies the effective interest rate on local gov. debt would decrease by ~30bps
each year on average in 2023E-25E. This would translate into a NIM decrease of covered
banks by an average 3-10bps each year in 2023E-25E. We believe ICBC/ABC/Industrial
bank would have a larger NIM contraction of 7.3/6.6/9.4bps vs. the 6.0bps average for
covered banks each year 2023-25E, while CMB and BOC would have a smaller NIM
decrease of 4.0/3.3bps, mainly due to the size of local gov. debt. The more local gov.
debt held by banks, the more NIM dilution.
Based on these assumptions, and with the multi-year margin contraction led by lowering
rates of increasing local gov. debt, banking system CET1 ratio could be 9.9%, with that
of non-covered banks remaining above the minimum requirement at 7.9% by
end-2025E, although the CET1 ratio would decrease by ~80bps cumulatively in
2023E-25E.
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Exhibit 9: We estimate system ROE decrease by ~100bps each year Exhibit 10: The effective rate cut each year would be ~30bps, with
in 2023E-25E, due to margin loss on local gov. debt, else being 1% rate cut for 20% balance rollover and 150bps opportunity cost
equal. Compared with covered banks which at a ~60bps ROE for ~10% new growth, which would translate to a NIM decrease of
decrease, non-covered banks would decrease c. ~150bps. covered banks by 3-10bps each year in 2023E-25E.
Margin loss impact to ROE Local gov. debt effective rate trajectory (base case)
14 360
12 0.72 340 -18
0.61 0.55
10 -16
320
8 1.10 0.96 0.89 -18
%
300
6 11.3 -12
11.1 10.8
bps
4 1.57 1.42 280 -18
7.8 7.6 7.4 1.38 350
2 260 316 -11
3.6 3.4 3.1
0 240 286
2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E
256
Covered banks System Non- covered banks 220
200
2022 Balance New 2023E Balance New 2024E Balance New 2025E
Adj. ROE vs. before adj.
rollover growth rollover growth rollover growth
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
Exhibit 11: We highlight ICBC/ABC/Industrial bank would have Exhibit 12: On our assumptions, with the multi-year margin
larger NIM contraction of 7.3/6.6/9.4bps vs. 6.0bps average of contraction led by lowering rates of increasing local gov. debts,
covered banks each year in 2023-25E, while CMB and BOC would banking system CET1 ratio could be 9.9%, with that of non-covered
have a smaller NIM decrease of 4.0/3.3bps, mainly due to the size of banks remaining above the min. requirement at 7.9% by end-2025E,
local gov. debt. though the CET1 ratio would decrease by ~80bps cumulatively in
2023E-25E.
-4.0 6 11.6
bps
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
This suggests that, before reaching the point of non-covered banks (39% of banking
assets) requiring recapitalization: 1) the effective interest rate on local gov. debt could go
lower, as our stress test suggests 30bps more rate cuts each year or ~100bps lower in
total for 2023E-25E; or 2) more time could be allowed for debt rollover, assuming a ,xed
setup of rate cuts on local gov. debt in our base case, else being equal.
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Exhibit 13: We stress-test that with effective interest rate on local Exhibit 14: The system ROE would be 6.6% vs. 7.4% base case, and
gov. debt decreasing by ~60bps each year, non-covered banks covered/non-covered banks ROE would arrive at 10.3%/1.7% vs.
would face recapitalization risk with the CET1 ratio dipping below 10.8%/3.1% of base case in 2025E.
7.5%, the min. requirement by end-2025E.
Adj. CET-1 ratio (stress case) Adj. ROE in base/stress case (2025E)
2.85%
3.0% 12.0
14.0 10.8
2.25% 2.5% 10.3
12.0 10.0
1.68% 2.0%
10.0
1.5% 8.0 7.4
8.0 Required min. 7.5 6.6
%
1.0%
%
6.0 6.0
11.5 11.4 11.2 0.5%
10.3 10.0 9.7
4.0 8.4 7.9 0.0%
7.5 4.0 3.1
2.0 -0.5%
1.7
2.0
0.0 -1.0%
2023E 2024E 2025E
0.0
Covered banks System Non- covered banks Base case Stress case Base case Stress case Base case Stress case
Required min. Effective rate (RHS) Covered banks System Non- covered banks
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
7. What would happen to covered banks if the local gov. debt rate went
lower towards the need for recapitilization?
If we stress test rates on local gov. debt going lower at ~60bps each year in 2023E-25E,
we could see covered banks have a NIM decrease of 12bps each year, driving ROE and
CET1 ratio decrease by ~120/10bps each year, assuming credit cost does not climb up
and else being equal. By the end-2025E, the stress tested ROE and CET1 ratio would be
10.3%/11.2% on average, or 52/14bps lower than the base case.
Exhibit 15: With the stress test to set rates on local gov. debt is to Exhibit 16: ...and CET-1 ratio would be 11.2%, or ~14bps lower than
lower at ~60bps each year in 2023E-25E vs. base case of ~30bps, base case, by the end-2025E.
ROE of covered banks would be 10.3%, or 52bps lower than of base
case...
Adj. ROE in base/stress case (2025E) Adj. CET-1 ratio in base/stress case (2025E)
17.0 0.3 15.0
0.09
_
14.0
15.0 0.8 0.10 0.19
13.0
0.7
13.0 12.0 0.08
0.8 0.8
1.0 11.0
0.4
%
%
Stress case vs. base case Stress case vs. base case Required min.
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
8. Does the local gov. debt mix matter as an offset to bank earnings?
With more bonds in local gov. debt portfolios, and more tax (0% tax rate vs. ~15% of
loans) and capital savings (10% (LGGB) or 20% (LGSB) risk weighting vs. 100% of
loans), it means banks can better offset the margin loss on local gov. debt.
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Most banks guide they would like to take more local gov. bonds onto their balance
sheets; despite nominal yields on local gov. bond not being high, the tax and capital
savings can provide more upside to adj. return. Banks also guide that if the central bank
allows more local gov. bonds as quali,ed collateral for liquidity, local gov. bonds can be
more attractive assets to enhance debt portfolio returns, amid lowering rates.
We estimate the system adjusted local gov. debt yield could be 0.8% higher on average
in 2023E-25E, thanks to the tax and capital bene,ts of local gov. bonds.
We estimate the weighted capital charges of local gov. bonds could be 39%, blended by
29% of LGGB (local government general bonds) with a 10% risk weighting, 43% of
LGSB (local government general bonds) with a 20% risk weighting, and 28% of implicit
LGFV (local government ,nancing vehicle bonds) with a 100% risk weighting. This could
help banks save capital by 61%, compared with loans which require 100% risk
weighting. We believe the saved capital could drive additional returns on normalized
ROE of 11% for covered banks, assuming the return on capital for each covered bank
remains unchanged.
Thereby, with inclusion of the tax and capital bene,ts of local gov. bonds, we could see
the decrease in ROE due to margin loss of local gov. debt narrow by 1.1ppts for covered
banks and 1.9ppts for non-covered banks.
Within our coverage, we have banks with larger local gov. bond exposures, i.e.
PSBC/CMB (83%/68% bond % local gov. debt), and banks with smaller exposures, i.e.
Industrial and BoCom (24%/31%), compared with the 50% average of covered banks.
Exhibit 17: More bonds in the local gov. debt portfolios, more tax Exhibit 18: We estimate the system adjusted local gov. debt yield
(0% tax rate vs. ~15% of loans) and capital savings (10%(LGGB) or could be 0.8% higher on average in 2023E-25E, thanks to the tax and
20% (LGSB) risk weighting vs. 100% of loans) mean banks can capital benebts of local gov. bonds.
offset the margin loss of local gov. debt
Mix Tax Risk
Rmb tn Balance Mix
_
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
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Exhibit 19: With the inclusion of the tax and capital benebts of local Exhibit 20: Within our coverage, we have banks with larger local
gov. bonds, we could see the decrease in ROE due to margin loss of gov. bond exposures, PSBC/CMB (83%/68% bond % local gov. debt),
local gov. debt narrowing by 1.1ppts for covered banks and 1.9ppts and banks with smaller exposures, Industrial and Bocom
for non-covered banks. (24%/31%), compared with the 50% average of covered banks.
As of 2022, GSe
5.5 5.3 40
6.0 5.0 68 64 62
11.3 11.1 30
10.8 52 52 48
1.9 20 41 38 35
4.0 7.8 1.9 1.9 31
7.6 7.4 10 24
0
2.0 3.6 3.4 3.1
0.0
2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E
Covered banks System Non- covered banks Local gov. bond as % of total Local gov. loan as % of total
Adj. ROE after margin dilution ROE change on benefits Adj. ROE after benefits Shadow banking as % of total
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
We think both size and mix of local gov. debt are factors that differentiate banks, as we
expect the larger levels of local debt held by banks, the more margin loss on the back of
lowering rates of local gov. debt, while the more bonds in local gov. debt portfolios, the
more tax and capital bene,ts can narrow the bottom-line decrease. Thus, we screen our
covered banks, and highlight two groups: 1) ABC (downgrade to Sell, from Neutral) and
PSBC (upgrade to Buy, from Sell) on the size of local gov. debt, and 2) ICBC (downgrade
to Sell, from Buy) and CCB (maintain Buy) on the % of local gov. bonds (see Part III in
_
n ABC and PSBC on the size of local gov. debt, given their similarly strong deposit
bases. ABC has 20% local gov. debt as a % of IEA, compared with 13% for PSBC.
Assuming local gov. debt on both banks rolls over with lowering rates, the PPOP
ROA of ABC would decrease by 7bps each year on average in 2023E-25E, compared
with 5bps of PSBC, else being equal. Moreover, when factoring in the tax and
capital savings of local gov. bonds - PSBC has 83% bond exposure in their local gov.
debt portfolio, compared with 48% for ABC - the savings could help PSBC narrow
its ROE decrease by 160bps each year on average in 2023E-25E, vs. 139bps at ABC.
n ICBC and CCB on their local gov. mix, as ICBC has 38% exposure to local gov.
bonds, compared with 62% for CCB. The more local gov. bonds, the more capital
and tax savings to mitigate earnings pressure caused by local gov. debt. We
compare ICBC with CCB as the two stocks generally trade in the same direction,
and as investors see few differences between the two. However, we think local gov.
debt can widen the divergence. If we look at these banks’ reported data and apply
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the same assumptions as our margin loss test, we estimate ICBC could see PPOP
ROA decrease by 7bps each year on average in 2023E-25E, compared with 4bps for
CCB. If we include tax and capital savings, the margin loss on the bottom line could
narrow more for CCB, with ROE decreasing less by 125bps each year on average in
2023E-25E, compared with 120bps for ICBC.
Exhibit 21: PSBC/ABC has 13%/20% local gov. debt exposure as % Exhibit 22: ICBC/CCB has 38%/62% local gov. bond mix, with ROE
of IEA, with ROE adjusted for margin loss and bond benebts at adjusted for margin loss and bond benebts at 12.2%/11.3% on
13.8%/11.7% on average in 2023-25E. average in 2023-25E.
Adj. ROE after/before including benefits Adj. ROE after/before including benefits
16.0 14.0 12.6
13.7 13.8 13.9 12.2 11.8 11.7 11.3
14.0 12.0 12.0 1.3 10.9
1.7 1.6 1.5 11.7 11.4 1.2 1.2 1.3 1.2
12.0 1.2
1.4 1.4 10.0
1.3
10.0
8.0
%
%
8.0
6.0 11.3
6.0 12.1 12.2 12.4 10.9 10.6 10.5 10.1
10.6 10.4 9.8
10.0 4.0
4.0
2.0 2.0
0.0 0.0
2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E 2023E 2024E 2025E
PSBC ABC CCB ICBC
Adj. ROE after margin dilution ROE change on benefits Adj. ROE after benefits Adj. ROE after margin dilution ROE change on benefits Adj. ROE after benefits
Source: Goldman Sachs Global Investment Research, Company data Source: Goldman Sachs Global Investment Research, Company data
The author would like to thank Zihan Wang and Claire Ouyang for their contributions to
this report.
_
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Appendix
Based on GS macro team estimates for gov. debt, we sum up of,cial local gov. debt of
Rmb 34.9tn (USD 5.0tn) and implicit onshore local gov. debt of Rmb 58.9tn (USD 8.4tn)
(incl. Rmb 13.5tn (USD 1.9tn) of bond and Rmb 45.4tn (USD 6.5tn) loans and shadow
credits), to get to the total onshore local gov. debt exposure of Rmb ~94tn (USD 13.4tn).
Exhibit 23: Local gov. debt (onshore) is estimated to be Rmb 94tn(USD 13.4tn), as of 2022.
_
Source: Goldman Sachs Global Investment Research, MOF, Wind, Bloomberg, CEIC
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Disclosure Appendix
Reg AC
I, Shuo Yang, Ph.D., hereby certify that all of the views expressed in this report accurately reaect my personal views about the subject company or
companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the speci,c
recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
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assess the normalized provisioning level of banks, with the potential inclusion of
further losses on banks’ credit portfolios, in order to evaluate whether provision
release remains an option to drive pro>ts.
With these, we address top of mind questions, namely 1) where we are in the
property credit cycle, 2) hidden losses in non-loan assets, and 3) the adjusted ROE
and NPL coverage ratio of banks. In summary:
n The property credit cycle continues with an increasing NPL formation rate. Large
banks may face relatively less pressure given already high reported property NPL
ratios, averaging 4.5%, vs. 1.8% for smaller banks which may continue to
recognize more NPL.
n Risky non-loan assets including corporate bonds and shadow credit can be
captured in debt investments, which allows us to calculate the implied loss ratio
for covered banks averaging at 6% vs. 25% for CMB (Neutral). This suggests
CMB has less room going forward to lower provisions on non-loan assets.
n Additional losses and provisions required by banks could amount to Rmb
337/429bn (USD 48/61bn). Adj. bank ROE would be 9.6% vs. 12.0% before
adjustment. BoCom (Sell) and Huaxia (Sell) would see large ROE decreases of
_
For our investment views on each bank, please see the third report in this series,
Testing the ‘Impossible Trinity’ III: Increasing dividend risk; PSBC up to Buy,
ICBC/ABC/Industrial down to Sell.
The author would like to thank Zihan Wang and Claire Ouyang for their contributions
to this report.
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Banks have started to release provisions, which has supported pro9ts at a time of
soft revenue growth, against the backdrop of prolonged property credit cycle and
overarching regulation to clean bank balance sheets. Although banks have built up
a risk buffer since Covid, the sustainability of provision release to drive pro9t
growth is top of investors’ minds. We build a new bottom-up framework to assess
potential additional NPL and provisions arising from banks’ credit portfolios
including property credits, loan book and debt investment. We conclude 1) Rmb
~337 bn (USD 48bn) more asset losses could be recognized, and Rmb ~429bn
(USD 61bn) provisions required, resulting in an NPL coverage ratio decrease of
-6ppts, book value dilution of -2%, CET1 ratio and ROE decrease by 20/239bps to
9.6%/11.5% in 2023E. We address three key investor questions below.
The framework suggests that divergence is set to widen between large banks and other
banks, as the large banks have reported much higher NPL ratios for property loans, with
an average of 4.5% vs. 1.8% for other covered banks. We would expect smaller banks
to report more property NPLs going forward, while large banks such as BOC and PSBC
could face less pressure on account of 1) the already high NPL ratio reported by BOC,
which is close to our stressed estimates of ~8.0% loss ratio of banks; 2) the low
_
property exposure of PSBC, which stands at 2% of total assets vs. 4% on average for
covered banks. We expect Rmb 90/140bn (USD 13/20bn) losses and provisions to be
recognized from property loans, with negative impacts on book value/ROE of
-2%/-2ppts in aggregate for covered banks.
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the minimum requirement, book value dilution would not be signi>cant, with 2%
markdown on average for covered banks, but net pro>ts would decrease by 21% in
aggregate, with NPL coverage ratio down by 6ppts in aggregate and 23ppts on average.
Notably, CMB could have the largest NPL coverage ratio decrease with 138ppts. To
arrive at this conclusion, we assume banks fully recognize the loss in 2023E by booking
provisions, although banks may recognize losses over multiple years, which would
smooth earnings growth.
Exhibit 1: Summary of additional NPL and provision required for property risk and non-loan assets
Rmb bn
Large Joint-stock Regional
Aggregate Average
Rmb bn ICBC CCB BOC ABC BoCom PSBC CMB PAB Industrial Huaxia BONJ BONB
NPL coverage ratio 202% 228% 189% 296% 176% 371% 437% 262% 215% 147% 368% 476% 239% 281%
NPL 368 337 246 301 113 66 63 41 56 47 11 9 1,658 138
LLR 745 768 465 892 198 244 275 108 120 69 41 43 3,967 331
Adj. NPL coverage ratio 208% 231% 205% 300% 188% 292% 299% 223% 165% 142% 390% 451% 234% 258%
vs. before adj. (ppts) 5 4 16 4 12 -78 -138 -38 -50 -5 22 -25 -6 -23
Driven by NPL increase (ppts) -15 -35 -2 -32 -24 -116 -191 -96 -111 -51 -27 -50 -40 -63
- unrecognized 3rd stage assets -10 -22 -2 -18 -9 -103 -170 -87 -105 -49 -7 -50 -31 -53
- property loss -5 -13 0 -14 -15 -13 -22 -9 -6 -2 -20 0 -9 -10
Driven by provision increase (ppts) 20 38 18 36 35 37 54 58 61 46 49 25 35 40
- unrecognized 3rd stage assets 16 29 18 29 22 29 41 47 53 42 31 25 28 32
- property loss 4 10 0 7 13 8 12 11 8 4 18 0 7 8
Adj. net NPL formation rate 0.8% 1.0% 0.7% 0.9% 1.2% 0.7% 2.7% 4.3% 2.0% 6.6% 12.0% 0.6% 1.3% 2.8%
Before adj. 0.7% 0.7% 0.7% 0.7% 0.9% 0.4% 2.0% 3.6% 0.9% 5.6% 11.9% 0.5% 1.0% 2.4%
Diff. (bps) 11 26 1 16 22 37 73 65 108 104 8 9 26 40
Impact (2023E):
△NPAT (Rmb bn) -42 -92 -29 -85 -41 -7 -14 -17 -22 -12 -2.2 -0.3 -363 -30
As % of NPAT -11% -28% -12% -32% -42% -8% -9% -34% -23% -47% -11% -1% -21% -22%
Adj. NPAT 328 241 209 183 56 86 137 34 71 14 18 26 1,402 117
Adj. book value 3,373 2,882 2,216 2,343 886 745 910 395 712 272 137 175 15,045 1,254
vs. before adj. -1% -2% -1% -2% -3% -1% -1% -4% -2% -3% -1% 0% -2% -2%
Adj. ROE 10.1% 8.6% 9.8% 8.0% 6.4% 12.0% 15.8% 9.0% 10.4% 5.2% 13.4% 15.8% 9.6% 10.4%
Before adj. 11.3% 11.7% 11.1% 11.6% 10.9% 13.0% 17.3% 13.3% 13.4% 9.6% 15.0% 16.0% 12.0% 12.8%
diff. (bps) -123 -314 -130 -357 -450 -97 -152 -429 -300 -438 -159 -20 -239 -247
Adj. CET-1 ratio 13.5% 13.1% 11.5% 10.4% 9.7% 9.2% 13.3% 8.2% 9.6% 9.0% 9.5% 9.4% 11.5% 10.5%
Before adj. 13.6% 13.4% 11.6% 10.7% 10.0% 9.2% 13.5% 8.5% 9.9% 9.3% 9.7% 9.4% 11.7% 10.7%
diff. (bps) -12 -29 -11 -27 -31 -6 -14 -33 -21 -30 -11 -2 -20 -19
_
Exhibit 2: Additional losses could amount to Rmb 337bn or USD Exhibit 3: Additional provisions required by banks could amount to
48bn (2023E) Rmb 429bn or USD 61bn (2023E)
60 0%
Rmb bn
60 49 100
-50% -10%
37 80
40 30 30 -20%
25 24 -100% 60 49 43
18 35
20 40 25 -30%
-150% 22
3 1 1 17 16
20 8 3 -40%
0 -200% 0
0 -50%
Unrecognized 3rd stage assets Property loss As % of reported NPL (2022) (RHS)
Unrecognized 3rd stage assets Property loss As % of reported LLR (2022) (RHS)
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
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Exhibit 4: Adj. NPL coverage ratio would be 234% vs. 239% before Exhibit 5: The adj. bank ROE would be 9.6% vs. 12.0% before
adjustment (2023E) adjustment (2023E)
Adj. NPL coverage ratio Before adj. Required min. =150% Adj. ROE vs. prior
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Exhibit 6: Adj. Bank CET1 ratio would be 11.5% vs. 11.7% before Exhibit 7: Adj. book value would be ~2% lower vs. before
adjustment (2023E) adjustment (2023E)
Adj. CET-1 ratio (%) Adj. book value vs. before adjustment
14.0 0.12 0.14 0.0%
0.29
13.0 -0.5% 0%
-4.0% -4%
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Banks have reported increasing property NPL ratio since 3Q21, and guide that
suf9cient provisions are in place against losses. Based on our Property Risk
Monitor framework (see I, II, III and IV), we believe more losses should be
recognized in bank loans as property bonds and shadow credits are
mark-to-market and have taken losses. We believe the property NPL formation rate
has not peaked out given deteriorating property sales volume and price. We
estimate Rmb 90bn (USD 13bn) more NPL and Rmb 140bn (USD 20bn) more
provisions required for covered banks, which could result in ROE/CET1 ratio
decreasing by -78/-6bps, with adj. NPL coverage ratio on average decreasing to
274% from 281% prior. We note the adj. ROE of CMB would be 16.0% vs. 17.3%
before adjustment.
To assess the property risk of individual bank, we consider three factors, namely 1) size,
represented by % of total assets; 2) mix, the more non-loan assets, the higher risk; 3)
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pace of NPL recognition, the higher reported NPL ratio, the more likely close to the peak
of NPL cycle. We summarize the statistics as:
n PAB/CMB have the largest property exposure (excluding mortgage), with Rmb
403/605bn (USD 57/86bn) or 8%/6% of total assets.
n ABC/BOC have the largest loan mix, with 90%/89% of total exposure,
CMB/Industrial Bank have the lowest, suggesting riskier property credit portfolio
as the non-loan asset like bonds and shadow credits could take more losses.
n BOC/ICBC presented the highest property NPL ratios of 7.2%/6.1%, which is close
to our estimated 8.0% from our ECL (Expected Credit Loss) model.
Given the further slowdown of property sales and guidance of banks to expect
continued property risk, we expect property NPL formation rate has not peaked out yet,
despite the record high printed in 4Q22. Thus, we expect the property NPL ratio of
covered banks to continue to increase, which can drive widening divergence of banks,
given their varying reported property NPL ratios. We expect large banks may face less
pressure on smaller property exposure relative to their large balance sheets, which is
3% of total assets vs. 5% for smaller banks (Exhibit 8), and high reported property NPL
ratio of 4.5% on average vs. 1.8% for smaller banks. Our analysis suggests CMB with
large property exposure and low mix of property loans, and a reported property NPL
ratio lower than that of large banks could recognize more property losses arising from
its balance sheet.
We estimate that covered banks would recognize Rmb 90bn (USD 13bn) more property
NPL, or 31% more of the total recognized NPL. With this setup, PSBC/BONJ may
recognize more property NPL which takes 151%/132% of the reported, and
BOC/BONB could be less pressured given smaller new property NPL to recognize.
(Exhibit 12)
We also assess that Rmb 140bn (USD 20bn) more provisions would be required to
cover the additional property NPL. We factor in bank guidance to set aside 2x of bank
_
LLR (loan loss reserve) as the risk buffer against property loans, and expect banks to at
least maintain the current provisioning level for both existing and newly recognized
property NPL. The new provisions would result in a pro>t decrease of 7% for covered
banks, and ROE, CET1 ratio and book value decrease of 78bps/6bps/-0.6%. Our analysis
suggests BoCom/PAB/BONJ/CMB would recognize more provisions with ROE
decreases of 178/147/133/125bps vs. 92bps average of peers. (Exhibit 12)
In summary, with inclusion of more NPL and provisions to recognize, the adj. ROE and
NPL coverage ratio of covered banks on average could decrease to 11.9%/274% vs.
12.8%/281% prior. CMB’s adj. ROE and NPL coverage ratio would be 16.0%/400% vs.
17.3%/437% prior.
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Exhibit 8: Total property exposure (excl. mortgage) as % of total Exhibit 9: Property exposure (excl. mortgage) mix
assets As of 2022
As of 2022
Property bond Shadow banking Property loan Property bond Shadow banking Property loan
Source: Company data, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Exhibit 10: Target property NPL ratio (2023E) Exhibit 11: Gross NPL formation rate of property loan (2022)
Target property NPL ratio (2023E) Gross NPL formation rate of property loan (2022)
8.0% 7.2% 7.2% 7.2% 4.0%
7.0%
6.5% 3.5%
7.0% 3.5%
3.1%
6.0%
5.0% 3.0%
5.0% 4.5%
2.4%
3.6% 2.5% 2.2% 2.2%
4.0% 3.1%
2.6% 2.0% 1.9%
3.0% 2.3% 1.7% 1.6% Avg. 1.8%
1.5% 1.4%
2.0% 1.2%
1.0% 0.4% 1.0%
0.0% 0.5% 0.3%
0.0%
0.0%
Source: Company data, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
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LLR ratio of the bank 2.9% 3.3% 1.8% 4.0% 2.5% 3.0% 4.1% 2.9% 2.2% 2.9% 3.7% 0.2%
LLR ratio for property loan 5.7% 6.5% 3.6% 7.9% 4.9% 6.1% 8.2% 5.9% 4.3% 5.8% 7.5% 0.3%
Implied property NPL coverage ratio (based on reported NPL ratio) 93% 149% 49% 153% 175% 419% 201% 410% 332% 205% 779% 81%
Implied property NPL coverage ratio (based on target NPL ratio) 79% 90% 49% 113% 98% 167% 126% 224% 139% 129% 322% 79%
Target NPL coverage ratio for △property NPL (150% min.) 150% 150% 150% 150% 150% 167% 150% 224% 150% 150% 322% 150%
Additional provisions 16 38 0 25 17 8 14 8 10 3 2 0
Adj. NPL coverage ratio 201% 222% 189% 289% 174% 357% 400% 259% 209% 147% 365% 476%
NPL coverage ratio (2023E) 202% 228% 189% 296% 176% 371% 437% 262% 215% 147% 368% 476%
vs. before adj. (ppts) -1 -5 0 -8 -2 -13 -36 -3 -7 0 -3 0
Driven by NPL increase (ppts) -6 -16 0 -15 -16 -24 -55 -20 -22 -5 -21 -1
Driven by provision increase (ppts) 4 11 0 8 14 11 19 17 16 5 19 0
Impact (2023E):
△NPAT (Rmb bn) -14 -31 0 -21 -16 -7 -12 -6 -8 -2 -1.8 0.0
As % of NPAT -4% -9% 0% -8% -17% -8% -8% -12% -9% -8% -9% 0%
Adj. NPAT 356 301 238 247 80 86 139 45 85 24 18 26
Adj. book value 3,392 2,924 2,236 2,388 903 745 912 405 721 279 138 175
vs. before -0.3% -0.7% 0.0% -0.6% -1.2% -0.7% -0.9% -1.3% -0.8% -0.5% -0.9% 0.0%
Adj. ROE 10.9% 10.7% 11.1% 10.7% 9.1% 12.0% 16.0% 11.8% 12.3% 8.8% 13.7% 16.0%
Before adj. 11.3% 11.7% 11.1% 11.6% 10.9% 13.0% 17.3% 13.3% 13.4% 9.6% 15.0% 16.0%
diff. (bps) -40 -107 0 -87 -178 -97 -125 -147 -115 -72 -133 -1
Adj. CET-1 ratio 13.6% 13.3% 11.6% 10.6% 9.9% 9.2% 13.4% 8.4% 9.8% 9.3% 9.6% 9.4%
Before adj. 13.6% 13.4% 11.6% 10.7% 10.0% 9.2% 13.5% 8.5% 9.9% 9.3% 9.7% 9.4%
diff. (bps) -4 -10 0 -7 -13 -6 -12 -11 -8 -5 -9 0
III. Quantifying potential further losses and provisions for assets under
stage 3
We estimate Rmb 247bn (USD 35bn) more NPL and Rmb 289bn (USD 41bn) more
provisions in total would be required for assets under stage 3, with ROE and CET1
ratio decreasing by -167bps/-11bps. We calculate the implied loss ratio of debt
investments (excluding gov. bond) is 6% on average, and 25% for CMB, while
corporate bonds and non-standard credit assets (NSCA) are 9% of debt
_
investments for CMB, compared with 16% for covered banks on average.This
suggests to us that CMB is unlikely to bene9t easily going forward from reduced
provisions on non-loan assets that boosted earnings in the past quarters.
As assets under stage 3 are risky assets with high probability to incur losses, which
should be recognized as NPL. This in our view means that the NPL should be at least
equal to assets under stage 3, otherwise, the reported NPL would be understated. Like
NPL, assets under stage 3 should be well provisioned with appropriate risk buffers. As
such, we set the highest provisioning level of covered banks as the benchmark to
assess the provision required for loans, and apply 100% provisioning level to debt
investments (excluding gov. bonds) to assess the provision required. So we could have:
n In the loan book, Rmb 87bn (USD 12bn) more NPL to recognize, and Rmb 260bn
(USD 37bn) more provisions required. (Exhibit 16)
n In the debt investment, Rmb 160bn (USD 23bn) more NPL to recognize, and Rmb
30bn (USD 4.3bn) more provisions required. (Exhibit 19)
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To better assess the credit risk of debt investments, we exclude bonds from debt
investments to have shadow credit, which is also called non-standard credit assets
(NSCA), and add it back with corporate bonds to assess the implied loss of debt
investment as we assume gov. bond remains risk free. Thus, we can calculate the
implied loss ratio of the debt investment book, which could be 6% on average for
covered banks with 25% for CMB.
In summary, combining the assessment of loss and provisions for both the loan and
debt investment book (Exhibit 13):
n Most new loss is from debt investment book, which takes 65% of total loss we
estimate. CMB, Industrial, Huaxia could recognize further losses of Rmb
34/40/20bn (USD 4.9/5.7/2.9bn) from debt investment, or 59%/73%/50% of the
reported.
n Most new provisions are from bank loans, which take 90% of the total required
provision. ABC would potentially require Rmb 76bn (USD 11bn) more provisions, or
9% of the reported loan provision, against the additional loss of Rmb 19bn (USD
2.7bn) in its loan book.
So there could be Rmb 247bn (USD 35bn) total losses to recognize and Rmb 289bn
(USD 41bn) more risk buffer required for covered banks in aggregate, with pro>ts/CET1
ratio down -14%/-11bps.
Exhibit 13: Aggregate impact of additional NPL and provisions in loan and debt investments
Rmb bn
Large Joint-stock Regional
Rmb bn ICBC CCB BOC ABC BoCom PSBC CMB PAB Industrial Huaxia BONJ BONB
Aggregate
_
Adj. NPL coverage ratio 209% 237% 205% 308% 191% 299% 312% 223% 166% 142% 394% 452%
vs. before adj. (ppts) 7 9 16 12 15 -72 -125 -38 -49 -5 26 -25
Driven by NPL increase (ppts) -10 -22 -2 -18 -9 -103 -170 -87 -105 -49 -7 -50
Driven by provision increase (ppts) 17 31 18 30 24 31 45 49 56 43 33 25
Impact (2023E):
△NPAT (Rmb bn) -28 -60 -29 -64 -24 0 -2 -11 -13 -10 -0.4 -0.3
As % of NPAT -8% -18% -12% -24% -25% 0% -2% -22% -14% -39% -2% -1%
Adj. NPAT 342 272 209 204 72 93 148 40 80 16 19 26
Adj. book value 3,382 2,904 2,216 2,358 897 750 920 400 718 273 139 175
vs. before -0.6% -1.4% -0.9% -1.9% -1.9% 0.0% -0.2% -2.4% -1.3% -2.7% -0.2% -0.2%
Adj. ROE 10.5% 9.7% 9.8% 8.9% 8.2% 13.0% 17.0% 10.5% 11.6% 5.9% 14.8% 15.8%
Before adj. 11.3% 11.7% 11.1% 11.6% 10.9% 13.0% 17.3% 13.3% 13.4% 9.6% 15.0% 16.0%
diff. (bps) -86 -213 -135 -277 -276 0 -29 -292 -191 -373 -27 -20
Adj. CET-1 ratio 13.5% 13.2% 11.5% 10.5% 9.8% 9.2% 13.5% 8.3% 9.7% 9.1% 9.6% 9.4%
Before adj. 13.6% 13.4% 11.6% 10.7% 10.0% 9.2% 13.5% 8.5% 9.9% 9.3% 9.7% 9.4%
diff. (bps) -7 -16 -9 -17 -18 0 -2 -17 -11 -19 -1 -1
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Exhibit 14: CMB new provision mix Exhibit 15: CMB NPL coverage ratio
18 18 7 7 18 17
12 7
5 11 11 11
6 8 350
5 5
0 -2 0
-3 -4
-5 300
-16
-10 299 298 291
-15 250
-20
1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23
Loan provision Non-loan provision Total new provision NPL coverage ratio Adjusted NPL coverage ratio
Exhibit 16: In the loan book, Rmb 87bn more NPL to recognize, and Rmb 260bn more provisions required
Rmb bn
Large Joint-stock Regional
Rmb bn ICBC CCB BOC ABC BoCom PSBC CMB PAB Industrial Huaxia BONJ BONB
Loans
Loans in stage 3 as % of total 1.45% 1.46% 1.32% 1.47% 1.41% 0.92% 1.07% 1.16% 1.36% 1.89% 0.88% 0.83%
Reported NPL ratio 1.38% 1.38% 1.32% 1.37% 1.35% 0.84% 0.96% 1.05% 1.09% 1.75% 0.90% 0.75%
Diff. (bps) 7 8 0 10 6 8 11 11 27 14 -2 8
Additional NPL 16 15 0 19 4 5 6 4 14 3 0 1
Stage-3 loan coverage ratio 78% 64% 75% 61% 63% 89% 86% 70% 77% 74% 84% 85%
Target coverage ratio (sample max) 89% 89% 89% 89% 89% 89% 89% 89% 89% 89% 89% 89%
Diff (ppts) -10 -24 -14 -28 -26 0.0 -2 -18 -12 -15 -5 -4
Additional provision 32 71 32 76 25 0.0 1 7 8 6 0.4 0.4
Exhibit 17: Diff between stage-3 loan proportion and reported NPL Exhibit 18: Stage-3 loan coverage ratio as of 2022
ratio as of 2022
bps
Diff. between stage-3 loan proportion and reported NPL ratio Stage-3 loan coverage ratio
(bps)
100%
89% Target level (sample max) :89%
30 27 90% 86% 85% 84%
78% 77%
25 80% 75% 74%
70%
_
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Exhibit 19: In the debt investment, Rmb 160bn more NPL to recognize, and Rmb 30bn more provisions required
Rmb bn
Large Joint-stock Regional
Rmb bn ICBC CCB BOC ABC BoCom PSBC CMB PAB Industrial Huaxia BONJ BONB
Debt investments
Additional NPL 3 20 2 1 2 20 34 17 40 20 0.4 0.3
Existing debt provision 33 41 10 20 3 28 43 16 45 17 3 2
Stage-3 debt investment coverage ratio 86% 87% 90% 99% 54% 100% 95% 58% 81% 64% 90% 95%
Target coverage ratio (sample max) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Diff (ppts) -14 -13 -9 -1 -45 0.0 -5 -42 -18 -36 -10 -5
Additional provision 0.4 2.6 2.4 0.01 0.8 0.0 1.7 7.2 7.3 7.3 0.04 0.01
Exhibit 20: Risky non-loan assets including corp. bonds and Exhibit 21: Stage-3 debt investment coverage ratio as of 2022
shadow credit can be captured in debt investments, which allows
us to calculate the implied loss ratio for covered banks averaging
6%
As of 2022
Implied loss ratio of non-loan assets Stage-3 debt investment coverage ratio
30% 120%
25% 100% 99% Target level (sample max): 100%
25% 100% 95% 95%
90%
87% 86%
81%
20% 80%
64%
58%
15% 60% 54%
11%
10% 8% 40%
7% 6% 6%
4%
5% 3% 20%
2% 1%
0% 0%
0% 0%
Source: Company data, Goldman Sachs Global Investment Research Source: Company data
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1. Total implied PD of our listco sample decreased to 12.8% in 1Q23, -1.0/-0.7ppts vs.
1Q22/4Q22, primarily driven by falling aggregate EIC (6.18x in 1Q23 vs. 6.34x in 4Q22).
We decompose changes in Earnings Interest Coverage (EIC) into three moving parts:
total debt, interest rates and cash aow.
Total debt increased by 5% in 1Q23 vs. 4Q22 driven by strong credit growth. (Exhibit
26)
Interest rate of corporate loans fell by 7bps in 1Q23 vs. 4Q22, driven by LPR cut and
liquidity loosening such as the cut to RRR. (Exhibit 27)
Cash aow deteriorated with 1Q23 EBIT falling 1.5% vs. 4Q22. (Exhibit 25)
All in, the decline in interest rates (a 0.1x improvement in EIC) is not enough to offset
the impact of increasing debt and decreasing EBIT (cash aow), which combined result in
a 0.16x deterioration in total EIC. (Exhibit 24)
2. What are consensus earnings estimates telling us? Based on the latest 2023E/2024E
Wind consensus estimates, 2023E implied PD is expected to drop to 9.9%, lower than
the peak of 2Q22, but rise to 10.4% in 2024E on macro challenges and cuts to
consensus earnings.
Banking sector margin of safety: Rmb 10.6tn (USD 1.5tn) in buffers vs. Rmb 8.4tn
(USD 1.2tn) NPLs
_
We set our stress test at an 7% NPL ratio on the total loan book, factoring in the asset
quality risk implied from A-share quasi-cash aow (as noted above: 12.8% PD, 55% LGD).
This implies total systemwide losses of Rmb 8.4tn (USD 1.2tn) vs. total risk buffers of
Rmb 10.6tn (USD 1.5tn) (above the minimum CET1 ratio). Overall, our covered banks
appear well placed to absorb losses with Rmb 7.6tn (USD 1.1tn) of risk buffers vs. Rmb
4.9tn (USD 0.7tn) in NPLs.
We could see widening divergence in banks’ balance sheet strength. Incorporating our
estimated loss of Rmb ~8.4tn (USD 1.2tn) we adjust the banks’ book value, and
compare them with our estimated book value. Our analysis suggests that most banks
show limited further markdowns, such as 0%/3%/3% for CMB/PSBC/PAB, while
Huaxia/BoCom could face more challenges if further property credit losses are
recognized.
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Exhibit 22: Total implied PD of our listco sample decreased to 12.8% Exhibit 23: ...-1.0/-0.7ppts vs. 1Q22/4Q22
in 1Q23...
1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Exhibit 24: The decline in interest rates (a 0.1x improvement in EIC) Exhibit 25: Cash bow deteriorated with 1Q23 EBIT falling 1.5% vs.
is not enough to offset the impact of increasing debt and 4Q22
decreasing EBIT (cash bow), which combined result in a 0.16x
deterioration in total EIC
Aggregate EIC (x) Implied NPLs (RHS) Aggregate TTM EBIT (Rmb tn)
3.80
3.68 3.64
3.63
7.0 6,000 3.59
6.34 3.56
-0.3 -0.07 6.18 3.60 3.52
0.24
5,500 3.44
6.0 3.36 3.39
3.40
5,207 5,000
5.0 Implied NPLs increased by
Rmb 525bn to Rmb 5207 bn in
4,682 4,500 3.20
Rmb bn
4.0
4,000
3.0
3.00 2.90 2.91 2.90 2.90
3,500
2.76 2.91
2.0 2.80
3,000
2.60
1.0 2,500 2.60
Source: Goldman Sachs Global Investment Research Source: Wind, Goldman Sachs Global Investment Research
_
Exhibit 26: Total debt increased by 5% in 1Q23 vs. 4Q22, driven by Exhibit 27: Interest rate of corporate loans fell by 7bps in 1Q23 vs.
strong credit growth 4Q22
Source: Wind, Goldman Sachs Global Investment Research Source: Wind, Goldman Sachs Global Investment Research
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90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2Q18
3Q18
4Q18
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22
1Q23
Energy Utilities Information Technology Consumer Staples Consumer Discretionary
Materials Industrials Property Healthcare
Exhibit 29: We estimate Rmb 10.6tn in systemwide risk buffers, comprising Rmb 7.6tn from covered (large cap) banks and Rmb 2.9tn from
non-covered (small) banks
Rmb bn, as of 2023E
1st layer: Additional LLR 2nd layer: PPOP excl. provision 3rd layer: Additional CET-1 excl. new R/E
Total risk
Rmb bn, as of 2023E New Additional
Min. LLR Additional PPOP excl. Min. CET-1 buffer
LLR NPL PPOP Provision CET-1 CET-1 ratio Retained CET-1 excl.
ratio LLR provision ratio
earnings new R/E
ICBC 745 368 70% 487 631 196 435 3,381 13.6% 9.0% 260 884 1,807
CCB 768 337 70% 532 555 148 407 2,941 13.4% 9.0% 241 729 1,668
BOC 465 246 70% 293 408 110 299 2,169 11.6% 9.0% 174 316 908
_
ABC 892 301 70% 681 461 145 316 2,402 10.7% 8.5% 187 307 1,304
PSBC 244 66 70% 198 135 35 100 745 9.2% 8.0% 65 34 332
BoCom 198 113 70% 119 166 64 102 907 10.0% 8.3% 67 92 314
CMB 275 63 70% 231 233 53 180 895 13.5% 8.3% 104 243 654
PAB 108 41 70% 79 135 70 65 389 8.5% 7.8% 45 0 144
Huaxia 69 47 70% 36 64 29 35 283 9.3% 7.8% 20 28 99
Industrial 120 56 70% 81 157 49 108 731 9.9% 8.3% 69 50 239
BONB 43 9 70% 37 40 11 29 174 9.4% 7.8% 23 8 74
BONJ 41 11 70% 33 33 10 23 140 9.7% 7.5% 14 17 74
Banking system 6,664 3,503 70% 4,212 2,885 23,198 10.7% 8.2% 1,970 3,458 10,554
Covered banks 3,967 1,658 70% 2,807 3,018 919 2,099 15,157 11.7% 8.6% 1,268 2,710 7,616
Non-covered banks 2,697 1,845 70% 1,405 786 8,042 9.2% 7.5% 702 747 2,938
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Exhibit 30: We forecast systemwide NPLs of Rmb 8.4tn, with possibility that non-covered small banks could exhaust their risk buffer
Rmb bn
Exposure Loss rate Implied NPL p Risk buffer (2023E) NPL absorption NPL ratio when…
Additional
On-B/S: Off-B/S: Implied Implied Additional Gap (as %
Total NPL Implied Additional PPOP excl. Additional PPOP excl. CET-1 No Recap
Corporate Shadow PD LGD on-B/S off-B/S CET-1 excl. Total of total
exposure ratio total NPL LLR provision LLR provision excl. new dividend required
loan banking NPL NPL new R/E buffer)
R/E
Rmb bn 2022 2022 2022 2023E 2023E 2023E 2023E
ICBC 14,202 180 14,382 12.8% 55% 7.0% 1,001 13 1,013 487 435 884 1,807 100% 100% 10% 0% 13% 19%
CCB 12,164 169 12,333 12.8% 55% 7.0% 857 12 869 532 407 729 1,668 100% 83% 0% 0% 14% 21%
BOC 11,099 148 11,247 12.8% 55% 7.0% 782 10 793 293 299 316 908 100% 100% 64% 0% 8% 15%
ABC 12,159 162 12,321 12.8% 55% 7.0% 857 11 868 681 316 307 1,304 100% 59% 0% 0% 11% 17%
PSBC 3,164 70 3,234 12.8% 55% 7.0% 223 5 228 198 100 34 332 100% 30% 0% 0% 10% 18%
BoCom 4,930 101 5,031 12.8% 55% 7.0% 347 7 355 119 102 92 314 100% 100% 100% 13% 6% 12%
CMB 2,890 264 3,153 12.8% 55% 7.0% 204 19 222 231 180 243 654 96% 0% 0% 0% 21% 28%
PAB 1,282 74 1,356 12.8% 55% 7.0% 90 5 96 79 65 0 144 100% 25% 0% 0% 11% 20%
Huaxia 1,566 43 1,609 12.8% 55% 7.0% 110 3 113 36 35 28 99 100% 100% 100% 14% 6% 11%
Industrial 3,009 176 3,185 12.8% 55% 7.0% 212 12 224 81 108 50 239 100% 100% 70% 0% 8% 15%
BONB 655 33 688 12.8% 55% 7.0% 46 2 48 37 29 8 74 100% 40% 0% 0% 11% 18%
BONJ 675 25 700 12.8% 55% 7.0% 48 2 49 33 23 17 74 100% 71% 0% 0% 10% 16%
Banking system 117,459 1,940 119,399 12.8% 55% 7.0% 8,277 137 8,414 4,212 2,885 3,458 10,554 100% 100% 38% 0% 9% 15%
Covered banks 67,793 1,446 69,239 12.8% 55% 7.0% 4,777 102 4,879 2,807 2,099 2,710 7,616 100% 99% 0% 0% 11% 18%
Non-covered banks 49,666 494 50,160 12.8% 55% 7.0% 3,500 35 3,535 1,405 786 747 2,938 100% 100% 100% 20% 6% 10%
Exhibit 31: Systemwide, risk buffer is sufccient to cover implied total NPL, with surplus of Rmb 2.1tn
Rmb tn
10.0
2.1
0.1 4.2
8.0
Rmb tn
6.0
10.6
2.9
4.0 8.3 8.4
2.0 3.5
0.0
On-B/S NPL Off-B/S NPL Implied total Risk buffer Total risk buffer Additional LLR PPOP excl. Additional CET-
NPL surplus provision 1 excl. new R/E
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Disclosure Appendix
Reg AC
I, Shuo Yang, Ph.D., hereby certify that all of the views expressed in this report accurately reaect my personal views about the subject company or
companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the speci>c
recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
GS Factor Procle
The Goldman Sachs Factor Pro>le provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its
sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial
Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for speci>c metrics for each stock. The
normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may
vary depending on the >scal year, industry and region, but the standard approach is as follows:
Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for >nancial stocks, only EPS and sales growth), with a
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stocks, only ROE), with a higher percentile indicating a company with higher >nancial returns. Multiple is based on a stock’s forward-looking P/E, P/B,
price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for >nancial stocks, only P/E, P/B and P/D), with a higher percentile
indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns
percentile and (100% - Multiple percentile).
Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the >scal year-end at least three quarters in the future. Growth uses inputs
for the >scal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics).
For a more detailed description of how we calculate the GS Factor Pro>le, please contact your GS representative.
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companies under our rated coverage from 1 to 3, with 1 representing high (30%-50%) probability of the company becoming an acquisition target, 2
representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard
departmental guidelines we incorporate an M&A component into our target price. M&A rank of 3 is considered immaterial and therefore does not
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the margin risk of local government debt and additional losses in bank credit
portfolios (see Parts I and II in the series).
Our analysis suggests that 1) adjusted dividend yields of A/H covered banks will
come in at ~4%/6% in 2023E, ~2ppt lower than before adjustment, and 2) dividend
payout targets could come under increasing pressure, on weaker earnings growth
and the need to maintain high CET1 ratio targets. Based on our framework, we see
potential for BoCom and Hua Xia to miss dividend payout targets in 2023E,
Industrial Bank in 2024E, and ICBC and ABC in 2025E (Exhibit 10-Exhibit 11).
Drawing parallels from the 2013-15 cycle, we note that banks struggled to maintain
dividends at the beginning of the downcycle then gave up dividend targets in order
to prioritize capital and risk buffers when the trinity of dividends, capital and
provisions could not be well balanced. We expect banks to face similar challenges in
2023-25E, with a similar dividend pattern to repeat.
Consensus believes that large banks are trading at distressed valuation multiples
(average ~2.5x P/PPOP), posing upside share performance risk. Fundamentally,
however, we believe a further multiple correction is likely, driven by margin risk from
local government debt and more losses within bank credit portfolios. This could
_
weaken earnings growth, pressure capital accumulation and thus pressure dividend
payout levels. We revise down our large bank PPOP estimates by -5%/-6% in
23E/24E reUecting margin risk. Our CAMELOT-based target P/PPOP (reUecting bank
PPOP growth, ROE, capital and dividend levels) is cut to 2.4x/2.2x for A/H shares in
order to capture squeezed bank earnings and notably incorporate dividend payout
risk, and therefore we revise our A/H 12m TPs by an average of -5%/-1%.
That said, PSBC‘s peer-leading earnings forecasts and stable dividend payouts are
underappreciated, in our view, and we upgrade PSBC-A/H to Buy from Sell, on
target P/PPOP of 3.75x/3.25x vs. 2.75x/2.25x prior and 3% PPOP increase vs. prior,
with new 12m TPs of Rmb6.03/HK$5.8 or 21%/19% upside. At the same time, we
downgrade ABC-A/H to Sell from Neutral, on target P/PPOP of 1.875x/1.6x vs.
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2x/1.6x prior and -9% PPOP change vs. prior, with new 12m TPs of Rmb2.59/HK$2.45 or
-28%/-21% downside, given similarly rich deposits but diverging local government debt
exposure. We model that ABC‘s dividend is not at risk until 2025E, with DPS increases
of 2%/1% vs. prior in 2023E/24E on provision release, but a 1ppt dividend payout cut in
2025E. With increasing target CET1 ratio (11.5% for ABC as G-SIB vs. 13.3% for ICBC),
ABC will face more dividend risk.
We maintain Buy on CCB A/H on more local government bond for capital and tax
savings to mitigate earnings risk. We downgrade ICBC A/H to Sell from Buy on large
local government debt, with increasing dividend risk owing to the high CET-1 ratio target
of 13% required as a G-SIB being diffcult to maintain. We cut DPS by 3%/5% vs. prior
in 2023E-24E and payout by 7ppts to 23% in 2025E and revise our target P/PPOP to
2.25x/1.75x from 2.75x/2.25x and -10% PPOP change vs. prior, to derive 12m TPs of
Rmb4.12/HK$3.55 or -16%/-16% downside.
We downgrade Industrial Bank to Sell from Buy on a worsening balance sheet. We cut
DPS by 4%/30% vs. prior in 2023E-24E, and revise target P/PPOP to 1.5x from 2.25x
and -4% PPOP change vs. prior, to derive our 12m TP of Rmb12.09 or -24% downside.
Lastly, we remain Neutral on CMB with new TPs of Rmb32.65/HK$36.24 or -3%/-2%
downside due to more credit losses to digest.
In summary, our DPS are 8%/15% lower vs. prior, driven by an average 3-4ppts payout
cut for covered banks. Having said that, we still see most banks able to maintain
dividends, though divergence is set to widen on payouts. In our view, upside risk could
come from new capital raises or lower CET1 ratio, which could allow banks such as
ICBC and ABC to alleviate dividend risk and sustain payouts.
The author would like to thank Zihan Wang and Claire Ouyang for their contributions to
this report.
H-share (HKD) 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E
ICBC (H) HK$ 4.24 3.55 4.98 -29% Sell Buy 1.750x 2.250x -0.500x -10% -16% 3.1 3.0 0.3 0.3 3.7 3.6 0.4 0.4 2.2 2.1
BOC (H) HK$ 3.19 2.83 2.72 4% Neutral 1.750x 1.750x 2% -11% 3.2 3.0 0.3 0.3 3.6 3.4 0.4 0.3 2.1 2.0
CCB (H) HK$ 5.12 5.81 6.07 -4% Buy 2.250x 2.250x -6% 13% 3.9 3.8 0.4 0.4 3.5 3.3 0.4 0.4 2.1 2.0
ABC (H) HK$ 3.12 2.45 2.62 -6% Sell Neutral 1.600x 1.600x -9% -21% 2.9 2.8 0.3 0.3 3.7 3.5 0.4 0.4 2.1 2.0
BoCom (H) HK$ 5.20 3.88 3.97 -2% Sell 1.500x 1.500x -3% -25% 2.7 2.6 0.3 0.3 3.6 3.5 0.4 0.3 2.1 2.0
PSBC (H) HK$ 4.87 5.80 4.06 43% Buy Sell 3.250x 2.250x 1.000x 3% 19% 5.2 4.7 0.6 0.6 4.4 4.0 0.5 0.5 3.0 2.7
CMB (H) HK$ 37.05 36.24 40.85 -11% Neutral 3.250x 3.500x -0.250x -1% -2% 5.5 5.0 0.9 0.8 5.6 5.1 0.9 0.8 3.6 3.3
A-share (Rmb)
ICBC (A) Rmb 4.88 4.12 5.29 -22% Sell Buy 2.250x 2.750x -0.500x -10% -16% 4.0 3.5 0.4 0.4 4.7 4.5 0.5 0.5 2.8 2.7
BOC (A) Rmb 3.98 3.46 2.71 28% Neutral 2.375x 2.000x 0.375x 2% -13% 4.3 3.7 0.5 0.4 4.9 4.7 0.5 0.5 2.9 2.7
CCB (A) Rmb 6.34 6.40 6.46 -1% Buy 2.750x 2.750x -6% 1% 4.8 4.1 0.5 0.5 4.8 4.6 0.5 0.5 2.9 2.7
ABC (A) Rmb 3.62 2.59 2.85 -9% Sell Neutral 1.875x 2.000x -0.125x -9% -28% 3.4 2.9 0.4 0.3 4.7 4.5 0.5 0.5 2.7 2.6
BoCom (A) Rmb 5.89 3.79 3.74 1% Sell 1.625x 1.625x -3% -36% 2.9 2.5 0.3 0.3 4.6 4.4 0.5 0.4 2.6 2.5
PSBC (A) Rmb 4.98 6.03 4.31 40% Buy Sell 3.750x 2.750x 1.000x 3% 21% 6.0 4.9 0.7 0.7 4.9 4.5 0.6 0.6 3.4 3.1
CMB (A) Rmb 33.72 32.65 35.52 -8% Neutral 3.250x 3.500x -0.250x -1% -3% 5.5 4.5 0.9 0.8 5.6 5.1 0.9 0.8 3.6 3.4
Industrial Rmb 15.83 12.09 18.93 -36% Sell Buy 1.500x 2.250x -0.750x -4% -24% 2.7 2.3 0.3 0.3 3.5 3.3 0.5 0.4 2.1 2.0
PAB Rmb 11.49 13.12 16.84 -22% Buy 1.750x 2.250x -0.500x 0% 14% 5.0 4.0 0.6 0.6 4.3 3.9 0.5 0.5 1.7 1.5
HuaXia Rmb 5.48 4.25 4.23 0% Sell 1.000x 1.000x -3% -22% 2.5 2.2 0.2 0.2 3.3 3.1 0.3 0.3 1.3 1.3
BONB Rmb 25.58 30.52 35.76 -15% Buy 4.500x 5.000x -0.500x -5% 19% 7.7 6.0 1.1 1.0 6.4 5.6 1.0 0.8 4.3 3.8
BONJ Rmb 8.09 8.61 9.98 -14% Neutral 2.500x 2.750x -0.250x -16% 6% 4.5 3.8 0.6 0.6 4.2 3.9 0.6 0.5 2.5 2.3
4 July 2023 2
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Exhibit 2: A-share banks current P/PPOP vs. historical range Exhibit 3: H-share banks current P/PPOP vs. historical range
A-share banks: Current P/PPOP (forward 12m) H-share banks: Current P/PPOP (forward 12m)
vs. historical range vs. historical range
Avg. + / - 1x std. dev. range Current Avg. since 2014 High / low since
Avg. + / - 1x std. dev. range Current Avg. since 2014 High / low since 8.0
9.0 2014
2014
8.0 7.0
7.0 6.0
6.0 5.0
5.0
4.0
4.0
4.0 3.4 3.1
3.4 3.5 3.0
3.0 2.4
2.7 2.6 2.5 2.7 2.7 2.6 2.7 2.1 2.0 2.1
2.4 2.0 2.0 2.0
2.0 2.0
1.0
1.3 1.0
ICBC (H) CCB (H) BoCom (H) CMB (H) BOC (H) Covered ABC (H) PSBC (H)
banks (H)
0.0
BONB HuaXia BONJ Industrial ICBC (A) CMB (A) Covered BoCom CCB (A) BOC (A) ABC (A) BOC (A) PSBC (A)
banks (A) (A)
4 July 2023 3
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With ongoing weakening of balance sheets expected for China banks, we stress
tested dividend risk in 2023E-25E using an adjusted ROE, which assumes margin
losses on local government debt and additional losses from banks’ credit
portfolios.The stress test implies average 2023E-25E adjusted dividend yields of
5.5%/7.2%, vs. 6.4%/8.3% pre-adjustment for our covered A/H shares.The test also
suggests that banks like BoCom, Hua Xia, Industrial, ABC and ICBC are likely to
face heightened dividend risk from weakening balance sheets and difUculty
maintaining target CET1 ratios. Based on risk buffer shortfalls according to our
framework (Exhibit 10), we see potential for BoCom and Hua Xia to miss dividend
payout targets in 2023E, Industrial Bank in 2024E, and ICBC, PAB and ABC in
2025E.
As per our economists, local government debt risk has been a long-standing issue over
the past decade, but recent reports have brought bond default risks back to investors’
attention (here, here, here). With this in mind, we use adjusted ROE in our stress test,
which assumes earnings cuts caused by the margin risk of local government debt and
losses on bank credit portfolios. We further tested banks’ dividend risk to assess the
robustness of bank balance sheets and sustainable investor returns; of note, company
strategies in Asia Pacifc have recently moved toward reducing capital expenditures and
increasing R&D investment and cash to shareholders per our Asia Pacifc Strategy team
(here). Amid this environment, we attempt to answer: 1) what’s the adjusted bank
dividend yield as the current market price appears to be implying a higher yield (non
adjusted) in a declining rate environment at ~6%/8% for A/H shares, and; 2) which
banks can sustainably pay a dividend amid challenging fundamentals.
Starting with adjusted ROE in 2023E, we adjust bank book value by taking prolonged
margin loss led by a net balance increase of government debt in 2024E-25E. We Uex the
_
condition that the NPL coverage ratio is lowered to 150%, the minimum requirement.
We can assume this, because we have built in most credit losses in 2023E for the
stress test, though we expect banks in reality to manage the pace of loss digestion for
their credit portfolios.
So for the stress test, bank balance sheets from 2024E should be cleaner and setting an
NPL coverage ratio of 150% can allow for the maximum provision release banks can
have to maintain capital and dividend. We expect banks to prioritize capital over dividend
based on historical precedence, which means when the CET1 ratio cannot be
maintained at the target level, we believe provision release would fll in the capital
shortfall as the top priority over dividend payments.
n Adj. bank dividend works out to 5.5%/7.2% for our A/H shares vs. 6.4%/8.3% before
adjustment on average for 2023-25E.
n From 2023E, BoCom and Huaxia could see heightened dividend payout risk, given
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their lower adj. ROEs at 5.4%/4.9% respectively, and any provision release will likely
not be suffcient to fll the capital shortfall. We bake in dividend payout cuts of
22ppts and 11ppts for BoCom and Huaxia in 2023E.
n Industrial Bank could miss its dividend payout target in 2024E, partly due to its high
target CET1 ratio, but more likely given fundamentals e.g. a worsening balance
sheet on larger local gov. debt exposure and potential for additional credit loss. Adj.
ROE before dividends in 2023E/24E/25E is 9.4%/12.3%/11.9% vs.
13.4%/12.9%/12.5% pre-adjustment. We bake in dividend payout cuts of 28ppts,
13ppts and 7ppts for BoCom, Huaxia and Industrial in 2024E.
n ICBC and ABC could see heightened dividend risk in 2025E, mainly due to the
prolonged margin loss on larger local gov. debt exposure. We expect ICBC and ABC
to maintain their high target CET1 ratios at 13.3%/11.5% as G-SIBs, which have set
an aggressive limit as the potential capital shortfall could be large and not covered
by provision release. We note that during the 2013-15 cycle, banks lowered CET1
ratios to meet the demands of provisions and dividends but weakened the overall
strength of their balance sheets, resulting in banks eventually cutting dividends to
save capital. (See Part II for bank dividend history.) We bake in dividend payout cuts
of 30ppts, 13ppts, 12ppts, 7ppts and 1ppts for BoCom, Huaxia, Industrial, ICBC,
PAB and ABC in 2025E.
Exhibit 4: A-share dividend yield pre/post adjustment (2023E) Exhibit 5: H-share dividend yield pre/post adjustment (2023E)
4.0
5.0
%
3.0 6.0
5.3 5.3 5.2 5.2 5.1 4.0
2.0 4.4 7.2 6.7
3.9 3.8 3.2 3.0 6.0 5.8
1.0 2.1 5.1 5.0
1.6 2.0 4.0
0.0
1.0
0.0
_
Source: Wind, Goldman Sachs Global Investment Research Source: Wind, Goldman Sachs Global Investment Research
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Exhibit 6: A-share dividend yield pre/post adjustment (2024E) Exhibit 7: H-share dividend yield pre/post adjustment (2024E)
%
7.5 7.3
3.0 6.5 6.3 6.3 6.3 6.2 6.2 6.2 8.8 8.6
4.0 8.0 8.0 7.7
2.0 7.0
3.0 6.3
3.0 2.4
1.0
2.0
0.0
1.0
0.0
CCB BOC ABC ICBC BoCom PSBC CMB
Div. yield (A) vs. before adj. Div. yield (H) vs. before adj.
Source: Wind, Goldman Sachs Global Investment Research Source: Wind, Goldman Sachs Global Investment Research
Exhibit 8: A-share dividend yield pre/post adjustment (2025E) Exhibit 9: H-share dividend yield pre/post adjustment (2025E)
6.0
%
0.0
CCB BOC ABC ICBC BoCom PSBC CMB
Div. yield (A) vs. before adj. Div. yield (H) vs. before adj.
Source: Wind, Goldman Sachs Global Investment Research Source: Wind, Goldman Sachs Global Investment Research
_
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Adj. CET-1 ratio after div. payout 13.0% 12.8% 11.2% 10.2% 9.5% 8.8% 12.7% 8.0% 9.3% 8.9% 9.2% 9.1%
Target 13.3% 13.3% 11.5% 11.5% 10.8% 9.7% 12.5% 8.7% 9.5% 9.1% 9.4% 9.6%
Diff. (ppts) -0.3 -0.6 -0.3 -1.3 -1.3 -0.9 0.2 -0.7 -0.2 -0.2 -0.3 -0.5
RWA 24,852 21,891 18,651 22,447 9,064 8,080 6,643 4,580 7,419 3,023 1,452 1,847
CET-1 surplus (shortfall) -74 -122 -62 -303 -120 -73 12 -33 -16 -6 -4 -9
Adj. CET-1 ratio with provision release 13.8% 14.0% 11.8% 12.1% 10.0% 10.4% 14.8% 8.8% 9.5% 8.8% 10.8% 10.7%
Total additional risk buffer 155 202 74 203 -70 64 179 15 2 -11 24 21
YES YES YES YES NO YES YES YES YES NO YES YES
2024E
Adj.NPL coverage ratio 192% 221% 201% 289% 175% 288% 298% 198% 151% 134% 374% 435%
Required min. 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% 150%
Diff. (ppts) 42 71 51 139 25 138 148 48 1 -16 224 285
Adj. NPL 462 445 279 375 150 101 116 79 119 80 14 12
Provision available to release 193 314 142 522 38 139 172 38 2 -13 32 33
Adj. CET-1 ratio after div. payout 12.8% 12.5% 11.1% 9.8% 9.2% 8.6% 12.9% 8.0% 9.2% 9.0% 9.0% 8.9%
Target 13.3% 13.3% 11.5% 11.5% 10.8% 9.7% 12.5% 8.7% 9.5% 9.1% 9.4% 9.6%
Diff. (ppts) -0.5 -0.9 -0.4 -1.7 -1.6 -1.1 0.4 -0.7 -0.3 -0.1 -0.5 -0.7
RWA 27,113 24,048 20,219 24,889 9,825 8,948 7,276 5,107 8,152 3,194 1,629 2,151
CET-1 surplus (shortfall) -141 -207 -75 -434 -152 -95 30 -35 -26 -4 -8 -15
Adj. CET-1 ratio with provision release 13.4% 13.6% 11.7% 11.5% 9.6% 10.1% 14.9% 8.6% 9.2% 8.7% 10.6% 10.3%
Total additional risk buffer 51 108 67 88 -114 43 202 2 -24 -17 24 18
YES YES YES YES NO YES YES YES NO NO YES YES
2025E
Adj.NPL coverage ratio 173% 211% 196% 279% 164% 286% 291% 169% 135% 125% 352% 424%
Required min. 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% 150% 150%
Diff. (ppts) 23 61 46 129 14 136 141 19 -15 -25 202 274
Adj. NPL 548 498 312 416 172 105 123 97 125 90 17 13
Provision available to release 127 303 145 536 23 143 173 19 -19 -23 35 35
Adj. CET-1 ratio after div. payout 12.6% 12.4% 11.1% 9.5% 9.1% 8.5% 13.2% 8.1% 9.2% 9.2% 8.8% 8.8%
Target 13.3% 13.3% 11.5% 11.5% 10.8% 9.7% 12.5% 8.7% 9.5% 9.1% 9.4% 9.6%
Diff. (ppts) -0.7 -1.0 -0.4 -2.0 -1.7 -1.2 0.7 -0.6 -0.4 0.0 -0.6 -0.9
RWA 29,588 26,245 21,860 27,415 10,644 9,904 7,983 5,693 8,972 3,357 1,829 2,507
CET-1 surplus (shortfall) -216 -258 -79 -541 -177 -117 55 -35 -34 2 -12 -22
Adj. CET-1 ratio with provision release 13.0% 13.3% 11.7% 11.2% 9.3% 9.9% 15.0% 8.4% 9.0% 8.6% 10.4% 10.0%
Total additional risk buffer -89 44 65 -6 -153 26 228 -16 -53 -21 23 13
NO YES YES NO NO YES YES NO NO NO YES YES
Exhibit 11: We baked in dividend payout cut of BoCom, Huaxia, Industrial, PAB, ICBC, and ABC in out years
given risk buffer shortfall built in our framework.
_
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We expect banks to repeat the cycle of 2013-15 in terms of dividend risk given
deteriorating fundamentals. We believe that at the start of the down-cycle banks
would likely try to maintain dividends rather than risk buffers, but swiftly change
to cutting dividends and prioritizing provision release to secure capital. As such,
we believe bank dividend risk is increasing and adj. dividend yield in 2023E could
potentially be -2ppts lower vs. before adjustment.
In order to assess when the tipping point might be at which banks would cut dividends,
we have back-tested data from past cycles, to see whether banks prioritized capital over
investor returns, in order to strengthen balance sheets and maintain sustainable growth
amid challenging times.
In the exhibits below we display the changes in dividend payout, NPL coverage ratio and
CET1 ratio starting from 2010 until 2022, and note that at the beginning of the 2010-16
cycle, banks started to cut dividend payouts and release additional provisions to support
capital.
From 2013-16, we see that banks struggled to prioritize dividend over risk buffers until
their balance sheets were no longer able to maintain suffcient capital. Notably, 2013
was the most challenging year for banks, as NPL coverage ratios and CET1 ratios both
declined by 35ppts/75bps on average, the largest drop in the 2010-2016 cycle, but
average dividend payout was maintained. Bank valuations bottomed, with dividend yield
peaking in 2013, likely suggesting that the market was expecting deteriorating bank
balance sheets and dividend risk given the weakening risk buffers (Exhibit 13).
Moving into 2014 and 2015, banks cut dividends and further lowered NPL coverage
ratios to accumulate earnings and support capital. We summarize the change over
2013-15 as:
_
n Banks could prioritize dividend at the beginning to support high dividend yield,
despite weakening balance sheets;
n But approaching the tipping point when banks could not maintain the balance of
provision, capital and dividend, banks shifted to prioritize capital over dividend to
support the balance sheet.
We think the 2023E-25E cycle could largely repeat what happened in 2013-15. We
model dividend payout risk, with lowering DPS by 8%/15% vs. prior, driven by an
average 3-4ppts payout cut for covered banks. Having said that, we still see most banks
able to maintain dividends, though divergence is set to widen on payouts (Exhibit 14,
Exhibit 15).
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△DPS (Rmb) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC 0.01 0.02 0.04 0.02 0.00 -0.02 0.00 0.01 0.01 0.01 0.00 0.03 0.01 0.01 0.01 -0.06
CCB 0.01 0.02 0.03 0.03 0.00 -0.03 0.00 0.01 0.02 0.01 0.01 0.04 0.02 0.01 0.02 0.02
BOC 0.01 0.01 0.02 0.02 0.00 -0.02 -0.01 0.01 0.01 0.01 0.01 0.02 0.01 0.01 0.01 0.01
ABC -0.02 0.03 0.02 0.01 -0.02 0.00 0.01 0.00 0.01 0.00 0.02 0.02 0.01 0.01 0.00
BoCom -0.09 -0.02 0.14 0.02 0.01 0.00 0.00 0.01 0.01 0.02 0.00 0.04 0.02 -0.27 -0.08 -0.03
PSBC 0.07 0.05 0.02 0.01 0.03 0.03 0.03 0.03 0.03
CMB 0.05 0.13 0.21 -0.01 0.05 0.02 0.05 0.10 0.10 0.26 0.05 0.27 0.22 0.16 0.19 0.23
PAB -0.11 0.01 -0.02 0.01 -0.01 0.00 0.07 -0.04 0.05 0.06 0.04 0.04 -0.06
Industrial -0.04 -0.09 0.20 -0.11 0.11 0.04 0.06 -0.02 0.04 0.07 0.04 0.23 0.15 0.02 -0.24 -0.21
Huaxia 0.07 0.05 0.22 -0.04 0.00 -0.07 -0.18 -0.03 0.02 0.08 0.05 0.04 0.06 -0.16 -0.03 0.01
BONJ 0.10 0.10 0.11 0.05 0.11 -0.17 -0.14 0.08 0.05 0.07 -0.07 0.08 0.06 0.04 0.04 0.05
BONB 0.00 0.00 0.05 0.15 0.05 0.00 -0.10 0.05 0.01 0.12 -0.03 0.00 0.00 0.07 0.08 0.10
△Payout ratio (ppts) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC -5 -5 1 0 -2 -3 0 0 0 0 0 0 0 0 0 -7
CCB -5 -4 0 0 -2 -3 0 0 0 0 0 0 0 0 0 0
BOC -5 -4 0 0 -2 -3 0 0 0 0 0 0 0 0 0 0
ABC -17 0 0 -2 -3 0 0 0 0 0 0 0 0 0 -1
BoCom -18 -5 18 0 -1 0 0 0 0 0 0 0 0 -22 -6 -2
PSBC 10 5 0 0 0 0 0 0 0
CMB -1 1 5 0 0 0 0 0 -1 3 0 0 0 0 0 0
PAB 0 0 0 2 -1 -1 5 -3 0 0 0 0 -3
Industrial -4 1 5 0 2 0 0 0 0 0 1 1 1 0 -7 -5
Huaxia -1 2 7 0 -3 -1 -11 0 3 5 4 0 2 -11 -3 0
BONJ 14 2 2 0 0 -11 0 11 0 1 -1 0 0 0 0 0
BONB -9 -7 0 6 2 1 -9 4 -2 3 -2 -3 -3 0 0 0
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△Div. yield (A-share, ppts) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC 1.2 0.4 1.0 1.6 -2.1 -0.2 0.2 -1.4 0.9 -0.3 0.9 1.0 0.7 -0.5 0.2 -1.3
CCB 1.4 0.6 0.6 1.4 -2.8 0.3 0.4 -1.3 1.0 -0.4 0.8 1.0 0.7 -0.5 0.3 0.3
BOC 1.3 0.8 0.7 1.5 -2.9 -0.2 0.5 -0.5 0.7 0.1 1.0 1.1 0.1 -1.1 0.3 0.3
ABC 3.0 0.6 1.5 -2.2 0.3 0.3 -0.8 0.2 0.1 1.0 1.1 0.6 -1.1 0.3 0.1
BoCom 0.1 0.0 2.6 1.9 -2.8 0.2 0.5 -0.1 0.6 0.4 1.5 0.6 0.2 -6.1 -1.3 -0.5
PSBC 3.6 0.8 0.5 0.7 0.5 0.6 0.7
CMB 1.1 1.3 1.0 1.1 -1.7 -0.2 0.4 -1.3 0.8 -0.5 -0.3 0.3 1.5 1.1 0.6 0.7
PAB -0.4 -0.2 0.2 0.5 -0.7 0.5 -0.2 -0.4 0.5 0.8 0.7 0.3 -0.5
Industrial 0.7 1.0 0.5 1.1 -1.1 0.1 0.2 0.0 0.8 -0.8 0.0 1.6 1.3 0.9 -1.5 -1.4
Huaxia 0.8 0.4 2.3 0.5 -1.8 -0.2 -1.3 0.0 0.7 0.9 1.6 1.2 1.3 -3.1 -0.6 0.2
BONJ 1.5 1.2 1.2 1.3 -2.3 -1.2 0.1 2.1 1.6 -1.6 0.4 0.3 0.0 2.1 0.5 0.7
BONB 0.5 0.6 0.2 2.0 -1.5 0.0 -0.8 0.1 0.2 -0.7 -0.4 -0.1 0.2 0.7 0.3 0.4
△Div. yield (H-share, ppts) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
ICBC 0.8 1.6 -0.1 0.9 -0.6 0.2 -0.1 -1.1 0.5 -0.3 1.6 1.4 0.8 -0.3 0.3 -1.7
CCB 0.2 1.7 0.1 1.0 -0.5 0.1 -0.7 -0.6 0.6 -0.2 1.4 1.3 1.2 -0.3 0.4 0.4
BOC 0.4 2.5 -0.4 0.7 -1.4 0.5 -0.4 -0.1 0.7 0.0 2.7 0.2 0.1 -0.8 0.4 0.4
_
ABC 3.2 0.3 0.7 0.0 0.3 0.0 -0.1 -0.3 0.0 2.1 1.1 0.4 -1.1 0.3 0.2
BoCom -0.8 0.5 2.8 0.9 -1.3 1.2 -0.4 0.7 -0.4 0.5 2.9 -0.4 0.6 -7.3 -1.6 -0.6
PSBC 2.3 1.0 -1.0 1.4 -0.4 0.8 0.8 0.7 0.8
CMB 0.6 1.5 1.3 0.1 -0.4 0.1 0.2 -1.4 0.5 -0.5 -0.2 -0.1 1.6 1.2 0.6 0.7
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III. Rating changes: PSBC (A/H) up to Buy; ICBC (A/H), ABC (A/H) and
Industrial down to Sell
Despite the distressed valuations large banks in China are trading at and likely
stimulus policy to boost market sentiment and drive banks’ share prices, we
further cut our covered bank earnings and target P/PPOP multiples to bake in
deteriorating fundamentals on margin risk from local government debt and credit
loss, which could send capital and dividend at risk. We lower the ROE of our
covered banks to 9.6% on average in 2023E (from 12.8%), expecting Industrial
Bank to miss dividend payout targets in 2024E on a deteriorating balance sheet,
and ICBC and ABC in 2025E given G-SIB requirements to prioritize capital over
dividends.Therefore, we cut dividend payouts of BoCom, Huaxia, Industrial, ICBC,
ABC and PAB in outer years, assuming no new capital raise or decrease in target
CET1 ratio. We downgrade ICBC (A/H), Industrial Bank and ABC (A/H) to Sell.That
said, we believe the market has underappreciated PSBC which could maintain its
dividend on robust balance sheet. We upgrade PSBC A/H to Buy from Sell.
Given the expected overall weakening of balance sheets, making it more challenging for
banks to maintain dividend targets in outer years, we further cut our covered banks’ net
proft by -1%~-4% in 2023E-25E to factor in the margin risk of local government debt
and more losses within banks’ credit portfolios. With this, we revise the ROE for our
covered A/H banks to 10.9% on average for 2023-25E from 12.8% prior. Our revenue
estimates on average are -1%/-3%/-5% below Visible Alpha consensus, and net proft is
-1%/-2%/-2% below consensus. Average DPS is -8%/-15% vs. prior on payout cut of
3/4ppts vs. prior in 2023E-24E. We revise the target P/PPOP by -4%/+2% on average for
A/H shares, and revise our 12m TPs by an average of -5%/-1% for A/H shares.
Having said that, we see two factors, namely local government debt and credit losses,
that could further differentiate banks:
_
1. Divergence within large banks set to widen, with local government debt the key
factor: We estimate large banks to have Rmb 29tn (USD 4.1tn) in local government
debt, or 86% of total debt for our covered banks:
n Size: We expect ICBC, ABC and BoCom to have larger exposure to local
government debt at 24%/20%/29% of IEA, compared with 18% on average for the
large banks.
n Mix: Banks with more local government bonds could utilize tax savings and capital
effciency to offset the margin headwinds of local government debt. CCB has local
government bonds worth Rmb 2.9tn, or 62% of total exposure in terms of local gov.
debt, vs 38% for ICBC. PSBC has the largest local government bond exposure at
83%, the highest among covered banks, with tax and capital savings as a % of
NPAT of 13% in 2023E vs. 9% on average for the covered banks.
2. Large banks look overall better positioned than smaller banks, as their larger
balance sheets allow them to digest more credit losses. We estimate property
exposure as a % of total assets for the large banks at 3% on average vs. 5% for other
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covered banks, and reported NPL ratio of property loans at 4.5% vs. 1.8%. Given we
assume large banks to have better reporting standards, we expect other banks could
report a higher NPL ratio of property loans, and thus more losses. We upgrade PSBC to
Buy from Sell with 2% property exposure, compared to Neutral rated CMB with 6%
(see here), and Industrial Bank with 6%.
All in, with the adjusted ROE revisions we make, we further normalize bank dividend
yield:
We believe a further multiple correction is likely, driven by margin risk from local
government debt and the ongoing credit cycle, and as such, we recalibrate our
CAMELOT scorecard and revise our target P/PPOPs by -4%/+2% on average in 2024E
to 2.4x/2.2x for A/H shares, and further revise down PPOP by -3%/-4%/-2% in
2023E-25E. Given our more cautious sector view, the continued weak trend in retail
demand and more divergence expected among large banks, we make one upgrade and
three downgrades.
Upgrade
PSBC (A/H): We upgrade PSBC A/H to Buy from Sell on peer-leading earnings
forecasts within the large bank group, a strong risk buffer and better NIM trajectory. Our
new target P/PPOPs for A/H are 3.75x/3.25x in 2024E vs. 2.75x/2.25x prior, with a
+2%~+3% change in PPOP in 2023E-25E. Our new 12m TPs are Rmb6.03/HK$5.8 from
Rmb4.31/HK$4.06.
Downgrades
_
n ICBC (A/H): We downgrade ICBC A/H to Sell from Buy on increasing diffculty to
maintain dividend payout ratio targets in 2025E, given the high CET1 ratio target that
G-SIBs need to maintain. We lower our target P/PPOP to 2.25x/1.75x from
2.75x/2.25x prior, with our PPOP cut -8%/-10% in 2023E/24E. Our new 12m TPs for
A/H are Rmb4.12/HK$3.55 from Rmb5.29/HK$4.98.
n Industrial Bank: We downgrade Industrial Bank to Sell from Buy, on a double
squeeze of both top and bottom line growth, due to more margin dilution and credit
loss digestion. Our target P/PPOP moves lower to 1.5x in 2024E from 2.25x, with
PPOP down -3%~-5% in 2023E-25E. Our new 12m TP is Rmb12.09, from
Rmb18.93.
n ABC (A): We downgrade ABC A/H shares to Sell from Neutral on long-term
dividend uncertainty, on top of year-to-date outperformance (+21%/+15% vs.
+3.2%/+4.2% average of our covered banks). Our target P/PPOPs for A/H are
1.875x/1.6x vs. 2x/1.6x prior, with PPOP down -8%/-9% in 2023E/24E. Our new 12m
TPs for A/H are Rmb 2.59/HK$2.45 from Rmb2.85/HK$2.62.
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Others
For those banks we make no rating changes to, we lower the target P/PPOP multiples
of some to rebalance their relative position in terms of expected share price changes.
CMB (A/H): We maintain Neutral ratings on CMB A/H on continued soft retail growth
and more credit losses to contain provision releases per our framework (see Part II). Our
new target P/PPOPs for A/H decline to 3.25x/3.25x in 2024E vs. 3.5x/3.5x prior, with no
change to PPOP in 2023E-25E. Our 12m TPs decline to Rmb32.65/HK$36.24 from
Rmb35.52/HK$40.85.
BOC (A/H): We maintain Neutral ratings on BOC A/H on relatively low local government
debt exposure and an improving balance sheet as suggested by 1Q23 results. Our
target P/PPOP for A/H moves to 2.375x/1.75x vs. 2x/1.75x prior, with our PPOP
estimates in 2023E/24E changing by +3%/+2%. Our 12m TPs move to
Rmb3.46/HK$2.83 from Rmb2.71/HK$2.72.
PAB: We maintain a Neutral rating on PAB, with a lower target P/PPOP of 1.75x vs.
2.25x prior, to reUect increased credit losses needed to digest and a lower rank as
suggested by our CAMELOT framework. Our 12m TP declines to Rmb13.12 from
Rmb16.84.
BONJ: We maintain a Neutral rating on BONJ, with a lower target P/PPOP of 2.5x vs.
2.75x prior, to reUect the lower rank suggested by our CAMELOT framework. Our 12m
TP declines to Rmb8.61 from Rmb9.98.
BONB: We maintain a Buy rating on BONB, with a lower target P/PPOP of 4.5x vs. 5x
prior, to factor in sector headwinds. Our 12m TP declines to Rmb 30.52 from Rmb
35.76.
_
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Source: Visible Alpha Consensus Data, Goldman Sachs Global Investment Research
H-share (HKD) 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E
ICBC (H) HK$ 4.24 3.55 4.98 -29% Sell Buy 1.750x 2.250x -0.500x -10% -16% 3.1 3.0 0.3 0.3 3.7 3.6 0.4 0.4 2.2 2.1
BOC (H) HK$ 3.19 2.83 2.72 4% Neutral 1.750x 1.750x 2% -11% 3.2 3.0 0.3 0.3 3.6 3.4 0.4 0.3 2.1 2.0
CCB (H) HK$ 5.12 5.81 6.07 -4% Buy 2.250x 2.250x -6% 13% 3.9 3.8 0.4 0.4 3.5 3.3 0.4 0.4 2.1 2.0
ABC (H) HK$ 3.12 2.45 2.62 -6% Sell Neutral 1.600x 1.600x -9% -21% 2.9 2.8 0.3 0.3 3.7 3.5 0.4 0.4 2.1 2.0
BoCom (H) HK$ 5.20 3.88 3.97 -2% Sell 1.500x 1.500x -3% -25% 2.7 2.6 0.3 0.3 3.6 3.5 0.4 0.3 2.1 2.0
PSBC (H) HK$ 4.87 5.80 4.06 43% Buy Sell 3.250x 2.250x 1.000x 3% 19% 5.2 4.7 0.6 0.6 4.4 4.0 0.5 0.5 3.0 2.7
CMB (H) HK$ 37.05 36.24 40.85 -11% Neutral 3.250x 3.500x -0.250x -1% -2% 5.5 5.0 0.9 0.8 5.6 5.1 0.9 0.8 3.6 3.3
A-share (Rmb)
ICBC (A) Rmb 4.88 4.12 5.29 -22% Sell Buy 2.250x 2.750x -0.500x -10% -16% 4.0 3.5 0.4 0.4 4.7 4.5 0.5 0.5 2.8 2.7
BOC (A) Rmb 3.98 3.46 2.71 28% Neutral 2.375x 2.000x 0.375x 2% -13% 4.3 3.7 0.5 0.4 4.9 4.7 0.5 0.5 2.9 2.7
CCB (A) Rmb 6.34 6.40 6.46 -1% Buy 2.750x 2.750x -6% 1% 4.8 4.1 0.5 0.5 4.8 4.6 0.5 0.5 2.9 2.7
ABC (A) Rmb 3.62 2.59 2.85 -9% Sell Neutral 1.875x 2.000x -0.125x -9% -28% 3.4 2.9 0.4 0.3 4.7 4.5 0.5 0.5 2.7 2.6
BoCom (A) Rmb 5.89 3.79 3.74 1% Sell 1.625x 1.625x -3% -36% 2.9 2.5 0.3 0.3 4.6 4.4 0.5 0.4 2.6 2.5
PSBC (A) Rmb 4.98 6.03 4.31 40% Buy Sell 3.750x 2.750x 1.000x 3% 21% 6.0 4.9 0.7 0.7 4.9 4.5 0.6 0.6 3.4 3.1
CMB (A) Rmb 33.72 32.65 35.52 -8% Neutral 3.250x 3.500x -0.250x -1% -3% 5.5 4.5 0.9 0.8 5.6 5.1 0.9 0.8 3.6 3.4
Industrial Rmb 15.83 12.09 18.93 -36% Sell Buy 1.500x 2.250x -0.750x -4% -24% 2.7 2.3 0.3 0.3 3.5 3.3 0.5 0.4 2.1 2.0
PAB Rmb 11.49 13.12 16.84 -22% Buy 1.750x 2.250x -0.500x 0% 14% 5.0 4.0 0.6 0.6 4.3 3.9 0.5 0.5 1.7 1.5
HuaXia Rmb 5.48 4.25 4.23 0% Sell 1.000x 1.000x -3% -22% 2.5 2.2 0.2 0.2 3.3 3.1 0.3 0.3 1.3 1.3
BONB Rmb 25.58 30.52 35.76 -15% Buy 4.500x 5.000x -0.500x -5% 19% 7.7 6.0 1.1 1.0 6.4 5.6 1.0 0.8 4.3 3.8
BONJ Rmb 8.09 8.61 9.98 -14% Neutral 2.500x 2.750x -0.250x -16% 6% 4.5 3.8 0.6 0.6 4.2 3.9 0.6 0.5 2.5 2.3
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Exhibit 18: A-share banks current P/PPOP vs. historical range Exhibit 19: H-share banks current P/PPOP vs. historical range
A-share banks: Current P/PPOP (forward 12m) H-share banks: Current P/PPOP (forward 12m)
vs. historical range vs. historical range
Avg. + / - 1x std. dev. range Current Avg. since 2014 High / low since
Avg. + / - 1x std. dev. range Current Avg. since 2014 High / low since 8.0
9.0 2014
2014
8.0 7.0
7.0 6.0
6.0 5.0
5.0
4.0
4.0
4.0 3.4 3.1
3.4 3.5 3.0
3.0 2.4
2.7 2.6 2.5 2.7 2.7 2.6 2.7 2.1 2.0 2.1
2.4 2.0 2.0 2.0
2.0 2.0
1.0
1.3 1.0
ICBC (H) CCB (H) BoCom (H) CMB (H) BOC (H) Covered ABC (H) PSBC (H)
banks (H)
0.0
BONB HuaXia BONJ Industrial ICBC (A) CMB (A) Covered BoCom CCB (A) BOC (A) ABC (A) BOC (A) PSBC (A)
banks (A) (A)
Exhibit 20: A-share banks trading multiple vs target multiple: Exhibit 21: H-share banks trading multiple vs target multiple:
P/PPOP P/PPOP
A-share banks: Current P/PPOP (forward 12m) H-share banks: Current P/PPOP (forward 12m)
vs. target multiple vs. target multiple
High / low since High / low since
9.0 Trading multiple Target multiple 8.0 Trading multiple Target multiple 2014
2014
8.0 7.0
7.0
6.0
6.0
5.0 5.0
4.500
4.0 3.75 4.0
3.0
3.25
2.75 3.25 3.25
2.50 2.38 2.38 3.0
2.0
2.25 2.31
1.63 1.88 2.25
1.50 2.0
2.19
1.0 1.00 1.75 1.75
1.50 1.60
0.0 1.0
BONB HuaXia BONJ Industrial ICBC (A) CMB (A) Covered BoCom CCB (A) BOC (A) ABC (A) BOC (A) PSBC (A)
banks (A) (A) ICBC (H) CCB (H) BoCom (H) CMB (H) BOC (H)
Covered banks (H)
ABC (H) PSBC (H)
Source: Wind, Goldman Sachs Global Investment Research Source: Wind, Goldman Sachs Global Investment Research
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Exhibit 24: New vs. Old: DPS & div. payout ratio
DPS (Rmb) Dividend payout ratio (%)
New Old Change New Old Change
Company Company
2023E 2024E 2025E 2023E 2024E 2023E 2024E 2023E 2024E 2025E 2023E 2024E 2023E 2024E
ICBC 0.31 0.32 0.26 0.32 0.34 (3%) (5%) ICBC 30 30 23 30 30 (0) (0)
CCB 0.40 0.42 0.44 0.39 0.41 2% 2% CCB 30 30 30 30 30 0 0
BOC 0.24 0.25 0.27 0.24 0.25 0% 0% BOC 30 30 30 30 30 (0) (0)
ABC 0.23 0.24 0.24 0.23 0.24 2% 1% ABC 30 30 29 30 30 0 0
BoCom 0.10 0.03 0.00 0.38 0.40 (73%) (93%) BoCom 8 2 0 30 30 (22) (28)
PSBC 0.30 0.33 0.37 0.30 0.34 0% (1%) PSBC 30 30 30 30 30 0 (0)
CMB 1.90 2.09 2.32 1.93 2.18 (2%) (4%) CMB 32 32 32 32 32 (0) (0)
Industrial 1.21 0.97 0.76 1.26 1.38 (4%) (30%) Industrial 27 20 15 27 27 0 (7)
HuaXia 0.23 0.20 0.21 0.37 0.38 (37%) (48%) HuaXia 14 11 11 22 22 (8) (11)
PAB 0.32 0.36 0.40 0.34 0.38 (5%) (6%) PAB 12 12 12 12 12 0 0
BONB 0.57 0.65 0.75 0.58 0.65 (1%) 0% BONB 14 14 14 14 14 0 (0)
BONJ 0.57 0.62 0.67 0.63 0.72 (9%) (14%) BONJ 30 30 30 30 30 0 0
Average Average
Total 0.53 0.54 0.56 0.58 0.64 (8%) (15%) Total 24 23 21 26 26 (3) (4)
Large 0.26 0.27 0.26 0.31 0.33 (15%) (19%) Large 26 25 24 30 30 (4) (5)
Joint-stock 0.92 0.91 0.92 0.97 1.08 (6%) (16%) Joint-stock 21 19 18 23 23 (2) (4)
Regional 0.57 0.64 0.71 0.60 0.69 (5%) (7%) Regional 22 22 22 22 22 0 0
_
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Sell GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: HK$1.5tr / $192.9bn Net inc. (attributable to equity 360,483.0 369,923.6 382,652.7 396,991.9
3m ADTV :HK$1.0bn/ $132.2mn Net inc. (Rmb mn) Old 366,367.2 383,241.5 403,635.4 --
China EPS (Rmb) New 1.01 1.04 1.07 1.11
China Financials EPS (Rmb) Old 1.03 1.08 1.13 --
EPS growth (%) 3.5 2.6 3.4 3.7
M&A Rank: 3 P/E (X) 3.6 3.8 3.7 3.5
P/B (X) 0.4 0.4 0.4 0.4
Price/PPOP (X) 2.3 2.2 2.1 2.0
Dividend yield (%) 8.3 7.9 8.2 6.6
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 03 Jul 2023 close.
Sell GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: Rmb1.7tr / $240.0bn Net inc. (attributable to equity 360,483.0 369,923.6 382,652.7 396,991.9
3m ADTV :Rmb1.6bn/ $227.9mn Net inc. (Rmb mn) Old 366,367.2 383,241.5 403,635.4 --
_
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 03 Jul 2023 close.
We downgrade ICBC A/H to Sell from Buy on increasing dividend risk given the high
CET1 ratio of ~13% required to maintain on the G-SIB list. Our stress-test which
includes margin risk of local gov. debt and loss of credit portfolio suggests that the
adjusted ROE of ICBC could be much lower than we previously expected at
4 July 2023 17
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1) ICBC could have a larger book of local gov. debt of Rmb 9.5tn, or 24% total IEA, vs.
18% average of large banks. As such, our stress test on margin loss from both stock
and Uow of local gov. debt suggests 85/69/63 bps ROE markdown and a -8%/-7%/-7%
net proft decrease, with a dilution of CET1 ratio by -8bps/-15bps/-20bps, leading to an
adjusted ROE of 10.5%/10.1%/9.8% in 2023E/24E/25E. We expect both the stock and
Uow of local gov. debt to lower rates, so with the net balance increase, the margin loss
is likely to persist and hurt bank book value, ROE and CET1 ratio. (More details can be
found in Part I of our series.)
2) ICBC has disclosed a high property NPL ratio of 6.1%, and better mix with 89% loan
of property credit exposure, vs. 3.2%/79% average of covered banks (as of 2022). But
given the backdrop of weak macro, we expect ICBC like other banks to see higher
losses in their credit portfolio. We stress test the FY23E total loss and estimate it at
Rmb 30bn, with Rmb 11bn from property loans and Rmb 19bn from assets under stage
3, and the provisions required would be Rmb 49bn, with Rmb 16bn from property loans
and Rmb 33bn from assets under stage 3, assuming 150% coverage ratio for additional
property NPL and 89%/100% (sample max) for the loan/debt portfolio. (Details for this
test are in Part II.)
before adjustment in 2023E/24E/25E. Assuming our adjusted NPL coverage ratio and
CET1 ratio, we think there is a risk to ICBC’s current dividend payout as the risk buffer
release cannot support our forecast dividend and capital in 2025E based on the target
~13% CET 1 ratio that we expect ICBC to maintain in order to remain as a G-SIB. We
model a dividend payout cut by 7ppts in 2025E, assuming no new capital raise or
decrease in target CET1 ratio. DPS is 3%/5% lower vs. prior in 2023E-24E.
GSe NPAT in 2023E-25E is -3%/-6%/-9% below Visible Alpha consensus data, which we
attribute to our more cautious view on potential margin loss from local gov. debt and
credit risk.
n Better than expected NIM to drive NII growth, which may come from more deposit
cost savings: Potential factors would include a further deposit rate cut, a further
policy rate cut, a smaller proportion of time deposits, and smaller margin risk from
local gov. debt on less exposure or an improved macro environment.
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n Stronger-than-expected retail recovery to drive retail loan growth and fee income
(such as fees from credit card and consumption loans): Such a recovery could be
supported by more retail consumption demand and better than expected household
wealth growth.
n Larger dividend payout to improve cash return of investors.
Exhibit 25: We estimate ICBC has a larger book of local gov. debt of Exhibit 26: We expect ICBC to have additional NPL of Rmb 30bn,
Rmb 9.5tn, or 24% total IEA, vs. 18% average of large banks. with Rmb 11bn from property loans and Rmb 19bn from assets under
stage 3.
As of 2023E
Rmb bn
Avg. 16%
15% 13% 13% 60 49
12% 11% -50%
11% 37
10% 9% 40 30 30
10% 25 24 -100%
18
20 -150%
5% 3 1 1
0 -200%
0%
Unrecognized 3rd stage assets Property loss As % of reported NPL (2022) (RHS)
Local gov. loan as % of IEA Local gov. bond as % of IEA Shadow banking as % of IEA
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Exhibit 27: We expect ICBC to have additional provisions of Rmb Exhibit 28: With adjusted NPL coverage ratio and CET1 ratio, we
49bn, with Rmb 16bn from property loans and Rmb 33bn from assets see a dividend risk for ICBC as risk buffer release cannot support
under stage 3. dividend and capital in 2025E on a target ~13% CET 1 ratio which
As of 2023E we expect ICBC to maintain as a G-SIB.
Additional provision ICBC adj. CET-1 ratio after div. and provision release
180 24% 25% 30% 14.0%
21% 13.8%
19%
160 16% 13.8%
12% 20%
7% 8% 6% 8%
140 3% 10% 13.6%
112 1% 13.4%
120 101 0% 13.4%
Rmb bn
100 13.3%
_
-10% 13.2%
80
13.0%
49 -20%
60 43 13.0%
35 -30%
40 25 22 12.8%
17 16
20 8 3 -40%
0 12.6%
0 -50%
12.4%
2023E 2024E 2025E
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
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Exhibit 30: ICBC(A) P/PPOP since 2014 Exhibit 31: ICBC(H) P/PPOP since 2014
ICBC (A) P/PPOP (Forward 12M) since 2014 ICBC (H) P/PPOP (Forward 12M) since 2014
(x) Current =2.7x Avg. since 2014 =3.2x (x) Current =2.1x Avg. since 2014 =2.9x
Avg. +1x std. dev. =3.7x Avg. -1x std. dev. =2.7x Avg. +1x std. dev. =3.4x Avg. -1x std. dev. =2.3x
Target P/PPOP =2.25x Old target P/PPOP =2.75x Target P/PPOP =1.75x Old target P/PPOP =2.25x
4.5
4.8
4.0
4.3
3.5
_
3.8
3.3 3.0
2.8 2.5
2.3 2.0
1.8 1.5
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
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Sell GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: Rmb328.9bn / $45.4bn Net inc. (attributable to equity 91,377.0 92,964.4 98,829.8 105,047.0
3m ADTV :Rmb1.2bn/ $168.1mn Net inc. (Rmb mn) Old 91,377.0 96,801.7 106,368.6 115,085.3
China EPS (Rmb) New 4.40 4.48 4.76 5.06
China Financials EPS (Rmb) Old 4.40 4.66 5.12 5.54
EPS growth (%) 10.5 1.7 6.3 6.3
M&A Rank: 3 P/E (X) 4.3 3.5 3.3 3.1
P/B (X) 0.6 0.5 0.4 0.4
Price/PPOP (X) 2.1 2.1 2.0 1.8
Dividend yield (%) 6.3 7.6 6.1 4.8
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 03 Jul 2023 close.
We downgrade Industrial Bank to Sell, from Buy, on a worsening balance sheet, its
larger exposure to local government debt vs. our other covered banks and further losses
from bank credit portfolios. We estimate the adjusted ROE before dividend could be
9.4%/12.3%/11.9% in 2023E/24E/25E vs. 13.4%/12.9%/12.5% before adjustment.
Based on this stressed scenario, we think dividend risk is high starting in 2024E. We
have changed our PPOP estimates by -3%/-4%/-5% vs. previously, with a new target
P/PPOP of 1.5x vs. 2.25x prior resulting in a new 12-month TP of Rmb 12.09 vs. Rmb
18.93 prior.
_
1) Larger local government debt exposure, with Rmb 2.2tn as of 2022, or 24% of total
IEA vs. avg 16% of our covered banks. The margin dilution assuming declining rates of
local government debt could drive net proft to decrease by -8%/-9%/-9% in 2023E-25E,
resulting in adj. ROE of 12.3%/11.9%/11.6% vs. 13.4%/12.9%/12.5% before adjustment,
and the book value to change by -0.8%/-1.5%/-2.1% vs. before adjustment in
2023E-25E, all else being equal.
2) Additional losses on credit portfolio could be Rmb 60bn in total (as of 2023E),
including Rmb 6bn of property loans, and Rmb 53bn of assets under stage 3. This also
requires more provision to set aside against the additional losses, which we estimate to
be Rmb 25bn in total, with Rmb 10bn for property loans and Rmb 15bn for assets under
stage 3. Hence we calculate the adjusted NPL coverage ratio would change to 165%
from 215%, with net proft further decreasing by -23%, and ROE by -300bps, and book
value decreasing -2% in 2023E.
3) All in, the adjusted ROE/CET1 ratio could be 9.4%/9.6% vs. 13.4%/9.9% before
4 July 2023 22
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adjustment in 2023E. As a result, we think the dividend is likely to miss the target
starting from 2024, as the adjusted NPL coverage ratio may not be able to support both
dividend and capital maintenance.
Our NPAT estimates for 2023E-25E are -2%/-4%/-5% below Visible Alpha consensus as
we take into account Industrial’s larger exposure to local government debt vs. our other
covered banks and further losses from bank credit portfolios.
n Better than expected asset quality, especially in property and local government debt,
which offer more room to release proft by lowering NPL coverage ratio.
n Better than expected NIM on deposit cost saving and improving funding mix:
Potential factors would include a further deposit rate cut, a further policy rate cut, or
a smaller proportion of time deposits.
n Stronger than expected retail fnance growth supported by retail lending balance
increase and fee income growth: This growth could be driven by more retail
consumption demand and better than expected household wealth growth.
Exhibit 33: We calculate Industrial Bank has larger local gov. debt Exhibit 34: We estimate Industrial Bank to have Rmb 60bn
exposure, with Rmb 2.2tn, or 24% of total IEA vs. avg 16% of our additional losses on credit portfolio in total, including Rmb 6bn of
covered banks property loans and Rmb 53bn of assets under stage 3...
As of 2023E
_
Avg. 16% 60
15% 13% 13% 60 49
12% 11% -50%
11% 37
10% 9% 40 30 30
10% 25 24 -100%
18
20 -150%
5% 3 1 1
0 -200%
0%
Shadow banking as % of IEA Local gov. bond as % of IEA Property loss Unrecognized 3rd stage assets As % of reported NPL (2022) (RHS)
Local gov. loan as % of IEA
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
4 July 2023 23
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Exhibit 35: ...and additional provision of Rmb 25bn in total, with Rmb Exhibit 36: All in, the adjusted CET1 ratio/ROE could be 9.4%/9.6%
10bn for property loans and Rmb 15bn for assets under stage 3 vs. 13.4%/9.9% before adjustment in 2023E; So we think the
As of 2023E dividend is likely to miss target starting in 2024
Additional provision Industrial adj. CET-1 ratio after div. and provision release
24% 25% 9.6% 9.5%
180 21% 30%
19% 9.5%
160 16% 9.5%
12% 20%
7% 8% 6% 8% 9.4%
140 3% 10%
112 1% 9.3% 9.2%
120 101 0%
Rmb bn
100 9.2%
-10% 9.1%
80 9.0%
49 -20% 9.0%
60 43
35 -30% 8.9%
40 25 22 17 16
8 -40% 8.8%
20 3 0
8.7%
0 -50%
8.6%
2023E 2024E 2025E
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Non-interest income growth 5.8 2.2 10.0 8.3 11.2 8.4 (3.6) (1.6) (2.8)
Operating expenses growth 5.0 1.9 7.8 6.6 8.5 7.6 (3.2) (1.2) (0.9)
Credit cost 0.6 0.6 0.5 0.6 0.52 0.55 (0.0) 0.0 0.0
ROA 0.95 0.91 0.96 0.88 0.9 0.9 (0.0) (0.1) (0.1)
ROE 13.4 12.8 13.3 12.4 13.0 12.0 (0.5) (0.9) (1.0)
New NPL formation rate 1.0 0.9 1.0 0.9 1.1 0.9 (0.1) (0.1) (0.2)
NPL coverage ratio 199.1 215.3 150.8 185.1 104.5 150.4 16.2 34.2 45.9
NII growth 4.3 1.1 6.7 5.8 6.9 7.0 (3.2) (0.9) 0.1
4 July 2023 24
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3.4
2.9
2.4
1.9
1.4
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
Source: Wind
Oper. rev. as % of assets 2.61 2.69 2.67 2.48 2.32 2.25 2.19
Oper. exp. as % of assets 0.70 0.67 0.70 0.75 0.70 0.68 0.67
PPOP ROA 1.91 2.02 1.97 1.73 1.61 1 .57 1.53
Loan prov. as % of assets 0.84 1.00 0.81 0.54 0.50 0.49 0.49
Pretax profits 1.08 1.02 1.16 1.19 1.11 1.08 1 .04
Tax 0.11 0.12 0.14 0.15 0.14 0.14 0.13
Net profits 0.96 0.90 1.02 1.03 0.97 0.94 0.90
Net profits to common shareholders 0.93 0.85 0.95 0.98 0.91 0.88 0.86
Net profit/RWA 1.31 1.19 1. 33 1.3 6 1.25 1.21 1.18
PPOP/RWA 2.69 2.82 2.76 2.41 2.22 2.15 2.10
4 July 2023 25
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Sell GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: HK$1.1tr / $139.4bn Net inc. (attributable to equity 259,140.0 267,868.3 278,705.9 289,993.3
3m ADTV :HK$416.3mn/ $53.1mn Net inc. (Rmb mn) Old 253,435.5 263,782.0 275,086.0 --
China EPS (Rmb) New 0.74 0.77 0.80 0.83
China Financials EPS (Rmb) Old 0.72 0.75 0.79 --
EPS growth (%) 7.4 3.4 4.0 4.0
M&A Rank: 3 P/E (X) 3.1 3.8 3.6 3.5
P/B (X) 0.4 0.4 0.4 0.4
Price/PPOP (X) 2.2 2.2 2.1 2.0
Dividend yield (%) 9.5 8.0 8.3 8.4
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 03 Jul 2023 close.
Sell GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: Rmb1.3tr / $174.8bn Net inc. (attributable to equity 259,140.0 267,868.3 278,705.9 289,993.3
3m ADTV :Rmb1.7bn/ $239.2mn Net inc. (Rmb mn) Old 253,435.5 263,782.0 275,086.0 --
China EPS (Rmb) New 0.74 0.77 0.80 0.83
China Financials EPS (Rmb) Old 0.72 0.75 0.79 --
_
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 03 Jul 2023 close.
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(Rmb37bn estimated additional loss, or 13% of reported losses) and below average
CET1 ratio among large banks, will increase its challenges maintaining its dividend, and
thus a dividend payout miss is likely in 2025E. Our new target P/PPOPs for the A/H
shares are 1.875x/1.6x vs. 2x/1.6x prior, and our PPOP growth forecasts are 2%/5%/5%
in 2023E/24E/25E. Based on these, we revise our 12m TPs for the A/H shares to
Rmb2.59/HK$2.45, from Rmb2.85/HK$2.62 prior. We consider A/H valuations stretched,
with our TPs offering -28%/-21% downside vs. banks coverage averages of -7%/-6%,
respectively. GSe NPAT in 2023E-25E is -0%/-3%/-6% below Visible Alpha consensus,
which we attribute to our more cautious view on potential margin loss from local gov.
debt and credit risk.
Based on our framework, we estimate that ABC could have Rmb6.8tn of local
government debt on its balance sheet, with Rmb3.5tn of loans and Rmb3.3tn of bonds.
Our test is based on the margin loss from 1) debt rollover on 1% lower rates each year;
and 2) the opportunity cost due to a spread existing between the weighted bank loan
rate and the local government debt yield. Also, assuming that 20% of existing local
government debt will roll over and that new local government debt growth will be in line
with the pace of balance sheet expansion, we model adjusted ROE for ABC in
2023E/24E/25E at 10.6%/10.4%/10.0%.
To adjust the book value, we stress test ABC‘s balance sheet by including potential
losses from property loans and assets under stage 3. Our analysis suggests a potential
Rmb37bn total loss, which would mark down book value by -2%. In this scenario,
adjusted ROE would be 8.0% vs. 11.6% before adjustment in 2023E.
Thus, with a target CET 1 ratio set at 11.5%, we believe the bank could face dividend
risk in 2025E, as provision release from the adjusted NPL coverage ratio is unlikely to
support capital and the dividend. We do not see ABC dividend at risk until 2025E, with
DPS increases of 2%/1% vs. prior in 2023E/24E on provision release, but dividend
payout cut in 2025E. With increasing target CET1 ratio (11.5% for ABC as G-SIB vs.
13.3% for ICBC), ABC will face more dividend risk.
_
Revising down our PPOP estimates by -8%/-9% for 2023E/24E and adjusting our target
P/PPOPs for the A/H shares to 1.875x/1.6x vs. 2x/1.6x prior, we arrive at new 12m TPs of
Rmb2.59/HK$2.45 vs. Rmb 2.85/HK$ 2.62 prior.
n Better than expected NIM to drive NII growth, which may come from deposit cost
saving and improving the funding structure: Potential factors would include a further
deposit rate cut, a further policy rate cut, and a smaller proportion of time deposits.
n Lower than expected local government debt rollover risk: This could be driven by a
lower than expected local gov. debt rate cut, and/or less than expected rollover
scale.
n Better than expected asset quality on improving macro: Potential drivers would
include less than expected property NPL formation and fewer than expected assets
moved to stage 3, which would require less additional provisioning and allow more
room for provision release to boost earnings.
4 July 2023 27
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n Stronger-than-expected retail recovery to drive retail loan growth and fee income
(such as fees from credit card and consumption loans): Such a recovery could be
supported by more retail consumption demand and better than expected household
wealth growth.
Exhibit 40: We estimate that ABC could have Rmb6.8tn of local gov. Exhibit 41: We estimate that ABC has Rmb37bn of additional losses
debt on its balance sheet, with Rmb3.5tn of loans and Rmb3.3tn of in the credit portfolio in total, comprising Rmb17bn of property
bonds loans and Rmb20bn of assets under stage 3...
As of 2022, GSe As of 2023E
Rmb bn
9% 60
Rmb tn
8 6.8
4 10% 60 49
-50%
6 4.6 5% 37
3 3.6 40 30 30
3.1 25 24 -100%
4 2.2 0% 18
6 3 1 1.8
2 1.0 0.8 20 -150%
2 4 1 0.4 0.3 0.2 -5% 3 1 1
2 2 1 1 2 1
0 -10% 0 -200%
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Exhibit 42: ...and additional provisions of Rmb101bn in total, Exhibit 43: We believe ABC could face dividend risk in 2025E, as
comprising Rmb25bn for property loans and Rmb76bn for assets provision release from the adjusted NPL coverage ratio is unlikely
under stage 3 to support capital and the dividend
As of 2023E
Additional provision ABC adj. CET-1 ratio after div. and provision release
180 24% 25% 30% 12.2% 12.1%
19% 21%
160 16% 12.0%
12% 20%
7% 8% 6% 8%
140 3% 10%
1% 11.8%
112
120 101 11.5%
0% 11.6%
Rmb bn
100 11.5%
-10% 11.4%
80
-20% 11.2%
60 49 43 11.2%
35 -30%
40 25
_
22 17 11.0%
16
20 8 3 -40%
0 10.8%
0 -50%
10.6%
2023E 2024E 2025E
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
4 July 2023 28
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Exhibit 45: ABC (A) P/PPOP since 2014 Exhibit 46: ABC (H) P/PPOP since 2014
ABC (A) P/PPOP (Forward 12M) since 2014 ABC (H) P/PPOP (Forward 12M) since 2014
(x) Current=2.7x Avg. since 2014=2.9x (x) Current=2.07x Avg. since 2014=2.44x
Avg. +1x std. dev.=3.3x Avg. -1x std. dev.=2.4x Avg. +1x std. dev.=2.93x Avg. -1x std. dev.=1.95x
New target P/PPOP =1.88x Old target P/PPOP =2x New target P/PPOP =1.6x Old target P/PPOP =1.6x
4.2
_
3.7
3.7
3.2
3.2
2.7
2.7
2.2
2.2
1.7
1.7
1.2 1.2
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
4 July 2023 29
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4 July 2023 30
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Buy GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: HK$482.9bn / $61.7bn Net inc. (attributable to equity 85,224.0 93,162.6 102,326.8 112,992.4
3m ADTV :HK$232.1mn/ $29.6mn Net inc. (Rmb mn) Old 85,224.0 92,914.0 103,823.1 115,116.7
China EPS (Rmb) New 0.92 1.01 1.11 1.22
China Financials EPS (Rmb) Old 0.92 1.01 1.12 1.25
EPS growth (%) 11.9 9.3 9.8 10.4
M&A Rank: 3 P/E (X) 5.0 4.5 4.1 3.7
P/B (X) 0.6 0.6 0.5 0.5
Price/PPOP (X) 3.5 3.3 3.0 2.8
Dividend yield (%) 6.0 6.7 7.4 8.1
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 03 Jul close.
Buy GS Forecast
12/22 12/23E 12/24E 12/25E
Market cap: Rmb493.8bn / $68.1bn Net inc. (attributable to equity 85,224.0 93,162.6 102,326.8 112,992.4
3m ADTV :Rmb887.3mn/ $127.0mn Net inc. (Rmb mn) Old 85,224.0 92,914.0 103,823.1 115,116.7
_
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 03 Jul 2023 close.
We upgrade PSBC A/H share to Buy, despite sector headwinds. Based on our
framework, we expect PSBC to maintain its dividend and healthy ROE due to its robust
balance sheet. We forecast an adjusted 2023E ROE before dividends of 11.1%, or
-187bps vs. prior. With 292% adjusted NPL coverage ratio and 9.1% adjusted CET1
4 July 2023 31
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ratio, we believe PSBC should be able to maintain dividends in our forecast years. We
also estimate 6%/10%/9% PPOP growth vs. 4%/5%/6% of large banks in
2023E/24E/25E, to factor in PSBC‘s growth potential. Our new TP of A/H share is Rmb
6.03/HK$ 5.8 vs. Rmb 4.31/HK$ 4.06 prior. Since our Sell rating in March 2023, PSBC
A/H share prices changed by +10%/+4% vs. +4%/+3% average of covered A/H share
banks, mainly due to greater than expected deposit cost savings leading to upbeat
NIMs. Since we added PSBC-H to our Sell list on March 2, 2023, its return has been
-0.2% vs. Hang Seng China Ent index at -7%. Since we added the A-share to our Sell list
on March 2, 2023, it has returned +6.5% vs. CSI 300 index of -7%. We think the
outperformance was mainly due to funding cost saving with deposit rate cut, given its
large deposits (96% of total liability).
From the framework we built in to assess the adjusted ROE of banks, we fnd that
PSBC’s robust balance sheet is due to:
1) The smaller gov. debt exposure, which we estimate at Rmb 1.8tn, or 13% of total IEA
with Rmb 0.3tn local gov. loans and Rmb 1.5tn local gov. bonds. Our analysis shows that
the margin dilution could lead to a 92/83/76 bps ROE markdown in 2023E/24E/25E vs.
77/67/61bps average of large banks, if we treat local gov. bonds and loans equally,
meaning no tax and capital benefts of local gov. bonds.
As we estimate PSBC holds more local gov. bonds (83% of total vs. 52% average of
large banks) than loans, the tax and capital benefts could be larger and thereby offset
the negative impact of margin risk of local gov. debt.
2) The smaller property exposure and likely recognition of a small loss. We estimate that
PSBC could have additional losses of Rmb 30bn to digest in total, with Rmb 5bn from
property loans and Rmb 25bn from assets under stage 3, and will set aside Rmb 8bn in
provisions with all of it for the property loan losses and Rmb 0bn against the assets
under stage 3. With this, we have adjusted our FY23E NPL coverage ratio and ROE for
PSBC to 292%/12%, -78ppts/-97bps vs. before adjustment, and this compares with
-6ppts/-245bps change on average of large banks.
_
Taking into account our adjusted key drivers, namely ROE, NPL coverage ratio and target
CET1 ratio, we note that PSBC should be able to continue to pay dividends in outer
years, provided the target CET1 ratio remains at the historical average. We forecast the
adjusted dividend yield in 2023E/24E/25E to be 5.2%/6.2%/6.9% vs. 4.5%/6.3%/6.6%
of larger banks’ average for A-share, and 5.8%/7.0%/7.7% vs. 5.8%/8.0%/8.4% of larger
banks’ average for H-share. We think PSBC‘s robust balance sheet will enable it to
maintain its trading P/PPOP valuation multiple, despite sector headwinds. Our PPOP
growth is 6%/10%/9% yoy vs. 4%/5%/6% average of large banks in 2023E/24E/25E.
We increase our estimated PPOP by +2%/+3%/+3% vs. prior to factor in its robust
balance sheet, and apply target P/PPOPs of A/H to 3.75x/3.25x, slightly above the
historical avg, to reUect both its robust balance sheet due to lower local gov. debt
exposure and fewer additional losses to recognize in its credit portfolio, vs. 2.75x/2.25x
prior. Our target price of A/H rises to Rmb 6.03/HK$ 5.8 vs. Rmb 4.31/HK$ 4.06 prior,
implying 21%/19% upside.
4 July 2023 32
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Downside Risk:
n Worsening asset quality, especially in property sector, which will require more
provisions and thus less room to release proft.
n Greater than expected NIM dilution, which may come from further LPR cuts, faster
than expected mortgage repricing, higher than expected mortgage early repayments
and weaker than expected retail loan demand.
n Weaker fee income growth due to a weaker than expected retail recovery.
n Recapitalization risk which dilutes ROE and poses downward pressure on share
price.
Exhibit 48: We estimate PSBC has smaller gov. debt exposure, Exhibit 49: As PSBC holds more local gov. bonds per our estimation
which we estimate Rmb 1.8tn, or 13% of total IEA with Rmb 0.3tn (83% of total vs. 52% average of large banks) than loans, the tax
local gov. loans and Rmb 1.5tn local gov. bonds. and capital beneats could be larger to offset the negative impact of
As of 2022, GSe margin risk of local gov. debts.
As of 2022
8 6.8
4 10% 40 83
30 68 64 62
6 4.6 5% 52 52
3 3.6 20 48 41
3.1 38 35 31
4 2.2 0% 24
3 1 1.8 10
6 1.0
2 2 0.8 -5% 0
4 1 0.4 0.3 0.2
2 2 1 1 2 1
0 -10%
Shadow banking Local gov. bonds Shadow banking as % of total Local gov. loan as % of total
Local gov. loans Local gov. debt exposure
Total local gov. debt as % of IEA (RHS) Local gov. bond as % of total
29%
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Exhibit 50: We estimate that PSBC could have Rmb 30bn more loss Exhibit 51: ...and Rmb 8bn provision to beef up in total, with Rmb
to digest in total, with Rmb 5bn from property loans and Rmb 25bn 8bn set aside against the property loan loss and Rmb 0bn against
from assets under stage 3... the asset under stage 3.
_
As of 2023E As of 2023E
60
Rmb bn
60 49 100
-50% -10%
37 80
40 30 30 -20%
25 24 -100% 60 49 43
18 35
20 40 25 -30%
-150% 22
3 1 1 17 16
20 8 3 -40%
0 -200% 0
0 -50%
Property loss Unrecognized 3rd stage assets As % of reported NPL (2022) (RHS)
Property loss Unrecognized 3rd stage assets As % of reported LLR (2022) (RHS)
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
4 July 2023 33
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Exhibit 52: Taking the adjusted key drivers, namely ROE, NPL
coverage ratio and target CET1 ratio, we note that PSBC could
continue to pay dividends in outer years, provided the target CET1
ratio remains at historical average.
10.2% 10.1%
10.0% 9.9%
9.8%
9.7%
9.6%
9.4%
9.2%
2023E 2024E 2025E
Loan growth 11.5 11.5 10.9 10.9 11.0 11.0 0.0 (0.1) 0.1
Deposit growth 11.5 11.5 11.0 11.0 10.9 10.9 0.0 0.0 0.0
Earning assets growth 11.5 11.5 10.9 10.9 10.7 10.7 0.0 (0.0) 0.0
Non-interest income growth 18.1 6.6 12.3 12.3 12.4 10.7 (11.5) (0.0) (1.7)
Operating expenses growth 6.0 5.4 9.2 10.1 8.9 9.3 (0.6) 0.9 0.4
Credit cost 0.39 0.41 0.36 0.41 0.33 0.40 0.0 0.1 0.1
ROA 0.6 0.6 0.6 0.6 0.6 0.6 0.0 (0.0) (0.0)
ROE 12.0 12.1 12.4 12.2 12.6 12.3 0.0 (0.2) (0.2)
New NPL formation rate 0.4 0.4 0.4 0.4 0.4 0.3 (0.0) (0.0) (0.0)
NPL coverage ratio 361.9 370.8 352.3 359.0 332.8 351.6 8.9 6.7 18.8
NII growth 2.7 5.6 8.4 9.6 8.0 9.0 2.9 1.2 1.0
4 July 2023 34
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Exhibit 54: PSBC (A) P/PPOP since 2019 Exhibit 55: PSBC (H) P/PPOP since 2016
PSBC (A) P/PPOP (Forward 12M) since Dec 2019 PSBC (H) P/PPOP (Forward 12M) since Sep 2016
(x) (x)
Current =3.9x Avg. since Dec 2019=3.6x Current =3.23x Avg. since Sep 2016 =3.14x
Avg. +1x std. dev.=4x Avg. -1x std. dev.=3.2x Avg. +1x std. dev. =3.6x Avg. -1x std. dev. =2.68x
5.0 New Target P/PPOP =3.75x Old Target P/PPOP =2.75x 4.8
New Target P/PPOP =3.25x Old Target P/PPOP =2.25x
4.5 4.3
4.0 3.8
3.5 3.3
3.0 2.8
2.5 2.3
2.0 1.8
Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Sep-21 Sep-22
Oper. exp. as % of assets 1.61 1.56 1.59 1.56 1.48 1.47 1.45
PPOP ROA 1.21 1.10 1.07 0.95 0.91 0 .90 0.89
Loan prov. as % of assets 0.56 0.47 0.39 0.27 0.24 0.24 0.23
Pretax profits 0.65 0.63 0.68 0.69 0.67 0.67 0 .66
Tax 0.03 0.04 0.04 0.05 0.04 0.04 0.04
Net profits 0.62 0.60 0.64 0.64 0.63 0.62 0.62
Net profits to common shareholders 0.59 0.57 0.59 0.59 0.58 0.58 0.58
Net profit/RWA 1.26 1.16 1. 18 1.1 5 1.13 1.12 1.13
PPOP/RWA 2.57 2.23 2.13 1.85 1.76 1.74 1.72
4 July 2023 35
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Regional banks
BONB 27% 24% 27% 9% 15% 21% 11% 31% 9% 11% 13% 12% (3) 3 (18) 6 6 (10) 20 (22) 2 2 (0)
BONJ 60% 52% 21% -9% 11% 20% 4% 18% 8% 8% 8% 9% (9) (30) (31) 21 9 (16) 14 (10) (0) 0 1
Aggregate
Total 26% 19% 9% 4% 13% 12% 8% 10% 1% 5% 7% 7% (7) (10) (5) 9 (1) (5) 2 (9) 4 2 0
Large 16% 7% -1% 9% 15% 7% 4% 6% -1% 4% 5% 6% (9) (8) 10 6 (8) (3) 2 (8) 5 1 0
Joint-stock 33% 28% 15% -1% 11% 16% 12% 8% 1% 3% 6% 7% (5) (12) (16) 12 5 (4) (4) (7) 2 4 0
Regional 43% 38% 24% 0% 13% 21% 8% 24% 8% 10% 10% 11% (6) (14) (25) 14 8 (13) 17 (16) 1 1 0
4 July 2023 36
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Regional banks
BONB 2.67 2.49 2.17 1.77 1.85 1.66 1.95 1.84 1.74 1.71 1.68 1.66 (18) (32) (40) 8 (20) 29 (11) (11) (2) (3) (2)
BONJ 2.71 2.77 2.30 1.85 1.84 1.67 1.67 1.67 1.42 1.37 1.33 1.31 6 (47) (45) (1) (17) (0) 0 (25) (5) (4) (2)
Average
Total 2.61 2.55 2.18 2.00 2.03 2.00 2.07 2.01 1.87 1.74 1.69 1.65 (6) (37) (18) 3 (4) 7 (6) (14) (13) (6) (4)
Large 2.60 2.46 2.02 2.01 2.06 1.98 1.98 1.92 1.80 1.64 1.57 1.52 (14) (44) (0) 5 (9) 1 (6) (12) (15) (7) (5)
Joint-stock 2.59 2.65 2.40 2.08 2.08 2.19 2.33 2.26 2.12 1.99 1.95 1.91 6 (25) (32) (0) 11 14 (7) (13) (13) (5) (3)
Regional 2.69 2.63 2.24 1.81 1.84 1.66 1.81 1.76 1.58 1.54 1.51 1.49 (6) (40) (43) 4 (18) 15 (5) (18) (4) (4) (2)
Regional banks
BONB 23% 22% 18% 14% 24% 23% 30% 25% 21% 15% 16% 16% (1) (3) (4) 9 (1) 7 (5) (4) (6) 1 (0)
BONJ 19% 44% 32% 17% 23% 18% 19% 17% 20% 15% 15% 15% 25 (12) (15) 6 (5) 0 (1) 3 (5) 0 0
Aggregate
Total 12% 11% 12% 11% 10% 11% 12% 12% 12% 12% 11% 10% 1 (1) (3) 1 (0) 0 (1) (1) (1) (0) (0)
Large 11% 10% 11% 10% 9% 10% 11% 12% 13% 12% 11% 10% 0 (1) (1) (1) 1 1 0 0 (1) (1) (1)
Joint-stock 16% 13% 17% 13% 15% 16% 14% 11% 9% 10% 10% 10% (3) 3 (3) 2 (0) (2) (3) (2) 1 (0) 0
Regional 21% 32% 25% 16% 24% 21% 24% 21% 21% 15% 15% 15% 12 (8) (9) 8 (3) 3 (3) (1) (6) 1 0
Large banks
ICBC 5% 0% 0% 3% 4% 5% 1% 10% 3% 3% 3% 4% (5) (0) 2 1 1 (4) 9 (7) (1) 1 0
BOC 8% 1% -4% 5% 4% 4% 3% 12% 5% 5% 5% 5% (7) (4) 8 (0) (0) (1) 9 (7) (0) 0 (0)
CCB 6% 0% 1% 5% 5% 5% 2% 12% 7% 3% 4% 5% (6) 1 3 0 (0) (3) 10 (5) (4) 2 0
ABC 8% 1% 2% 5% 5% 5% 2% 12% 7% 3% 4% 4% (7) 1 3 0 (0) (3) 10 (4) (4) 1 0
BoCom 6% 1% 1% 4% 5% 5% 1% 12% 5% 4% 4% 4% (5) (0) 3 0 0 (4) 11 (7) (1) (0) 0
PSBC 10% 7% 14% 20% 10% 16% 5% 19% 12% 9% 10% 10% (3) 7 6 (10) 7 (11) 13 (7) (3) 1 1
Regional banks
BONB 16% 16% 19% 20% 20% 23% 10% 30% 18% 14% 15% 15% 0 3 0 0 3 (13) 20 (12) (4) 1 (0)
BONJ 25% 25% 18% 17% 15% 12% 5% 21% 16% 8% 8% 9% 0 (7) (1) (2) (2) (7) 16 (5) (9) 0 1
Aggregate
Total 13% 6% 6% 8% 8% 10% 3% 18% 11% 6% 7% 7% (6) (0) 2 0 1 (7) 15 (7) (5) 1 0
Large 7% 2% 3% 7% 6% 7% 2% 13% 7% 4% 5% 5% (5) 1 4 (1) 1 (4) 10 (6) (2) 1 0
Joint-stock 17% 6% 6% 6% 8% 11% 1% 21% 14% 7% 8% 8% (11) (1) 0 3 2 (9) 19 (7) (7) 1 0
Regional 20% 21% 19% 18% 17% 18% 7% 25% 17% 11% 11% 12% 0 (2) (0) (1) 0 (10) 18 (8) (6) 1 1
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Regional banks
BONB 1.15 1.67 1.65 0.92 1.23 1.12 1.12 1.02 0.72 0.66 0.63 (115) 167 (2) (73) 32 (12) 1 (10) (30) (6) (3)
BONJ 1.47 2.50 2.15 0.97 1.37 1.41 1.14 1.01 1.05 0.84 0.80 0.77 103 (35) (118) 40 4 (28) (12) 3 (21) (4) (3)
Average
Total 0.94 1.35 1.39 1.15 1.20 1.22 1.10 0.97 0.88 0.80 0.76 0.73 30 16 (24) 5 2 (12) (13) (9) (7) (4) (3)
Large 0.70 0.82 0.75 0.79 0.98 0.93 0.91 0.78 0.64 0.63 0.60 0.58 12 (7) 4 19 (5) (2) (13) (14) (1) (3) (2)
Joint-stock 1.11 1.85 2.10 1.61 1.56 1.61 1.38 1.20 1.16 1.07 1.02 0.96 74 25 (49) (5) 4 (23) (18) (4) (8) (6) (6)
Regional 1.31 2.50 1.91 1.31 1.15 1.32 1.13 1.07 1.03 0.78 0.73 0.70 (6) 66 (60) (16) 18 (20) (6) (4) (26) (5) (3)
Regional banks
BONB 285 309 351 493 522 524 506 526 505 476 455 441 23 43 142 29 2 (19) 20 (21) (28) (21) (14)
BONJ 326 431 457 463 463 418 392 397 397 368 355 335 105 26 5 0 (45) (26) 6 (0) (29) (12) (20)
Average
Total 248 214 213 242 267 279 274 302 295 281 264 247 (34) (1) 29 24 12 (5) 29 (7) (15) (16) (18)
Large 241 184 174 195 223 243 230 252 251 244 233 222 (57) (10) 21 28 20 (13) 22 (1) (7) (11) (10)
Joint-stock 229 181 176 195 220 237 251 298 284 265 241 212 (49) (4) 19 24 17 14 47 (14) (19) (24) (29)
Regional 305 370 404 478 492 471 449 461 451 422 405 388 64 35 74 14 (21) (22) 13 (10) (29) (17) (17)
Large banks
ICBC 11.9% 12.9% 12.9% 12.8% 13.0% 13.2% 13.2% 13.3% 14.0% 13.6% 13.5% 13.5% 0.9 0.0 (0.1) 0.2 0.2 (0.0) 0.1 0.7 (0.4) (0.1) 0.0
BOC 10.6% 11.1% 11.4% 11.2% 11.4% 11.2% 11.3% 11.3% 11.8% 11.6% 11.6% 11.6% 0.5 0.3 (0.2) 0.3 (0.2) 0.1 0.0 0.5 (0.2) 0.0 0.0
CCB 12.1% 13.1% 13.0% 13.1% 13.8% 14.4% 13.6% 13.6% 13.7% 13.4% 13.2% 13.2% 1.0 (0.2) 0.1 0.7 0.6 (0.8) (0.0) 0.1 (0.3) (0.2) 0.0
ABC 9.1% 10.2% 10.4% 10.6% 11.6% 11.2% 11.0% 11.4% 11.2% 10.7% 10.4% 10.4% 1.2 0.1 0.3 0.9 (0.3) (0.2) 0.4 (0.3) (0.5) (0.3) 0.0
BoCom 11.3% 11.1% 11.0% 10.8% 11.2% 11.2% 10.9% 10.6% 10.1% 10.2% 10.4% 10.4% (0.2) (0.1) (0.2) 0.4 0.1 (0.4) (0.3) (0.6) 0.2 0.2 0.0
PSBC 8.4% 8.5% 8.6% 8.6% 9.8% 9.9% 9.6% 9.9% 9.4% 9.2% 9.1% 9.1% 0.1 0.1 (0.0) 1.2 0.1 (0.3) 0.3 (0.6) (0.1) (0.1) 0.0
Regional banks
BONB 10.1% 9.0% 8.6% 8.6% 9.2% 9.6% 9.5% 10.2% 9.8% 9.4% 9.3% 9.3% (1.0) (0.5) 0.1 0.6 0.5 (0.1) 0.6 (0.4) (0.3) (0.1) 0.0
BONJ 8.6% 9.4% 8.2% 8.0% 8.5% 8.9% 10.0% 10.2% 9.7% 9.7% 9.5% 9.5% 0.8 (1.2) (0.2) 0.5 0.4 1.1 0.2 (0.4) (0.1) (0.1) 0.0
Average
Total 9.8% 10.2% 10.1% 10.1% 10.6% 10.8% 10.7% 10.9% 10.9% 10.8% 10.8% 10.8% 0.4 (0.1) 0.0 0.5 0.2 (0.1) 0.2 0.1 (0.2) 0.0 0.0
Large 10.6% 11.2% 11.2% 11.2% 11.8% 11.9% 11.6% 11.7% 11.7% 11.5% 11.4% 11.4% 0.6 0.0 (0.0) 0.6 0.1 (0.3) 0.1 (0.0) (0.2) (0.1) 0.0
Joint-stock 9.0% 9.3% 9.2% 9.4% 9.8% 9.9% 9.8% 10.0% 10.3% 10.3% 10.5% 10.5% 0.3 (0.1) 0.2 0.4 0.2 (0.2) 0.2 0.4 (0.0) 0.2 0.0
Regional 9.3% 9.2% 8.4% 8.3% 8.8% 9.2% 9.7% 10.2% 9.7% 9.5% 9.4% 9.4% (0.1) (0.8) (0.1) 0.5 0.4 0.5 0.4 (0.4) (0.2) (0.1) 0.0
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outperformance. That said, we think ABC’s relatively large local government debt
exposure, in addition to more losses to digest in its credit portfolio and below average
CET1 ratio among large banks, will increase its challenges maintaining its dividend.
Upside risks include better than expected NIM to drive NII growth, lower than expected
local government debt rollover risk, better than expected asset quality on improving
macro and stronger-than-expected retail recovery to drive retail loan growth and fee
income.
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Key risks: better-than-expected asset quality, margin expansion and trading income
recovery.
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Key risks: 1) worse-than-expected asset quality and fee income; 2) margin dilution; 3)
developer risk.
Key risks: 1) Weakening NIMS; 2) credit costs becoming more sensitive to net proft
given increasingly large loan book due to strong loan growth.
_
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Disclosure Appendix
Reg AC
I, Shuo Yang, Ph.D., hereby certify that all of the views expressed in this report accurately reUect my personal views about the subject company or
companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specifc
recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
GS Factor Proale
The Goldman Sachs Factor Profle provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its
sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial
Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specifc metrics for each stock. The
normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may
vary depending on the fscal year, industry and region, but the standard approach is as follows:
Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for fnancial stocks, only EPS and sales growth), with a
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price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for fnancial stocks, only P/E, P/B and P/D), with a higher percentile
indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns
percentile and (100% - Multiple percentile).
Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fscal year-end at least three quarters in the future. Growth uses inputs
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For a more detailed description of how we calculate the GS Factor Profle, please contact your GS representative.
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Quantum
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Disclosures
The rating(s) for Agricultural Bank of China (A), Agricultural Bank of China (H), Bank of China (A), Bank of China (H), Bank of Communications
(A), Bank of Communications (H), Bank of Nanjing, Bank of Ningbo, China Construction Bank (A), China Construction Bank (H), China
Merchants Bank (A), China Merchants Bank (H), Hua Xia Bank, ICBC (A), ICBC (H), Industrial Bank, Ping An Bank Co., Postal Savings Bank of
China Co. (A) and Postal Savings Bank of China Co. (H) is/are relative to the other companies in its/their coverage universe: Agricultural Bank
of China (A), Agricultural Bank of China (H), Bank of China (A), Bank of China (H), Bank of Communications (A), Bank of Communications (H), Bank of
Nanjing, Bank of Ningbo, China Construction Bank (A), China Construction Bank (H), China Merchants Bank (A), China Merchants Bank (H), Hua Xia
Bank, ICBC (A), ICBC (H), Industrial Bank, Ping An Bank Co., Postal Savings Bank of China Co. (A), Postal Savings Bank of China Co. (H)
_
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