Impacts of proactive fiscal policies on banks should be examined from the following two aspects:
1) Loan growth. Massive construction will increase credit demand, preventing loan growth from slowing substantially down in 2009. But we should bear the following in mind:
a) Banks may be reluctant to lend if the projects are not lucrative; b) Banks would examine the solvency of local governments, if they provide guaranty on these projects; c) CCB and ICBC have some edge in construction loans, especially CCB; but a syndicated bank facility must be created when the single client/project borrows more than Rmb3bn, or equivalent foreign currencies, which allows small-to-mid banks to benefit from the augmented investment as well. d) Large state-owned banks will face bigger pressure than joint-stock banks if the government forces them to lend to profitless projects.
2) Asset quality. The massive construction may help lessen the pressure of excessive capacities and improve asset quality of banks, positive to bank stocks. But bigger risks may be triggered in the mid/long term as it remains to be seen whether the projects will be profitable and whether they would worsen overcapacity eventually. In all, it is conductive to steel, building material, construction and machinery sectors but risks in ordinary manufacturing industries won’t dissipate much.
Overall, we should be clear about the following two issues before examining the impacts on banks: 1) Whether these policies really beat expectations and whether they are already partially reflected in previous FAI forecast; 2) Whether the projects are profitable or may incur more NPLs.
These policies will find it hard to remove the challenges for the banking sector in the next two years; and FY09~10 NIM may squeeze more than we expect if the government slashes rates more aggressively.
We maintain NEUTRAL view towards the banking sector. 1) H-share investors should sell to take profits; 2) A-share investors should market-weight the banking sector and favor high-beta bank stocks, mainly joint-stock banks, considering their better risk/return tradeoff.
