China banks: We don't expect CBRC to ask for maximum countercyclical capital buffer in possible new capital norms

- "Possible China version of Basel III. 21st Century Business Herald reported CBRC is considering China version of Basel III including capital, liquidity and leverage ratio requirement. Potential new capital requirement include a minimum core tier-1 ratio of 6%, tier-1 ratio of 8% and CAR of 10%. Banks important to the system may need 1% additional capital. In addition, CBRC may ask for a counter-cyclical surplus CAR in the range of 0-4%. System-important banks would need to achieve this by 2012YE while others would need to comply by 2016YE."
- "Capital and liquidity norms are already very good in China: By international standards Chinese banks already have one of the best liquidity ratios and one of the strongest deposit funding. The existing capital ratio (common tier-1 ratio at 9.5% post rights offering to be completed in the next 6 months) is also well above the global BASEL III requirement. Post the announced equity issuance which is scheduled to be completed by 1Q11, tier-1 equity to assets is at 5% or above. Meanwhile, capital structure is simple, with no hybrid tier-1. We also see room to further boost CAR by about 2.5ppt purely through tier-2 debt (capped at 25% of tier-1 capital)."
- "Further big capital raising unlikely to be accepted by other key government entities. A potential capital deficit depends on the level of counter-cyclical surplus capital requirement. We however believe it’s unrealistic for CBRC to ask for a 14 % CAR, since this means over Rmb1trn capital raising, which we think would be an impossible amount to raise. Moreover, further big capital raising is unlikely to be supported by other key ministries. If CBRC asks for up to 13% CAR for the state-controlled banks, and 12% for other banks, and still allows tier-2 debt to be 25% of tier-1 capital, then we think there will still be limited equity shortfall as capital shortfall may be covered by tier-2 debt issuance."
- "Surplus capital is linked to excess loan growth under Basel III. We think it’s misleading to add maximum surplus capital buffer to mini requirement at all times. The original Basel paper (16 July) shows surplus reserve is linked to credit cycle or credit multiplier (namely credit growth/normal GDP growth). As we expect credit growth to further slow and credit growth/normal GDP growth at 1-1.2x in the next 2- years, we don’t think CBRC will ask for 15% CAR which is based on maximum surplus capital."
- "Stay defensive, policy risks prevents re-rating. Despite solid operating performance, we agree policy uncertainty is looming. While policy risks may not lead to material earnings or ROE impact and may not even be realized, investors do not like uncertainty. In view of the regulator’s “interventionist” approach, together with what can at times be a noisy cynical media and public calling for “social service”, investors may be unwilling to pay higher multiples. We advise investors to stick with bigger banks whose earnings and ROE may be more resilient to policy risk.."

JPMorgan China Banks 20100915

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