Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Thematic (Sector/Industry)

We believe the recent announcement by China’s banking regulator CBRC to lower loan-loss provisions for qualified banks is positive for near-term profitability outlooks. These criteria include prudent bad debt recognition, efforts to write off bad debts and capital adequacy ratio. The new regulation will introduce a dynamic framework for banks and reward banks with stringent bad debt classification, proactive bad debt disposal and strong capital position, while banks which failed such criteria are required to maintain the highest level of provision. The lowest provision level is 120% bad debt coverage and 1.5% loan loss reserve ratio, down from the previous 150% and 2.5% respectively for all banks.We are sticking to our fair value estimates for Chinese banks in our coverage, as there’s no change to our assumptions and we believe the regulatory move reaffirms our view Chinese banks' credit costs are likely to peak in 2017 and 2018, and tightened financial regulation bodes well for large banks with prudent operations and strong deposit franchise. Judging from the latest financial data, we believe narrow-moat big four banks, narrow-moat <a href="https://www.smartkarma.com/entities/10987" target="_blank" data-smartkarma-citation="entities:10987:1">China Merchants Bank H (3968 HK)</a> and <a href="https://www.smartkarma.com/entities/22848" target="_blank" data-smartkarma-citation="entities:22848:1">Postal Savings Bank of China (1658 HK)</a> are the largest beneficiaries. Among these six banks, only <a href="https://www.smartkarma.com/entities/656" target="_blank" data-smartkarma-citation="entities:656:1">Bank Of China Ltd (H) (3988 HK)</a> and CMB are classified in the Tier 1 group in terms of above-mentioned three criteria. While <a href="https://www.smartkarma.com/entities/1120" target="_blank" data-smartkarma-citation="entities:1120:1">Agricultural Bank Of China Limited (1288 HK)</a> failed to pass the threshold of 13.5% for systematic important banks, <a href="https://www.smartkarma.com/entities/1119" target="_blank" data-smartkarma-citation="entities:1119:1">Industrial and Commercial Bank of China (H) (1398 HK)</a>, <a href="https://www.smartkarma.com/entities/45" target="_blank" data-smartkarma-citation="entities:45:1">China Construction Bank H (939 HK)</a> and PSBC are classified in the second-highest group as their first-half bad debt write-offs failed to exceed 90% of new bad debt formation during the period. <a href="https://www.smartkarma.com/entities/8983" target="_blank" data-smartkarma-citation="entities:8983:1">China Minsheng Banking H (1988 HK)</a>, <a href="https://www.smartkarma.com/entities/653" target="_blank" data-smartkarma-citation="entities:653:1">China Citic Bank Corp Ltd H (998 HK)</a> and <a href="https://www.smartkarma.com/entities/681" target="_blank" data-smartkarma-citation="entities:681:1">Ping An Bank Co Ltd A (000001 CH)</a> are still struggling to pass all three criteria. We expect the regulation will speed up bad debt recognition and disposal, improve balance sheet transparency and earning visibility for banks. Chinese banks are trading at 0.6 to 0.8 times 2018 PB, except for CMB trading at 1.0 time 2018 PB. Our top picks are ICBC and BOC, given their strong fundamentals and best position for tightening regulatory environment.Analyst: Iris Tan, CFA

We believe the recent announcement by China’s banking regulator CBRC to lower loan-loss provisions for qualified banks is positive for near-term profitability outlooks. These criteria include prudent bad debt recognition, efforts to write off bad debts and capital adequacy ratio. The new regulation will introduce a dynamic framework for banks and reward banks with stringent bad debt classification, proactive bad debt disposal and strong capital position, while banks which failed such criteria are required to maintain the highest level of provision. The lowest provision level is 120% bad debt coverage and 1.5% loan loss reserve ratio, down from the previous 150% and 2.5% respectively for all banks.We are sticking to our fair value estimates for Chinese banks in our coverage, as there’s no change to our assumptions and we believe the regulatory move reaffirms our view Chinese banks' credit costs are likely to peak in 2017 and 2018, and tightened financial regulation bodes well for large banks with prudent operations and strong deposit franchise. Judging from the latest financial data, we believe narrow-moat big four banks, narrow-moat China Merchants Bank H (3968 HK) and Postal Savings Bank of China (1658 HK) are the largest beneficiaries. Among these six banks, only Bank Of China Ltd (H) (3988 HK) and CMB are classified in the Tier 1 group in terms of above-mentioned three criteria. While Agricultural Bank Of China Limited (1288 HK) failed to pass the threshold of 13.5% for systematic important banks, Industrial and Commercial Bank of China (H) (1398 HK), China Construction Bank H (939 HK) and PSBC are classified in the second-highest group as their first-half bad debt write-offs failed to exceed 90% of new bad debt formation during the period. China Minsheng Banking H (1988 HK), China Citic Bank Corp Ltd H (998 HK) and Ping An Bank Co Ltd A (000001 CH) are still struggling to pass all three criteria. We expect the regulation will speed up bad debt recognition and disposal, improve balance sheet transparency and earning visibility for banks. Chinese banks are trading at 0.6 to 0.8 times 2018 PB, except for CMB trading at 1.0 time 2018 PB. Our top picks are ICBC and BOC, given their strong fundamentals and best position for tightening regulatory environment.Analyst: Iris Tan, CFA

Large Banks Benefit from CBRC’s Relaxation in Provision Requirement