China's M2 growth declines to 12.8% YoY in August

For the second month in a row.

For China banks, there has been a continued decline in M2 growth, with M2 growth falling the second month in a row to 12.8% YoY in Aug 2014 (+13.5% YoY in Jul 2014), lower than Bloomberg consensus at 13.5%.

According to a research note from Maybank Kim Eng, this was partly due to the slowdown in net liquidity injection by the PBOC to the banking system (CNY49b in Aug 2014 vs CNY109b in Jul 2014).

Further, it is believed there was ongoing shift of deposits to A-share market (brokers’ margin deposits) in Aug 2014 given continued rise in A-share market turnover; and increase in new customer accounts of brokers (0.6m new accounts in Aug 2014 vs 0.56m in Jul 2014).

Here’s more from Maybank Kim Eng:

We expect China brokers’ margin deposits increased by over CNY0.3t MoM in Aug 2014 (CNY0.3t MoM in Jul 2014). Total RMB deposits rebounded moderately by CNY108b MoM in Aug 2014 (-CNY1.98t MoM in Jul 2014).

With seasonal maturity of wealth management products and gradual recovery in trade balance, we expect RMB deposit growth to rebound prominently in Sep 2014.

Further de-risking of loan portfolio. RMB loan growth recovered from CNY0.4t MoM in Jul 2014 to CNY0.7t MoM in Aug 2014, in line with Bloomberg consensus.

Key drivers were still long-term individual loans (proxy of residential mortgages), long-term corporate loans (proxy of project financing) and bill finance. Banks remained cautious on SME loans and micro-finance.

The RMB loan-to-deposit (L/D) ratio rose to 70.5% in Jul 2014 (69.9% in Jun 2014). To avoid sharp deterioration in asset quality, we expect China banks to switch to less risky loans in 2H14.

Decline in risky shadow bank assets. Total aggregate financing amounted to CNY957b in Aug 2014 (CNY273b in Jul 2014), lower than the Bloomberg consensus forecast of CNY1.1t.

This was due to continued decline in trust loans and undiscounted bankers’ acceptance. This implied that banks have gradually reduced their exposure to risky shadow bank assets.

Still, entrusted loans grew CNY175b MoM in Aug 2014. This could be related to good loan demand for pawnshops and small loan finance companies (SLFCs).

What’s Our View: Maintain OVERWEIGHT. We see a 6-16% EPS CAGR for H-share banks in

2013-2016 under our conservative assumption on NPLs and provisions. Dividend pay-outs should be sustainable in 2014-2016.