China Banks Sector:More spin-offs ahead?

What’s new: We believe major China banks may spin off certain subsidiaries or business lines into separate listings, with the likely spin-offs serving as part of SOE reform in the sector.

    What’s the impact: Probable spin-off of investment banking platforms. Local media report that after BoCom International, the investment banking arm of Bank of Communication, filed its listing application to the Hong Kong Stock Exchange (HKEx) on 16 January 2017, the other 4 large state-owned China banks may follow suit and list their investment banking platforms, ie, ICBC International, CCB International, BOC International and ABC International.

    Among these investment banks, we believe BOC International is the largest (BOC did not disclose its financials for BOC International). BoCom International is the smallest (according to the parent banks’ annual report), but could be the first to be spun off. On our and Bloomberg consensus forecasts, the average 2017E PBR of listed China securities firms is 1.1x, compared with 0.7x for China banks.

    Possible spin-offs. In the financial leasing segment, BOC spun off and listed BOC Aviation (2588 HK, HKD39.95, Buy[1]) on the HKEx in June 2016. For wealth management, CEB announced plans to establish a wealth management subsidiary in 2015 but has not yet done so. CMB is likely to follow suit, in our view, as the size of its wealth management business reached CNY2tn in 2016. In the credit card segment, CMB, BoCom and CITIC are the most likely to spin off their operations, in our view. CMB has one of the largest credit card businesses in China, and is a well-known franchise locally. BoCom’s credit card subsidiary already operates as a separate entity with a JV ownership structure where HSBC and BoCom each holding a 50% stake. CITIC announced that it would set up a credit card subsidiary in 2015 but has not yet done so.

    What we recommend: Possible spin-off listings should benefit the parent banks’ group valuation and capital raising, in our view, albeit with a limited impact when compared with the market cap of parent banks. Our top pick remains BoCom (3328 HK, HKD5.72, Buy [1]). The key risk to our sector call: a sustained economic recovery in 2017 that would help banks improve the quality of bank loans and other non-loan assets.

    How we differ: Unlike some in the market, we do not believe the likely spin-offs aim to raise capital and lift group market cap. Rather, we believe the rationale is to enhance asset quality transparency and is part of SOE reform under the national financial strategy.