CMB International Global Markets | Equity Research | Sector Update PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE MORE REPORTS FROM BLOOMBERG: RESP CMBR OR .hk China Financials Sector Gigi Chen, CFA (852) 3916 3739 .hk Nika MA (852) 3900 0805 .hk Stocks Covered： Ticker Rating Target Price Upside 2318 HK BUY 81.40 53% 601318CH BUY 67.56 46% 2628 HK BUY 18.18 33% 601628CH SELL 18.10 -42% 2601 HK BUY 30.49 59% 601601CH BUY 30.37 29% 1336 HK BUY 32.35 47% 601336CH SELL 26.85 -16% 966 HK BUY 11.48 19% 1339 HK BUY 3.58 49% 601319CH SELL 3.72 -26% 2328 HK BUY 11.64 43% 6060 HK BUY 33.20 30% 1658 HK BUY 8.40 35% 939 HK BUY 8.10 55% 600000CH HOLD 9.00 12% 601229CH BUY 8.68 32% 3618 HK HOLD 3.05 8% 601577CH HOLD 8.30 5% 601658CH BUY 7.07 38% 601939CH BUY 7.50 23% 601077CH HOLD 3.60 -3% Source: Company data, CMBIS estimates Recent Reports: 1. Expect higher NPL in 2Q & 2H; P&C loss ratio improved during COVID lockdowns (link) 2. ST loan and special bond drive TSF beat; P&C momentum rebounded (link) 3. Manageable impact of Henan village banks incident (link) 1 OUTPERFORM (Maintain) 4 Jul 2022 Looking forward to 3Q22, we expect banks corporate lending business will act as a primary growth driver of the sector, while the retail banking business will remain muted. Among these, SOEs and leading regional banks are expected to outperform given their more promising provision strategies and less business dependency upon retail banking. Maintain OUTPERFORM on the banking sector with PSBC (1658 HK, BUY) as our top pick with a target price of HK$8.40. On the insurance front, our channel check suggested that major listed life insurers saw sequential improvements in new business momentum in 2Q22, due to better sales of savings products and low base effect. P&C recovery remained on track, with industry-wide P&C loss ratio improved by 2.3ppt YoY, and premiums growth rebounded to +4.4% YoY in 5M22 (vs -2.0% YoY in 4M22). Average premium income per policy for auto insurance slightly increased by 2% YoY in 5M22, owing to higher pricing of NEV insurance and inflation factors. We maintain PICC P&C (2328 HK, BUY) as our top pick and look positive on Ping An (2318 HK) as its agency scale is bottoming out. Life new business momentum marginally improved in 2Q22; P&C momentum picked up in May-June. Our channel check suggested that major life insurers 2Q22 YoY new business momentum marginally improved compared to 1Q22, driven by increasing sales of paid-up additional whole-life products and annuities, while new premiums from critical illness products remained sluggish. Listed insurers showed divergent performance on agency scale: Ping An and Taiping Lifes agent headcount slightly improved on MoM basis in May and June, while the agent number of CPIC and New China Life continued shrinking. According to the statistics of CBIRC, P&C industry loss ratio improved by 2.4ppt YoY in 5M22, reflecting stable underwriting quality. Auto premiums growth picked up to 2% YoY in May (vs -4.2% YoY in April), and non-auto premium income increased 8.3% YoY (vs +1.0% YoY in April). For assets, banks with more exposure to retail business are expected to underperform. Currently, it is widely acknowledged among market consensus that the worst economic performance was in place in 2Q22. Looking forward to 3Q22, we expect the corporate business will act as a key growth driver of the banks income, while the retail business may remain mute. Based on channel check results, retail banking performed weak. JSBs, with more exposure to retail business, experienced more pressure on balance sheet expansions, given weak demands for mortgages, consumer loans and credit card lending. Besides, stock market volatility and unstable fund distribution income will further drag the growth of fee & commission income. For corporate business, infrastructure loans, SME loans and green loans are main growth drivers. Investments on special bonds and LGFV bonds are expected to grow rapidly. Some banks commented that they will not be assured on property default risks until the weekly sales figures indicating sustainable recovery. For liabilities, SOEs will benefit more from funding costs given a 10-bp RRR cut. Since the rate cut will only affect term deposits, JSBs that have more interbank liabilities and demands for deposits are expected to underperform in cost savings. In conclusion, SOEs are expected to outperform on a NIM basis. Nationwide-operating banks with high provisions and regional banks in Yangtze River Delta will be exposed with less pressure given their stabilized asset quality.China Financials Weekly Ping An agency scale bottoming out; Retail banking business to remain muted 4 Jul 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 Contents Banking Focus Charts . 3 Insurance Focus Charts . 5 Trading Bands of PBV by banks . 9 Trading Bands of PER by banks . 12 Trading Bands of PBV by insurers . 15 Trading Bands of PER by insurers . 17 Trading Bands of PBV by brokers . 19 Trading Bands of PER by brokers . 21 Valuation . 23 Banking Industry .23 Insurance Industry .23 4 Jul 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 Banking Focus Charts Figure 1: Market lending rate Source: Company data, CMBIGM estimates Figure 2: Sector NPL balance and growth Source: Company data, CMBIGM estimates Figure 3: Sub-sector NPL ratio Source: Company data, CMBIGM estimates Figure 4: Sub-sector NIM Source: Company data, CMBIGM estimates Figure 5: Sub-sector earnings growth Source: Company data, CMBIGM estimates Figure 6: CIR and non-interest income as % of revenue Source: Company data, CMBIGM estimates 0246810122008-12-01 2012-04-01 2015-08-01 2018-12-01Overall lending rate Ordinary loan rateBill discount rate Mortgage(%)-20.0%-10.0%0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%05001,0001,5002,0002,5003,0002011-032012-092014-032015-092017-032018-092020-032021-09(RMB bn)0.0%1.0%2.0%3.0%4.0%5.0%2009-032010-032011-032012-032013-032014-032015-032016-032017-032018-032019-032020-032021-03All banks SOEs JSBsCity banks RC banks1.5%1.7%1.9%2.1%2.3%2.5%2.7%2.9%3.1%2017-03 2018-03 2019-03 2020-03 2021-03All banks SOEs JSBsCity banks RC banks-20%-15%-10%-5%0%5%10%15%20%2019-03 2019-09 2020-03 2020-09 2021-03 2021-09All banks SOEs JSBsCity banks RC banks15%20%25%30%35%40%2010-12 2012-11 2014-10 2016-09 2018-08 2020-07Non-interest income as % of revenue CIR4 Jul 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 4 Figure 7: Sub sector provision coverage ratio changes Source: Company data, CMBIGM estimates Figure 8: Loan Prime Rate (LPR) changes Source: Company data, CMBIGM estimates Figure 9: Development loan balance and growth Source: Company data, CMBIGM estimates Figure 10: Mortgage balance and growth Source: Company data, CMBIGM estimates Figure 11: All property loan changes Source: Company data, CMBIGM estimates Figure 12: Sector SME loan balance changes Source: Company data, CMBIGM estimates 100%130%160%190%220%250%280%310%2014-03 2015-07 2016-11 2018-03 2019-07 2020-11SOEs JSBs City banks RC banks3.5%3.7%3.9%4.1%4.3%4.5%4.7%4.9%5.1%2019-08-01 2020-04-01 2020-12-01 2021-08-011-yr LPR 5-yr LPR0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%02,0004,0006,0008,00010,00012,00014,0002004-12 2008-05 2011-10 2015-03 2018-08(RMB bn)0.0%10.0%20.0%30.0%40.0%50.0%60.0%05,00010,00015,00020,00025,00030,00035,00040,00045,0002006-062007-062008-062009-062010-062011-062012-062013-062014-062015-062016-062017-062018-062019-062020-062021-06(RMB bn)0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%010,00020,00030,00040,00050,00060,0002004-12 2008-05 2011-10 2015-03 2018-08(RMB bn)20.0%25.0%30.0%35.0%40.0%45.0%50.0%05,00010,00015,00020,00025,0001Q192Q193Q194Q191Q202Q203Q204Q201Q212Q213Q214Q21(RMB bn)4 Jul 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 5 Insurance Focus Charts Figure3: China Life (2628 HK) Premiums Cum.& Mon. YoY% Source: Company data, CMBIGM Figure 4: Ping An (2318 HK) Life Premiums Cum.& Mon. YoY% Source: Company data, CMBIGM Figure5: CPIC(2601 HK) Life Premiums Cum.& Mon. YoY% Source: Company data, CMBIGM Figure 6: NCL (1336 HK) Life Premiums Cum.& Mon YoY% Source: Company data, CMBIGM - 2 0 %- 1 0 %0%10%20%30%40%Ch in a L if e Cu m . Y O Y % C h in a L if e M o n . Y O Y %- 2 0 %- 1 5 %- 1 0 %- 5 %0%5%10%P in g A n L i f e C u m . Y O Y % P in g A n L i f e M o n . Y O Y %- 2 0 %- 1 0 %0%10%20%30%40%50%C P I C L i f e C u m . Y O Y % C P I C L i f e M o n . Y O Y %- 4 0 %- 2 0 %0%20%40%60%80%NC L L i f e Cu m . Y O Y % N C L L i f e M o n . Y O Y %Figure 1: Life Premiums Accumulative & Monthly YoY% Source: Company data, CMBIGM Figure 2: Life Premiums Mix % (FY19-FY21, 4M22) Source: Company data, CMBIGM - 6 0 %- 5 0 %- 4 0 %- 3 0 %- 2 0 %- 1 0 %0%10%20%- 1 2 0 %- 1 0 0 %- 8 0 %- 6 0 %- 4 0 %- 2 0 %0%20%40%Li f e Pr em i um s C um . Y OY% (L H S) Lif e Pr em ium s M on. YOY% (R H S)5 8 . 8 % 6 1 . 2 % 6 1 . 4 %6 6 . 0 %1 . 7 % 1 . 6 % 1 . 5 %1 . 0 %1 6 . 1 %1 8 . 0 % 1 8 . 4 %1 5 . 6 %2 2 . 5 % 1 8 . 0 % 1 6 . 9 %1 6 . 7 %1 . 0 % 1 . 2 % 1 . 8 % 0 . 6 %0%10%20%30%40%50%60%70%80%90%100%1 2 M 1 9 1 2 M 2 0 1 2 M 2 1 4 M 2 2寿险 意外险 健康险 U n iv e r s a l L i f e U n it - lin k e d4 Jul 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 6 Figure 9: Life Insurance Industry Loss Ratio (1M19 4M22) Source: Company data, CMBIGM Figure 10: Life Industry Total Assets & YoY% (incl. 4M22) Source: Company data, CMBIGM Figure 11: P&C Premiums Accumulative & Monthly YoY% Source: Company data, CMBIGM Figure 12: P&C Insurance Premiums Mix (%) (FY19-3M22) Source: Company data, CMBIGM 0%5%10%15%20%25%1M193M195M197M199M1911M191M203M205M207M209M2011M201M213M215M217M219M2111M211M223M22L o s s r a t io1 6 , 9 5 81 9 , 9 7 92 1 , 3 9 02 2 , 1 3 21 6 . 1 %1 7 . 8 %7 . 1 %6 . 0 %0%5%10%15%20%05 , 0 0 01 0 , 0 0 01 5 , 0 0 02 0 , 0 0 02 5 , 0 0 0F Y 1 9 F Y 2 0 F Y 2 1 4 M 2 2L if e T o t a l A s s e t s L if e T o t a l A s s e t s Y O Y %( R M B - 1 5 %- 1 0 %- 5 %0%5%10%15%20%25%P C P r e m i u m s C u m . Y O Y % P C P r e m i u m s M o n . Y O Y %7 2 . 1 % 7 0 . 1 %6 6 . 5 %5 6 . 9 %0%10%20%30%40%50%60%70%80%90%100%1 2 M 1 9 1 2 M 2 0 1 2 M 2 1 4 M 2 2A u t o C r e d it A g r o H e a lt h A c c id e n t O t h e r N o n - a u t oFigure7: Taiping(966 HK)Life Premiums Cum. & Mon. YoY% Source: Company data, CMBIGM Figure 8: PICC Life (1339 HK) Premiums Cum. &Mon. YoY% Source: Company data, CMBIGM - 2 0 %- 1 0 %0%10%20%30%T a i p in g L if e C u m . Y O Y % T a i p in g L if e M o n . Y O Y %- 4 0 %- 2 0 %0%20%40%60%80%100%P I C C L i f e C u m . Y O Y % P I C C L i f e M o n . Y O Y %4 Jul 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 7 Figure 13: P&C Auto VS Non-auto Premiums Mix (incl.4M22) Source: Company data, CMBIGM Figure 14: P&C Industry Loss Ratio (1M19-4M22) Source: Company data, CMBIGM SS Figure 15: P&C Industry Total Assets & YoY% (incl.4M22) Source: Company data, CMBIGM Figure16:PICC PC(2328 HK) Premiums Cum.& Mon. YoY% Source: Company data, CMBIGM Fig 17: Ping An (2318 HK)PC Premiums Cum.& Mon. YoY% Source: Company data, CMBIGM Figure 18: CPIC (2601 HK)PC Premiums Cum.& Mon. YoY% Source: Company data, CMBIGM 72% 70%67%57%28% 30%33%43%0%10%20%30%40%50%60%70%80%90%100%1 2 M 1 9 1 2 M 2 0 1 2 M 2 1 4 M 2 2A u t o P r e m i u m s % No n - a u t o P r e m i u m s %0%10%20%30%40%50%60%70%1M193M195M197M199M1911M191M203M205M207M209M2011M201M213M215M217M219M2111M211M223M22L o s s r a t io2 , 2 9 42 , 3 4 22 , 4 5 12 , 5 8 1- 2 . 3 %2 . 1 %4 . 7 %4 . 5 %- 3 %- 2 %- 1 %0%1%2%3%4%5%6%2 , 1 5 02 , 2 0 02 , 2 5 02 , 3 0 02 , 3 5 02 , 4 0 02 , 4 5 02 , 5 0 02 , 5 5 02 , 6 0 02 , 6 5 0F Y 1 9 F Y 2 0 F Y 2 1 4 M 2 2P C T o t a l A s s e t s P C T o t a l A s s e t s Y o Y %( R M B b n )- 2 0 %- 1 0 %0%10%20%30%40%P I C C P C C u m . Y O Y % P I C C P C M o n . Y O Y %- 2 0 %- 1 0 %0%10%20%30%P in g A n P C C u m . Y O Y % P in g A n P C M o n . Y O Y %- 2 0 %- 1 0 %0%10%20%30%C P I C P C C u m . Y O Y % C P I C P C M o n . Y O Y %4 Jul 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 8 Figure19:Taiping(966 HK)PC Premiums Cum.& Mon.YoY% Source: Company data, CMBIGM Figure20: Zhong An(6060 HK) Premiums Cum. & Mon. YoY% Source: Company data, CMBIGM Figure 21: China Re(1508 HK)PC Premiums Cum.&Mon YoY% Source: Company data, CMBIGM Figure 22: Industry Total Assets & YoY% (FY19-4M22) Source: Company data, CMBIGM Figure 23: Industry Investment Assets Mix% (FY19-4M22) Source: Company data, CMBIGM - 3 0 %- 2 0 %- 1 0 %0%10%20%30%T a i p in g P C C u m . Y O Y % T a i p in g P C M o n . Y O Y %- 8 0 %- 5 0 %- 2 0 %10%40%70%100%Z h o n g A n C u m . Y O Y % Z h o n g A n M o n . Y O Y %- 3 0 %- 1 0 %10%30%C h in a R e C u m . Y O Y % C h in a R e M o n . Y O Y %20, 565 2 3 , 2 9 8 24, 887 25, 784 13. 3%6. 8%5. 8%0%2%4%6%8%10%12%14%05 , 0 0 01 0 , 0 0 01 5 , 0 0 02 0 , 0 0 02 5 , 0 0 03 0 , 0 0 01 2 M 1 9 1 2 M 2 0 1 2 M 2 1 4 M 2 2T o t a l A s s e t s T o t a l A s s e t s Y O Y %( R M B 1 3 . 6 % 1 2 . 0 % 1 1 . 3 % 1 1 . 8 %3 4 . 6 % 3 6 . 6 % 3 9 . 0 % 3 9 . 8 %1 3 . 2 % 1 3 . 8 % 1 2 . 7 %1 1 . 9 %3 8 . 7 % 3 7 . 7 % 3 7 . 0 % 3 6 . 5 %0%10%20%30%40%50%60%70%80%90%100%1 2 M 1 9 1 2 M 2 0 1 2 M 2 1 4 M 2 2C a s h B o n d s S t o c k s & F u n d s O t h e r s4 Jul 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 9 Trading Bands of PBV by banks Fig.1: Postal Savings-H (1658 HK) 12-month forward P/B Source: Company data, CMBIGM Fig.2: CCB-H (0939 HK) 12-month forward P/B Source: Company data, CMBIGM Fig.3: Bank of Shanghai (601229 CH)12-month forward P/B Source: Company data, CMBIGM Fig.4: SPDB-CH (600000 CH) 12-month forward P/B Source: Company data, CMBIGM Fig.5: Bank of Changsha (601577 CH) 12-month forward P/B Source: Company data, CMBIGM Fig.6: CQRC-H (3618 HK) 12-month forward P/B Source: Company data, CMBIGM 024680 . 20 . 40 . 60 . 81 . 01 . 2Price(HK$)P/BV(x)P/ BV (L H S) Av er ag e + S D-S D Pr i c e (R H S )0123456789100 . 00 . 51 . 01 . 52 . 02 . 51/7/20101/7/20111/7/20121/7/20131/7/20141/7/20151/7/20161/7/20171/7/20181/7/20191/7/20201/7/20211/7/2022Price(HK$)P/BV(x)P/ BV (L H S) Av er ag e + S D-S D Pr i c e (R H S )0246810120 . 00 . 40 . 81 . 21 . 6Price (CNY)P/BV(x)P/ BV (L H S) Av er ag e + S D-S D Pr i c e (R H S )4812160 . 20 . 40 . 60 . 81 . 0Price (CNY)P/BV(x)P/ BV (L H S) Av er ag e + S D-S D Pr i c e (R H S )46810120 . 00 . 40 . 81 . 21 . 62 . 01 / 7 / 2 0 1 9 1 / 7 / 2 0 2 0 1 / 7 / 2 0 2 1 1 / 7 / 2 0 2 2Price (CNY)P/BV(x)P/ BV (L H S) Av er ag e + S D-S D Pric e (R H S )01234560 . 00 . 20 . 40 . 60 . 81 . 01/7/20111/7/20121/7/20131/7/20141/7/20151/7/20161/7/20171/7/20181/7/20191/7/20201/7/20211/7/2022Price (HK$)P/BV(x)P/ BV (L H S) Av er ag e + S D-S D Pr i c e (R H S )4 Jul 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAG