Despite the market’s woes about China’s shadow banking issue for years, the Chinese banks have yet to crash. Following the new rules in August 2017 to further curb shadow banking, it is expected that banks will tighten their liquidity.

The new rules were targeted at guarantor companies that were left unregulated and used the loopholes to lend money to companies on the restricted list with funds from the banks.

Expansion of loans

The Big-4 banks in China (Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China) have seen growth in their loan portfolio.

Corporate loans grew 2.0% quarter on quarter (QoQ) that was driven by infrastructure projects. Retail loans increased by 4.0% to 5.0% QoQ, which was contributed by residential mortgages and credit card overdraft.

Based on a report from Deutsche Bank Research, eight joint-stock banks in China saw their card business grow exponentially and has contributed to 20% of their revenue.

Collectively, receivables were up 43% and card fees increased by 51%. There are two sides of the coin that investors may look at when addressing the credit card boom.

On the high side, it is one of the signs to show that China’s domestic consumption is growing. On the flip side, worries over the sustainability and credit quality remain a problem.

Net interest margin and fees

The Big-4 banks saw their total deposits expanded by 6.0% to 7.0% in 1H2017 despite the tighter liquidity. Their deposit franchises enabled them to register a net interest margin expansion of four to eight basis points (bps).

Despite the growth in credit card revenue, most banks experienced a fall in fees collected. This is largely attributed to the drop in agency commissions and lower contribution from their wealth management units.

This may improve in the future given the current low penetration rate of credit cards in China. Being the world’s second largest economy, the penetration rate of credit cards is significantly lower than those of mature markets.

Industrial & Commercial Bank of China

Large banks are still on the preferred list given the structural risk of Chinese banks remains high. Industrial & Commercial Bank of China (ICBC) has managed to achieve a twin reduction of special mention loans (SMLs) and overdue loans (OLs).

Reduction is significant for ICBC as SMLs fell 7.3% and OLs dropped 10.8% in 1H2017.

Analysts from UOB Kay Hian Research gave Industrial & Commercial Bank of China (HKG: 1398) a “Buy” call with a target price of HK$6.78.

China Construction Bank

China Construction Bank (CCB) reported a doubling of consumption loan in the first half of 2017.

Despite its peers are having trouble sustaining their fees income, CCB was able to hold its fees income steady through growth in its wealth management services, bank cards and electronic banking.

Analysts from UOB Kay Hian Research gave China Construction Bank (HKG: 939) a “Buy” call with a target price of $8.25.

Bank of China

With the rising interest rates, Bank of China (BOC) appears to be the first in line to benefit from higher net interest margins contributed by its overseas markets.

A recovery in trading activities and stability of the Chinese Yuan has led to a 6.0% growth in fees for BOC. It was attributed to an increase in settlement and clearing services and spread income from foreign exchange.

Bank of China has also achieved a twin reduction in SMLs and OLs.

Analysts from UOB Kay Hian Research gave Bank of China (HKG: 3988) a “Hold” call with a target price of $4.30.

The attractive yield of 5.6% of the stock should be the main attracting point when comparing BOC with its peers.