Deutsche Bank Markets ResearchAsia Hong Kong Banking / Finance BanksIndustry Chinese banksDate 30 August 2017Industry UpdateHans Fan, CFAJacky Zuo Chinas credit card boom?JSBs reported strong revenue growth from credit cards in 1H17 The eight joint-stock banks (JSBs) we cover have released 1H17 results and it is worth noting that all of them reported faster growth in the credit card business. With receivable accelerating to 43% yoy and fees up 51% yoy, credit card revenue has contributed 20% of JSBs revenue in 1H17 (2016: 16%). ThisResearch Analyst(+852 ) 2203 6353hans.fandb.comEdward DuResearch Associate(+852 ) 2203 6185edward.dudb.comResearch Analyst(+852 ) 2203 6255jacky.zuodb.compartly explains the recent surge in Chinas short-term consumer debt, which is now growing at 34-35% yoy (see report Chinas consumer debt boom). The stronger credit card business should boost banks revenue in the near term, but it is unlikely to fully offset the deleveraging pressure faced by JSBs, and the asset quality and growth sustainability will be tested in coming years.What is driving this? Deleveraging pressure, policies, wealth effect On the supply side, we view the strong credit card growth as a result of a shift in JSBs business focus when they are subject to rising earnings and capital pressure from financial deleveraging (see our reports Rising funding pressure, Series I, II, III and IV). Being more wholesale-funded and more exposed to shadow banking, JSBs recorded NIM compression (Figure 6) and notable asset growth slowdown or even shrinkage in 1H17 (Figure 7). To offset the deleveraging pressure, JSBs stepped up efforts to promote a better-margin credit card business. Policy wise, this is also supported by governments initiative to promote inclusive financing. On the demand side, consumer confidence has surged to a ten-year high (Figure 11) and our China economist team argued that this was driven by the wealth effect of a property bubble (see report Chinas consumption boom? dated 25 Aug 2017).Stephen Andrews, CFAResearch Analyst(+852 ) - 2203 6191stephen-a.andrewsdb.comTop picksICBC (1398.HK),HKD5.93Bank of China (3988.HK),HKD4.10Source: Deutsche BankCompanies FeaturedICBC (1398.HK),HKD5.93China Construction Bank (0939.HK),HKD6.98Agri. Bank of China (1288.HK),HKD3.70Bank of China (3988.HK),HKD4.10Bank of Communications (3328.HK),HKD5.98BuyBuyBuyBuyBuyBuyBuyIs this a game changer for joints-stock banks? Asset quality and sustainability The short answer is, probably not yet. Indeed stronger credit card business boosts the revenue for JSBs and relieves their pressure amid deleveraging to some extent in the near term. Yet, given such strong growth, we are not entirely sure that the banks maintained strict underwriting standards and monitored the uses of funds properly. The eight JSBs issued 40 m new credit cards in total in just six months (up 58% yoy), which already exceeded the total new credit cards for the full year of 2016 for all of China. While the NPL ratio stayed low (1.77%), the regulator has warned about the potential risks relatedChina Merchants Bank Hold (3968.HK),HKD28.90China CITIC Bank (0998.HK),HKD5.11 HoldChina Minsheng Bank (1988.HK),HKD7.80 HoldCEB (6818.HK),HKD3.80 SellChongqing Rural Bank (3618.HK),HKD5.87 HoldHuishang Bank (3698.HK),HKD3.91 SellBank of Chongqing (1963.HK),HKD6.56 SellShanghai Pudong Bank Hold (600000.SS),CNY12.95 to credit card instalment loans. For example, in the past months, the CBRC has imposed fines on some banks regarding lending to unqualified borrowers and lack of proper post-lending monitor (Figure 17). Another issue is that the sustainability may be questionable. As the recent consumption boom was mainly driven by wealth effect from property bubble, the credit card momentum may soften if p