 We are expanding our coverage of China banks  We think wealth management services can become a powerful new earnings driver  We initiate on Bank of Hangzhou (Buy), Bank of Chengdu (Buy), Bank of Suzhou (Buy), and Bank of Jiangsu (Hold) Expanding coverage. We are initiating on four regional A-share banks, expanding our coverage from the seven A-share banks we already cover. The focus of this report is wealth management, which we see as the next growth opportunity (see our thematic report Spotlight: A new playbook for wealth management, 26 November 2021). We think the market has yet to price in this opportunity. We look at the positioning of the banks’ wealth management and private banking operations, client acquisition strategies, and service models. We believe the banks, which get it right, will be rewarded by the market.

An important moment. Wealth management is still at an early stage of development in China, but the target market is growing fast. HSBC Global Research thinks the number of high net worth individuals will double to 5m by 2025e and the broader middle class also needs more sophisticated products and services. It is an import moment for the industry – from 2022, banks will no longer be able to sell wealth management products with guaranteed returns, popular products that the regulator has deemed too risky. In our view, banks need to increase their efforts. We think broader risk-adjusted portfolios of stocks and bonds, as well as advisory services – the model used by leading US and European banks – represent the future of the industry in China.

Different stages. The wealth management capabilities of the banks we cover vary greatly, as do the contributions that this type of business make to revenue. For our covered banks, wealth management commission fees and income accounted for between 29.8% and 87.2% of total revenue in 1H21 (see Exhibit 1). We expect this will increase to 35-92% by the end of 2023e with a three-year CAGR of 16.2-49.8% for our Buy-rated banks.

Valuations and risks. We initiate on Bank of Hangzhou (Buy, TP RMB17.80), Bank of Chengdu (Buy, TP RMB19.50), Bank of Suzhou (Buy, TP RMB10.00), and Bank of Jiangsu (Hold, TP RMB6.50). We value the stocks using a Gordon growth model with a trading discount, in line with our sector coverage. Key downside risks: Tighter regulations, failure to expand/improve wealth management services, and rising competition.