The recent completion of the $19.2 bn IPO of Agricultural Bank of China (AgBank) (ABGEF.PK) marks a watershed event in China’s modern banking history. With all the largest Chinese banks now publicly traded, four (ICBC, CCB, BoC (BACHY.PK) and AgBank)* of today’s top ten global banks by market capitalization are in China. The historical focus of these banks, as echoed in their names, has today evolved into broader expansion across the economy.
Irrefutably, the opportunity for banking in China is immense, in parallel with its economic growth. First, with a nascent bond market, bank credit is presently crucial for corporate growth and expansion. In 2008, bank lending comprised 83% of total lending. Unlike many of its emerging market peers, China’s credit to GDP is highest at 127%, more a developed market compare. This is despite low penetration in the retail segment (23%).
However, the retail segment is key to funding. Like most emerging market economies, retail deposits form the core of bank funding. Furthermore, the China Banking Regulatory Commission (CBRC) puts a ceiling on the loan-to-deposit ratio at 75% primarily through the reserve requirement ratio. The historic branch networks today provide the top Chinese banks with tremendous reach, albeit across a large land mass. This competitive advantage, in addition to foreign bank ownership limits, has provided the domestic banks with unfettered development of the domestic market.
Name* | Market cap ($ bn) | Major shareholders | 2010e P/Bx | 2010e P/Ex |
ICBC | 240.2 | Huijin 35.4% MoF 35.3% Goldman Sachs 4.9% SSF 4.2% Allianz 1.9% American Express 0.4% | 2.0x | 9.9x |
CCB | 183.4 | Huijin 48.2% BoA ~5% | 1.8x | 9.0x |
BoC | 124.3 | Huijin 67.5% Temasek 13.8% Morgan Stanley 4.9% | 1.4x | 8.1x |
BoComm | 52.7 | MoF 26.5% HSBC 18.6% | 1.8x | 9.0x |
CMB | 49.0 | China Merchants Steam Nav 12.4% China Ocean Shipping 6.4% | 2.4x | 12.2x |
Minsheng | 25.5 | Liu Yong hao 7.1% China Life 4.0% | 1.7x | 11.2x |
Citic | 23.6 | CITIC Group 62.3% BBVA 15.0% | 1.3x | 9.0x |
Bank credit growth has been strong (>25%), marked most recently by the spectacular government driven mandate issued at the beginning of 2009 to counter effects of the global financial crisis. By Q1/09, China’s banking sector had made more loans than it had during 2008. As would be expected, in addition to significant government ownership, central bank and regulatory oversight of the sector is high. Augmenting the usual coverage including capital and loss provision oversight, current intervention extends to lending and deposit interest rates levels, sector lending, and purchase of government bonds and t-bills.
A quick overview of the balance sheet and key ratios of the banks shown below reveals average NIM and asset return with strong efficiency (cost management) and double digit RoE. Particularly in the current environment, Tier 1 ratios are mixed with the entire sector raising capital following the CBRC’s strong encouragement. NIM is low in comparison to other emerging markets driven by the large proportion of state-owned enterprise (SoE) lending and low dispersion anchored by the PBoC’s minimum lending rate.
Similarly, while the PBoC has lifted the ceiling on retail deposit rates, the banks have not sought to move significantly away from the minimum deposit rate. Significant ownership of government bonds as part of PBoC policy is the remaining factor determining NIM.
(All figures for 2009 in RMB bn)
Name | Loans | Deposits | Shareholders’ equity | Tier 1 ratio | RoA | RoE | NIM | Efficiency |
ICBC | 5,728.6 | 9,772.7 | 673.9 | 9.9% | 1.19% | 20.2% | 2.26% | 39.0% |
CCB | 4,819.8 | 8,001.3 | 555.5 | 9.3% | 1.24% | 20.9% | 2.41% | 39.0% |
BoC | 4,910.3 | 6,620.5 | 511.2 | 9.1% | 1.03% | 16.6% | 2.63% | 44.0% |
BoComm | 1,839.3 | 2,371.2 | 163.8 | 8.1% | 1.01% | 19.5% | 2.30% | 39.3% |
CMB | 1,185.8 | 1,612.6 | 92.8 | 6.6% | 1.00% | 21.2% | 2.23% | 50.9% |
Minsheng | 882.9 | 1,127.9 | 88.0 | 8.9% | 0.98% | 17.1% | 2.59% | 50.1% |
Citic | 1,065.6 | 1,341.9 | 104.0 | 9.2% | 0.92% | 12.8% | 2.51% | 46.7% |
The continued robust health and development of the banking sector is fundamental to China’s economic growth. However, the current re-allocation of household savings into the economy will reach its limit and reverse as a combination of China’s rapidly aging demographics and higher household consumption driven by increasing affluence provide alternate uses for low interest earnings bank deposits.
Development of China’s fixed income market is one of the next key shifts. This will enable large SoEs, which are currently crowding out other smaller and mid-sized enterprises and arguably inhibiting broader development of a more competitive Chinese economy, to tap a broader source of investors and better match their lending horizons. And, the historical extremely costly loan loss busts will not only shift out of the government-backed bank sector, but into a better market monitored environment. All of this would combine to enhance the overall investment opportunity of the Chinese banking sector and enable the government to make a profitable exit from the sector over time.
* Industrial & Commercial Bank of China, China Construction Bank, Bank of China. Other banks referenced are Bank of Communication (BoComm), China Merchants Bank (CMB), China CITIC Bank (Citic) and China Minsheng Bank (Minsheng).
Disclosure: No positions
