A gauge of financial companies soared 6.7% on rumors Chinese banks will be allowed to issue preferred stock to boost capital levels. Shanghai Pudong and Agricultural Bank each jumped 10% on speculation they will be the first to participate in a trial offering.
Separately, Ping An Bank gained 10% after announcing plans to raise $2.4B by selling 1.32B shares to parent Ping An Insurance Group. The purchase will raise the parent's stake to 59% from 52.4%.
Investors are having nothing of China Construction Bank's "beat" of earnings expectations, instead more concerned with where non-performing loans are headed. The ratio fell to 1% in Q2 from 1.4% in March, but the bank says its "unrealistic" to expect further declines. You think? Of 47 business owners disappearing this year, 17 were CCB customers.
Chinese banks accounted for almost a third of global bank profit last year, up from just 4% in 2007. Much of the gains came at the expense of European peers who bled marketshare. Leading the profit tables: ICBC with pretax earnings of $43.2B, China Construction Bank with $34.8B, and Bank of China with $26.8B. JPMorgan (JPM) and HSBC (HBC) took fourth and fifth place.
Last week's PBOC rate cut looks like a step to ending Chinese banks' comfy 3-6-3 arrangement (borrow at 3%, lend at 6%, golf course by 3). A major step towards a market-oriented interest rate regime, the central bank now allows lenders to offer up to a 20% discount from the state-mandated rate, a move expected to shave cushy profit margins.
China delays tightening bank capital rules until next year, with new draft rules from the China Banking Regulatory Commission that seek to set "reasonable" schedules for banks to meet capital targets in a way that helps "maintain appropriate credit growth." Shares of Chinese banks climbed.
Jim Chanos brushes off chatter about the large Chinese banks being broken up, calling them "arms of state policy. They loan because the local party official ... tells them we need a new stadium ... I really doubt the party is going to give up a lever of power." (Chanos earlier on "the party.")
"China's banks (aren't) really the villains here," writes Patrick Chovanec, responding to Premier Wen's comments about their monopoly power. "They are creatures of the State; they do what they are told and incentivized to do," - that is lend, without counting the cost, for projects that "carry the imprimatur (and implicit guarantee) of the Mother State."
"The Chinese government has said similar things for many, many years," without following up with action, says Victor Shih, reacting to yesterday's comments from Premier Wen about breaking up the big bank cartel (there, not here) and liberalizing the financial sector.
China's biggest banks are expected to post solid profits when they report Q4 income later this month, but will also higher non-performing loans for the first time in 3 years. "It's the beginning of a worrisome trend," says an analyst urging investors to cash in profits following a 42% rise in bank shares over the last 5 months.
"The notion that Chinese banks have 1% non-performing loans is patently ridiculous," writes Patrick Chovanec of the record annual profits posted by the lenders. "That provisions for 2.5X this amount are somehow 'generous' are equally absurd." Based on the banks' valuations - Industrial Bank (IDCBF.PK) trades at a PE of 6 - investors don't buy it either.
China Construction Bank joins the country's other major lenders, reporting increasing profits in Q3 with strong loan demand and a falling bad debt ratio. Time will tell, but the reports don't square with anecdotal evidence of a lending slowdown and an increase in non-performing loans. China financial ETF: CHIX +26% this month.
Late to the party, but still of interest, Sanjay Jain of Credit Suisse is bearish on Chinese banks, figuring their non-performing loans may rise to 8-12% in coming years - completely eradicating their equity. While the banks may look attractive at current P/B ratios, Jain thinks 2012 earnings could be wiped out, making the "cheap" valuation not so.
"The government stepping in to shore up the banks, when two months ago people thought there was nothing wrong with the Chinese banks, should tell you just how seriously this situation is deteriorating,” says Jim Chanos. "The property market is what investors ought to be watching ... (and it's in the) first parts of a very serious pullback."
Patrick Chovanec sees China's buying of bank shares as a "head fake," a preemptive move to stop a crash and make it easier for the lenders to raise capital. He quotes Vitaliy Katsenelson: "China's SWF is not Warren Buffett... when he's buying BRK.A, he actually thinks it's undervalued. China (is) just trying to create confidence."
Chinese bank stocks sky after Huijin Investments - an arm of China's SWF - buys $31M worth of shares in the 4 major lenders. Huijin is already controlling shareholder of those banks, so its move is not totally unlike Berkshire Hathaway stepping into the market to buy up stock in BRK.A.