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%.
When will China's big 4 banks begin to recognize what must surely be increasing levels of nonperforming loans? Essentially government arms, the lenders have been pushed to make loans to local governments for favored, but not necessarily economic projects. China Merchants Bank (the nation's 6th largest) reported an NPL ratio of 0.56%, unchanged from last year. "Hilarious," tweets Patrick Chovanec.
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.
Industrial Bank (IDCBF.PK) dove 4.5% in Hong Kong trade last night after the PBOC rate cut included allowing banks to offer a 20% discount to the benchmark lending rate. Chinese banks have benefited from state-set lending and deposit rates which guaranteed them a chunky margin. Liberalization is a good thing, but true competition is sure to crimp profits.
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.
An investigation of the China's Industrial Bank by the National Audit Office finds the bank lent money for land acquisition to firms not in the real estate business, and for trade finance to companies not in the business of trading. The books are a "mess." "Basically what would happen when banks were told to lend as much as possible," writes Also Sprach Analyst.
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.
Goldman Sachs (GS) is free to sell its shares in Industrial and Commercial Bank of China (ICBC) now that the lock-up period has ended, says Yang Kaisheng, ICBC's president. Reports are circulating that Goldman is getting ready to further reduce its stake, but is unlikely to completely exit the investment. (previously)
"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.
A ranking of the 10 largest banks by market cap as it's evolved over the last 20 years. Completely vanished are the Japanese lenders that dominated in 1991. Today's list is all about China and the American TBTFs.