ICBC : Industrial and Commercial Bank of China (1398)

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Just want to share an article i read from Bloomberg:

The risk of what Nobel laureate Paul Krugman calls "Japanification" -- a semipermanent economic funk -- has haunted China for at least a couple of years now. Last week a Bank of America Merrill Lynch report again asked, "Will China Repeat Japan’s Experience?"

Let's dispense with the suspense: Yes, China very likely will. And the outcome will have far more serious global implications than Krugman's main worry, which focuses on the chances of stagnation in Europe.

China's "severely under-capitalized financial system," "imbalanced growth" and chronic "overcapacity" all remind Merrill Lynch analysts Naoki Kamiyama and David Cui of Japan in 1992, when its bubble troubles first began to paralyze the economy. China is even more reliant on exports than Japan was in the 1990s, and its all-important property market now "may be tipping over.”

Most worrying is the shaky banking sector. What concerns Kamiyama and Cui is the lack of bold action in Beijing at a time when the scale of Chinese bad debt may be higher than Japan’s ever was; they believe nonperforming loan ratios are "significantly into double-digit" territory. In the first half of this year, the analysts estimate, commercial banks had to book larger nonperforming loan liabilities than for all of 2013. Mind you, this comes even as the government claims financial imbalances are being addressed. As recently as July, total social financing, a proxy for debt, was still growing by almost 16 percent year-over-year, a rate well above China’s nominal GDP growth. In other words, China has spent much of this year adding to its debt and credit bubbles -- not curbing them.

If this were 1992, China could simply force state-owned banks and enterprises to rein in excesses and ride out the resulting modest hit to gross domestic product. But China passed the point of no return after the crash of Lehman Brothers in 2008, when it unleashed a $652 billion stimulus package, followed by untold smaller ones since. The moves put China, in the words of New York hedge-fund manager James Chanos, on a "treadmill to hell." If Beijing were to attempt a broad credit shakeout now, virtually every sector of the economy would suffer. The risks of social unrest would soar.

China may soon face the dilemma Japan did in 1997, when 100-year-old Yamaichi Securities Co. collapsed and threatened to turn the Asian Financial Crisis into a global meltdown. Rather than come clean about the true magnitude of its bad-loan problem, Japan raced to prop up its banking system with bailouts and interest-rate cuts. Leaders in Tokyo feared the country would lose face if counterparts in Washington, London and Brussels knew how close Japan Inc. was to insolvency. But the Japanese response -- which included untold numbers of state-funded cash injections and the propping up of weak banks by healthier ones -- shoved the country into the infamous "lost decades" from which Prime Minister Shinzo Abe is now pledging to extricate the nation.

The popular tonic is that China has $4 trillion of currency reserves to toss at its bad-loan problem. Yet any move to turn China's U.S. Treasuries, European debt and Japanese bonds into cash could precipitate a global rout. A Chinese crash would hammer commodities markets, industries from manufacturing to high tech, and the sovereign and corporate credit ratings of export-reliant economies from Australia to Japan to Brazil. It would be an untimely blow to the U.S. and an increasingly fragile Europe.

Yet Chinese banks continue to open new credit spigots. Last month, new local-currency loans grew to $114 billion (compared with $63 billion in July), while M2 money supply grew 12.8 percent from a year earlier. And with China now recording the weakest industrial-output figures since the global crisis, economists like Liu Li-Gang of Australia & New Zealand Banking Group are betting on fresh rounds of stimulus to ensure China hits this year's 7.5 percent growth target.

China should instead allow deleveraging to begin immediately. While the government has allowed some small debt defaults, including Shanghai Chaori Solar Energy Science & Technology in March, it has yet to permit a big one that would chasten lenders. It's going to have to stomach some bigger defaults that may include a local government or two. Leaders need to direct the central bank to drain credit and clamp down on the shadow-banking monster that's grown exponentially since 2008.

Alas, China shows no signs of engineering such a purge. As Japan proves even today, healthy growth depends on a functioning and stable banking system. The longer China waits to create one, the more it courts the kind of lost decade the world economy can scarcely afford.

I havent seen the actual report from Merrill Lynch by the 2 analysts, but then I found a similar report by David Cui warning of the bursting of the china bubble and that china is going down the same path as Japan etc... way back in 2011.
He may still be right, but it seems like even the experts cannot get the timing right.

(31-08-2014, 01:21 PM)GFG Wrote:
(07-07-2014, 06:34 PM)weilieh Wrote: Some amateur thoughts on online MMF:
Online money market fund is probably going to have a major presence in China but the impact on Chinese banks’ deposits are probably going to be minimal. China’s total bank deposits stand roughly around RMB109 trillion in 1Q14 whilst the local money market funds have an AUM of less than RMB1 trillion (correct me if I’m wrong). Growth on these money market funds might be large but the absolute amount still pales in comparison to the total deposits these banks are holding. Moreover, ICBC holds roughly RMB14.6 trillion bank deposits (both corporate and retail) as at end Dec 2013. Despite having a capped deposit rate in China, I believe the Chinese population at large still prefers having to put money in a bank given the perception of stability and an implicit government guarantee on deposits. Online money market funds are generally susceptible to financial regulation (Singapore is a good example). If the government sees a huge threat to bank’s profitability, they might actually tighten regulation on these non-bank funds.

ICBC is probably one of the better well-capitalized bank with CAR at 13.1%. Their NIM would probably tighten going forward given high competitive lending rates. However, ICBC still has ample liquidity to ramp up their lending organically (LTD ratio stands at 66.2%, which has a wide margin against a cap of 75%) and they have an adequate cash reserve to meet liquidity needs.

On a separate issue, I’m just wondering what much discount to par value would China Huarong buy these NPL assets off ICBC? Thanks for any inputs!

(Not vested and opinion does not constitute an investment recommendation)

Finding Value in a Speculative World!

ICBC 's NIM actually increased in the recent FY14Q2 results
Profit is also higher than analysts estimates
The share price took a hit though, as investors are focussed on the increased NPL ratio, now ard 0.99%
I still think this is an undervalued company with too much emphasis on the NPL ratio

I remember WB said the spread between the cost of capital and the interest rates the bank charges for loans (aka the NIM) is the key to profitability. He said this in the midst of the crisis with regard to Wells Fargo

At 0.99%, the NPL is still a fraction of its peers.
In any case, as u increase the loan quantum, naturally the NPL ratio increases as well

(Still vested @ HKD 4.74)

Sold out my 300 lots @ HKD 5.44 approximately
capital gain of 14.7%
Dividend gain of ard 7%
Total gain of apprpximately 23% in a year.

Although still optimistic about ICBC, I think the rice has run ahead too rapidly
Taking into account likely compression in interest margins going forward, I have decided to divest.
Also, found another opportunity that I am optimistic about

Another point to note, ICBC shanghai used to trade at a steep discount compared to the HK listed icbc. Now that the exchange link was established, it has actually reversed such that icbc shanghai is more expensive than the HK equivalent
Although still optimistic about icbc LONG TERM prospects, I think any gains in the short term is likely to be mediocre in light of the steep run up in price
GFG, very astute observation and decision. May do the same on Monday.
Temasek's confidence on ICBC remains...

(not vested)

Temasek raises stake in ICBC in vote of confidence after rout
23 Sep 2015 17:55
[SHANGHAI] Temasek Holdings Pte, the biggest foreign investor in Chinese banks, has raised its stake in Industrial & Commercial Bank of China Ltd to 10 per cent of the company's Hong Kong-listed shares after a stock market rout drove the world's largest bank to record-low valuations.

The Singapore state-owned investment company spent HK$141 million (US$18 million) to buy 30 million ICBC H shares at an average HK$4.696 apiece, according to a Hong Kong stock exchange filing on Wednesday. Temasek raised its stake from 9.97 per cent of ICBC's H shares.

"Temasek is confident in the long-term prospect of the Chinese economy," spokesman Jeffrey Fang said by e-mail. "We actively seek opportunities to broaden and rebalance our exposure to the Chinese economy."

Source: Business Times Breaking News
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
but sometimes this kind of stuff, Temasek's "vote of confidence" may not be monetary driven, more of a way to score political points with the China government. I would rather follow Li Ka-shing who took out all his money from China. I wonder what did he see or feel so strongly about China as I am sure a smart man like him would have guessed the repercussions of his actions (currently getting blasted by People's Daily).

Sorry rather off topic from ICBC.
(23-09-2015, 10:55 PM)financiallyfree Wrote: but sometimes this kind of stuff, Temasek's "vote of confidence" may not be monetary driven, more of a way to score political points with the China government. I would rather follow Li Ka-shing who took out all his money from China. I wonder what did he see or feel so strongly about China as I am sure a smart man like him would have guessed the repercussions of his actions (currently getting blasted by People's Daily).

Sorry rather off topic from ICBC.

I don't think Temasek's investment in ICBC is about political points.
Temasek's mandate is to invest for profits, and they themselves have their results heavily scrutinised these days
I sold out earlier at around HKD 5.5, at a nice profit BUT which it was unfortunately just before the crazy run up in prices.
At current prices, I think value is starting to come back

<not vested currently>
ICBC is $5.10 now. Temasek's in the money.
the current stock price seems to price in a very pessimistic scenario.

While the real non-performing loan is probably larger than the level stated in its balance sheet, given china's relatively closed and govt-controlled financial system, ICBC and all other 3 big banks should have several years of time to dispose of its bad debts in an orderly fashion to govt-controlled entities like Cinda and Huarong.

It's ROE has consistently been in the double digits in the past several years. And note that the CAR ratio has been improving in the past several quarters and has been comfortably above the minimum CAR set by the govt.

The only other big bank with better CAR is China Construction Bank.

The high dividend yield (which I think is sustainable, given the payout ratio less than 40% of profit) means that investor is paid comfortably (much higher than bond yield) to wait.

The role of technology in reducing cost and the rising share of non-interest income ...



The Reason China's Banks Are So Profitable – and Why It's Good
In the second of a two-part series, ICBC's former head says banks have seen their assets grow, improved technologies and controlled expenses, all for the nation's benefit
By Yang Kaisheng

In recent years a controversy has surrounded the big profits China's banks make, and two critical voices are most prominent. One argues that the gains are high primarily because the differences between deposit and lending interest rates are large, and that this is attributable to the interest rate regime not being fully liberalized. The other says banks make great profits because they charge too many fees.
In fact, Chinese banks, especially the big ones, do not owe their profit growth in recent years to making high-interest loans. The central bank maintains no ceiling on bank loan interest rates. But last year, data shows that only 48.57 percent of new bank loans were lent at a rate higher than the central bank's benchmark interest rate. Another 34.25 percent were lent at the benchmark rate and the rest at a lower rate.
Some people always think that banks' high returns are not all attributable to normal operations simply because China's interest rates are not fully liberalized. A comparison of the world's top 10 banks shows that the average net interest margin for the Big Five state-owned banks was 2.5 percent in 2013. The figures for America's Wells Fargo bank, Citibank and Bank of America were 3.39 percent, 2.88 percent and 2.46 percent, respectively.
Those banks' interest spreads were higher than those at Chinese banks even though they have a liberalized interest rate system and come amid the Federal Reserve's policy of quantitative easing. So the Chinese banks' relatively fast profit growth cannot simply be written off as a result of policy protection and a lack of market-determined interest rates.
A look at what happened to banks in the world's major countries and regions when they liberalized interest rates also helps illustrate the matter. Many banks saw their spreads narrow in the first stage of rate liberalization, but their paths soon began to diverge. Some saw their rate differential grow again and others continued to shrink. So it is an oversimplification of matters to assume that as interest rate reform deepens, banks' interest rate spreads will narrow.
As for charges, Chinese banks do not have much autonomy in pricing services according to factors including cost, risk, competition and expected returns. Banks' non-interest income as a share of total income is small compared with many other big banks around the world.
The ratio for listed Chinese banks was 23.1 percent last year. It was 59.22 percent for Barclays, 44.42 percent for the Royal Bank of Scotland, 53.54 percent for Deutsche Bank, 55.16 percent for JPMorgan & Chase, 46.95 percent for the BNP, 48.91 percent for the Wells Fargo, 45.02 percent for HSBC Group, 52.48 percent for the Bank of America, 38.73 percent for the Citigroup and 34.76 percent for the Santander Group.
Admittedly, the shortfall between the Chinese ratio and those of foreign banks is in part the result of different operating scopes. But even considering only service fees as a share of total income, the world's top 10 banks scored an average of 27.63 percent last year, higher than the average of 19.57 percent in China.
Of course, bank charges in the country do have problems that need redressing. For instance, a bank could have fixed the lending interest rate for a loan at 7.2 percent, but instead set the interest rate at 6 percent and charged the other 1.2 percentage points in the name of consulting fees to boost its income from intermediary services. It is understandable that clients should have an issue with this type of operation.
In the future, however, as banks' ability to provide financial products and services improves, new types of charges will emerge. The key is having strict rules for charges and making the standards and details transparent. Specifically, fees that require regulatory permission must be approved, and charges must correspond to services. Enforcing these rules to the letter would improve the public's understanding of charges.
So where did banks' profits come from? Let's take a look at some data. Last year, the average return on assets ratio for the country's 16 listed banks was 1.23 percent. The figure for industrial enterprises with an annual operating income of at least 20 million yuan was 7.39 percent. The average return on equity ratio for the banks and the enterprises was 18.93 and 12.78 percent, respectively.
If the comparison of the two figures alone is not a strong enough argument, we can take the analysis further. In my view, the profit growth of banks in the past few years owes primarily to the expansion of their total assets and that those assets are of better quality, improved technologies and rigorous control of operating expenses.
First, the rapid increase of total banking assets propelled profit growth. The banking industry's assets increased 3.7 times, or 119 trillion yuan, from 2004 to 2013. It would have been abnormal if its profits did not increase accordingly. Of course, there are problems associated with the expansion. Some executives, especially those at big banks, do not wish to see the continued expansion of their bank's assets because they are well aware of and concerned about the underlying risk.
Also, the relative stability of banking assets over the past few years promoted the growth of profits. From 2006 to last year, the amount of outstanding non-performing bank loans declined from 1.2549 trillion yuan to 592.1 billion yuan and the non-performing loan ratio fell from 7.09 percent to 1 percent.
This resulted in a reduction in the credit cost ratio – the ratio of provision to total loans – from 0.7 percent to 0.54 percent. The drop in credit cost ratio has in turn led to a lower ratio of provision to pre-provision operating profit, which fell from 25.5 percent to 14.88 percent.
Therefore, it can be said that banks' loan quality improved and their returns grew because of a relatively stable economy and stronger credit management abilities.
The quality of bank loans has fluctuated, challenging banks' profitability because of the slowing economy. Data for last year and the first quarter of this year show that the growth rates of bank profits have fallen significantly. This proves that the industry's earlier high-speed profit growth resulted from and reflected the development of the economy.
In addition, improved technologies have driven profits to rise. For the major big banks, clients deal with an electronic banking system rather than a clerk sitting at a bank counter for almost 80 out of every 100 times the banks provide a service. The figure a decade ago was around 15 percent. For Industrial and Commercial Bank of China (ICBC), it has reached 82 percent. Without the strong support of Internet technologies, ICBC alone would need almost 30,000 service sites for the amount of work it is now handling.
The average cost of offering a service online is 0.49 yuan per time, compared with 3.06 yuan at a counter. Profit growth was undoubtedly a result of the banks' earlier investment in digitalization, building information networks and upgrading technologies. ICBC has invested an average of more than 5 billion yuan in its IT system every year from 2000. The bank would be delinquent if such a huge investment did not produce sufficient returns.
Moreover, strict operating cost controls guaranteed the growth of profit. Chinese banks, especially the big ones, have seen their cost-to-income ratio fall. In 2006, the ratio averaged 45.14 percent. Seven years later, it was 30.79 percent. Meanwhile, the ratio abroad has risen from 56.5 percent to 66.5 percent. This shows that strict cost control is an important reason for the improved profitability of the country's banks.
I think it is good for Chinese banks, especially the large ones, to have sustainable profit growth, which shows that they are fulfilling their responsibility to the nation, the shareholders and the public. It is unfair that they should be criticized for that.
Yang Kaisheng is former president of Industrial and Commercial Bank of China. This is a translated excerpt of a commentary published in China Reform and on Caixin's Chinese website
Near 52-weeks low, is this ICBC still worth a buy?

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