ICBC : Industrial and Commercial Bank of China (1398)

If the Chinese capital market takes this great opportunity to develop a good bond market, it will make significant difference to the future capital market and credit market.

The ordinary investors should not invest into high risk trust product or wealth management product and these should be only to accredited investors. There should be a regulated low risk bond market but higher return for ordinary investors as suggested by Graham that every investor should have certain amount of bond in his/her portfolio.

When outside people are criticizing the high profit the banks are making, they forget that the banks can make such profit because there are too much deposit in the banks. The saving rate is so high that there is no reason that the banks should not make money from it. A more balanced credit market will have much less deposit and the money can be channeled into the bond market to earn the income which previously belongs to the banks only.

When the crisis comes, the banks will shrink their loans. They will shrink their deposit creation process. Inevitably, the deposit rate will go down a lot, potentially near to 0 to drive away the deposit in the banks.

The smarter banks will have more liquid treasuries/central bank bills or agent debt in the balance sheet while cutting their loans.

^^ I don't think China liberalised the deposit rate fully yet. Therein lies the structural problem to your scenario

And people forget China is still communist. When bad times come, the big 4 loan book may not actually shrink especially if government reduce RRR from 20%

(01-09-2014, 08:18 AM)specuvestor Wrote: U increase loan quantum the NPL tends to increase, but not the NPL ratio

I think the chinese govt stance had been made clear in the last year of wen/ Hu admin. They are making too much and thats one reason why the financial deregulation presumably is accelerated. IMHO the govt will tighten regulation on these non bank funds because it will pose a systemic risk, and Xi/Li admin is much more proactive than their predecessor.

(01-09-2014, 08:43 AM)GFG Wrote: The NPL ratio does increase too, because as u chase more loanees, inevitably you have to consider those with lower credit profile
Esp if the loans granted by ICBC is growing at a rate higher than the total loans in the economy

Generally in a good economy u can increase your loan book without increasing NPL ratio. So sometimes NPL ratio has a lagging effect only when economy turns

Plus NPL formation is related to loans growth but they may not be a direct correlation, very much dependent on the economic or sector risk. Mortgage is a good example during the bubble years that NPL for new mortgage are very low. Let's see how it goes next few quarters as UOB has given a glimpse.

Communist or not, Basel III still applies.

Unless someone is going to inject a huge amount of equity into the balance sheet of the banks, they have shrunk their balance sheet.

Deposit rate might not be liberalised, but the banks can stop accepting time deposit.

The 1-year time deposit rate is above 3%, but the normal saving account deposit rate is only 0.35%.

Thanks city farmer for sharing the article
It's def relevant here

data talking time:

As of half year end, ICBC has 10,646,115 million yuan of loan with 251,680 million yuan of allowance for credit impairment. ICBC has 1,354,857 million yuan of equity and 148,100 million yuan of profit with 24,167 million yuan of impairment losses. ICBC paid dividends for financial year ended in 2013 of nearly 70 billion yuan.

So pre-impairment profit should be more than 150 billion for half year, simply annualized, 300 billion yuan of annual profit.

Assuming, pre-impairment profit remains the same, so is the dividend. For end of financial year 2015, ICBC's equity will rise to 1.3 trillion + 150 billion + 300 billion - 150 billion = 1.6 trillion pre-impairment.

Assuming, the loan size will remain the same of around 10 trillion and total asset of around 20 trillion, with a minimum equity ratio of 5%, the minimum equity required is 1 trillion yuan.

So ICBC still has a head room of credit impairment of another 600 billion yuan before it falls below 5% equity ratio.

With additional 600 billion yuan of allowance, total allowance will reach above 800 billion yuan, divided by 10 trillion of total loan, around 8%.

Is 5% equity ratio low? A lot of major European banks have equity ratio of below 5% today.

Is 8% impairment high? During the worst of the crisis, major Spanish banks have NPL ratio of below 8%.

You can adjust your own assumption to derive whether ICBC can withstand an impending crisis with just current form without any capital raise.

Since data always in doubt, especially on NPL (impairment allowance), let's supplement it with a guessing time:

The industrial guesstimate NPL ratio has a wide range, from as "optimistic" as 5%, to a "reasonable" 17%, to "pessimistic" of up to 30%.

Is the 8% impairment allowance high? Well, may be on the optimistic side...

(02-09-2014, 10:16 AM)freedom Wrote: data talking time:

As of half year end, ICBC has 10,646,115 million yuan of loan with 251,680 million yuan of allowance for credit impairment. ICBC has 1,354,857 million yuan of equity and 148,100 million yuan of profit with 24,167 million yuan of impairment losses. ICBC paid dividends for financial year ended in 2013 of nearly 70 billion yuan.

So pre-impairment profit should be more than 150 billion for half year, simply annualized, 300 billion yuan of annual profit.

Assuming, pre-impairment profit remains the same, so is the dividend. For end of financial year 2015, ICBC's equity will rise to 1.3 trillion + 150 billion + 300 billion - 150 billion = 1.6 trillion pre-impairment.

Assuming, the loan size will remain the same of around 10 trillion and total asset of around 20 trillion, with a minimum equity ratio of 5%, the minimum equity required is 1 trillion yuan.

So ICBC still has a head room of credit impairment of another 600 billion yuan before it falls below 5% equity ratio.

With additional 600 billion yuan of allowance, total allowance will reach above 800 billion yuan, divided by 10 trillion of total loan, around 8%.

Is 5% equity ratio low? A lot of major European banks have equity ratio of below 5% today.

Is 8% impairment high? During the worst of the crisis, major Spanish banks have NPL ratio of below 8%.

You can adjust your own assumption to derive whether ICBC can withstand an impending crisis with just current form without any capital raise.

(02-09-2014, 10:16 AM)freedom Wrote: data talking time:

As of half year end, ICBC has 10,646,115 million yuan of loan with 251,680 million yuan of allowance for credit impairment. ICBC has 1,354,857 million yuan of equity and 148,100 million yuan of profit with 24,167 million yuan of impairment losses. ICBC paid dividends for financial year ended in 2013 of nearly 70 billion yuan.

So pre-impairment profit should be more than 150 billion for half year, simply annualized, 300 billion yuan of annual profit.

Assuming, pre-impairment profit remains the same, so is the dividend. For end of financial year 2015, ICBC's equity will rise to 1.3 trillion + 150 billion + 300 billion - 150 billion = 1.6 trillion pre-impairment.

Assuming, the loan size will remain the same of around 10 trillion and total asset of around 20 trillion, with a minimum equity ratio of 5%, the minimum equity required is 1 trillion yuan.

So ICBC still has a head room of credit impairment of another 600 billion yuan before it falls below 5% equity ratio.

With additional 600 billion yuan of allowance, total allowance will reach above 800 billion yuan, divided by 10 trillion of total loan, around 8%.

Is 5% equity ratio low? A lot of major European banks have equity ratio of below 5% today.

Is 8% impairment high? During the worst of the crisis, major Spanish banks have NPL ratio of below 8%.

You can adjust your own assumption to derive whether ICBC can withstand an impending crisis with just current form without any capital raise.

Thanks for this insightful analysis.

The other point made earlier, is that China is still communist after all.
That is, the downside risks of a full blown crisis is limited by the backing of CCP. I don't think the chinese communist party will allow the big 4 to fail, especially after they had a preview with the Lehman Brothers saga just a few yrs ago, that's fresh in their minds.
Let's not forget the CCP is all about survival, they need the mandate of the people to stay in power, and a big part of that is ensuring no major economic fallout US style.
And there's no doubt that China has the reserves firepower to prop up / package and isolate bad loans from the banks.

(02-09-2014, 10:57 AM)CityFarmer Wrote: Since data always in doubt, especially on NPL (impairment allowance), let's supplement it with a guessing time:

The industrial guesstimate NPL ratio has a wide range, from as "optimistic" as 5%, to a "reasonable" 17%, to "pessimistic" of up to 30%.

Is the 8% impairment allowance high? Well, may be on the optimistic side...

I don't think NPL of 5% is considered "optimistic" as these are not subprime borrowers. 5% is often enough to wipe out most of the banks around the world. During the height of the last financial crisis, a lot of US banks has equity/asset of less than 5%. In that case, Basel III have to have a higher requirement for banks.

I doubt that there is any bank in the world being able to withstand 17% NPL, even as strong as Singapore banks.

(02-09-2014, 12:59 PM)GFG Wrote: Thanks for this insightful analysis.

The other point made earlier, is that China is still communist after all.
That is, the downside risks of a full blown crisis is limited by the backing of CCP. I don't think the chinese communist party will allow the big 4 to fail, especially after they had a preview with the Lehman Brothers saga just a few yrs ago, that's fresh in their minds.
Let's not forget the CCP is all about survival, they need the mandate of the people to stay in power, and a big part of that is ensuring no major economic fallout US style.
And there's no doubt that China has the reserves firepower to prop up / package and isolate bad loans from the banks.

Well said. IMHO buying ICBC is just a faith on the Chinese gov.
The NPL ratio is definitely much much higher than reported. The banks can hide them under some trust funds or special purpose vehicle. But if crisis really hits, the gov has to take up the bill. The bad loans will get nationalized.

I seriously doubt that the gov will risk the Image they painstakingly built over years. You may worry ICBC repeat the story of Citi bank, it's possible, but I still believe the chance is slim.

(02-09-2014, 01:54 PM)freedom Wrote:

(02-09-2014, 10:57 AM)CityFarmer Wrote: Since data always in doubt, especially on NPL (impairment allowance), let's supplement it with a guessing time:

The industrial guesstimate NPL ratio has a wide range, from as "optimistic" as 5%, to a "reasonable" 17%, to "pessimistic" of up to 30%.

Is the 8% impairment allowance high? Well, may be on the optimistic side...

I don't think NPL of 5% is considered "optimistic" as these are not subprime borrowers. 5% is often enough to wipe out most of the banks around the world. During the height of the last financial crisis, a lot of US banks has equity/asset of less than 5%. In that case, Basel III have to have a higher requirement for banks.

I doubt that there is any bank in the world being able to withstand 17% NPL, even as strong as Singapore banks.

I think CityFarmer meant that NPL ratio of 5% is relatively bearable in the event of a crisis
But yes, I'll have to agree, that 17% NPL is not considered "reasonable", much less "pessimistic 30%"
In the crisis, in 2011, the highest share of NPLs (in EU) was registered in Ireland and Lithuania, 16.1% and 16.3% respectively.
So at 16% plus its enough to cause mayhem, much less 30%.
Although again, I'll have to emphasize China has much greater reserves and flexibility with their currency than the EU states.

The data reference:
http://www.ebf-fbe.eu/uploads/FF2012.pdf
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