ICBC : Industrial and Commercial Bank of China (1398)

[Thriftville]

Do you have the link to the source that states >5% NPL?

I am researching on China banks, and the 5% was on a number of analyst report I read. I didn't manage to retain the links

Coincidently, the "NPL" level of YZJ's lending investment was also about 5%, base on its AR.

IMO, the top two concerns on China bank are
- NPL level, since no reliable data available, only guesstimate
- Upcoming interest-rate liberalization, which will depress the interest income

Hi Citi,
I think NPL is not a big issue. Most of the loans are lent to state-owned enterprise, who then sub-lend to smaller businesses. In case of default, the SOE will take the first blow. Gov will also step in to help SOE to prevent confidence crisis. Hence, I feel NPL can be contained.

Rate liberalization wise, most of the lending are controlled by the big 4 banks. I read sometime ago that they have already "fixed" the interest. So, it's unlikely that a price war will break out.

[CityFarmer]

Hi Citi,
I think NPL is not a big issue. Most of the loans are lent to state-owned enterprise, who then sub-lend to smaller businesses. In case of default, the SOE will take the first blow. Gov will also step in to help SOE to prevent confidence crisis. Hence, I feel NPL can be contained.

Rate liberalization wise, most of the lending are controlled by the big 4 banks. I read sometime ago that they have already "fixed" the interest. So, it's unlikely that a price war will break out.

First of all, there must be good reason(s) for investor to pay close to 2x book value for a HK bank, while SEHK listed China banks are only valued at 0.8x-0.9x. IMO, one of the reasons, is the NPL.

No trusted data on NPL level. It can be as high as alarming 30% as in 1998, a "manageable" 5%-10%, or as <1% as in the book?

Overcapacity is one lingering issue in China, and SOEs seems the major contributors. To solve the issue, the state needs to restructure or even close down those inefficient ones. Those SOEs are likely the borrowers of the NPL.

In 1998, when the Big Four banks was fully state-owned, the banks had to do write-down, recapitalization and sell bonds, even after the NPLs were "sold" to asset management companies (AMCs) and additional funds from state. Now, the banks aren't fully state-owned, although still majority-owned. The solution to the NPL will never be as generous as in 1998.

High interest income margin is unique to China banks. It is due to lending above benchmark rate, and deposit rate is way below. The liberalization of the rate, will not cause a price war, but will slowly reduce the margin, thus lower revenue for the banks.

(not vested)

[lilvestor]

Hi Citi,
I think NPL is not a big issue. Most of the loans are lent to state-owned enterprise, who then sub-lend to smaller businesses. In case of default, the SOE will take the first blow. Gov will also step in to help SOE to prevent confidence crisis. Hence, I feel NPL can be contained.

Rate liberalization wise, most of the lending are controlled by the big 4 banks. I read sometime ago that they have already "fixed" the interest. So, it's unlikely that a price war will break out.

First of all, there must be good reason(s) for investor to pay close to 2x book value for a HK bank, while SEHK listed China banks are only valued at 0.8x-0.9x. IMO, one of the reasons, is the NPL.

No trusted data on NPL level. It can be as high as alarming 30% as in 1998, a "manageable" 5%-10%, or as <1% as in the book?

Overcapacity is one lingering issue in China, and SOEs seems the major contributors. To solve the issue, the state needs to restructure or even close down those inefficient ones. Those SOEs are likely the borrowers of the NPL.

In 1998, when the Big Four banks was fully state-owned, the banks had to do write-down, recapitalization and sell bonds, even after the NPLs were "sold" to asset management companies (AMCs) and additional funds from state. Now, the banks aren't fully state-owned, although still majority-owned. The solution to the NPL will never be as generous as in 1998.

High interest income margin is unique to China banks. It is due to lending above benchmark rate, and deposit rate is way below. The liberalization of the rate, will not cause a price war, but will slowly reduce the margin, thus lower revenue for the banks.

(not vested)

Totally agree, I took a look at most of their books and I came to the same conclusion - bad debt provisions are way too low. Its just unrealistic given the fact that credit literally exploded in the last few years, and much of it went into unproductive capacity that yields very little.

I would be VERY wary of putting money into Chinese banks now.

[Behappyalways]

They now have some high-profile company. George Soros, the legendary investor and billionaire, recently wrote a column in which he cited China as “the major [economic] uncertainty facing the world today.” Beijing’s growth model, Soros said, “has run out of steam.” And to punctuate his pessimism, he wrote, “There are some eerie resemblances with the financial conditions that prevailed in the U.S. in the years preceding the crash of 2008.”

A nation that was already building out infrastructure massively – high-speed railways, subway systems, bridges – doubled down. Total economy-wide debt increased from 125 percent of GDP in 2008 to 218 percent at the end of last year, according to an estimate from Fitch Ratings.

Credit expanded $15 trillion – from $9 trillion to $24 trillion – in just five years. As Patrick Chovanec, managing director of investment firm Silvercrest




The Beijing Bubble
http://www.newsweek.com/beijing-bubble-225991


(you might want to re-read some of the articles in investideas under Asia,Oceania -China-Economic News headlines)

http://investideas.net/forum/index.php?s...cb1224e636

[grubb]

http://www.reuters.com/article/2014/01/1...MT20140116

China's ICBC says won't compensate investors in troubled shadow bank product

Jan 16 (Reuters) - Industrial and Commercial Bank of China, the world's largest bank by assets, said on Thursday that it has no plans to use its own money to repay investors in a troubled off-balance-sheet investment product that it helped to market.

ICBC's shares have fallen this week amid speculation that the bank would be forced to help repay investors in a 3 billion yuan ($496.20 million) high-yield investment product issued by China Credit Trust Co Ltd but marketed through ICBC branches. The product is due to mature on Jan. 31.

"Regarding this unsubstantiated rumour, a situation completely does not exist in which ICBC will assume the main responsibility (for the trust product)," an ICBC spokesman told Reuters by phone on Tuesday.

The trust product, called "2010 China Credit / Credit Equals Gold #1 Collective Trust Product", used the funds it raised from wealthy investors in 2010 to make a loan to unlisted coal company Shanxi Zhenfu Energy Group Ltd.

But in May 2012, Zhenfu Energy's vice chairman, Wang Ping Yan, was arrested for accepting deposits without a banking licence.

Following an investigation, China Credit Trust told investors that Zhenfu Energy had taken out high-interest underground loans totaling 2.9 billion yuan, bringing its total liabilities to 5.9 billion yuan and threatening its ability to repay the trust loan.

China's coal industry has been battered by falling prices over the last year. Several other banks and trust companies are facing losses on loans to another coal company, Liansheng Resources Group.

Analysts have expressed increasing concern in recent years about Chinese banks' exposure to off-balance-sheet risks.

While trust products and other so-called wealth management products typically don't carry a formal guarantee from banks that help to create and sell them, bankers worry that investors widely perceive them as carrying an implicit guarantee from state-owned banks.

That means that banks may face pressure to shield investors from losses in order to protect their reputations, even if they are not legally required to do so.

[HitandRun]

First of all, there must be good reason(s) for investor to pay close to 2x book value for a HK bank, while SEHK listed China banks are only valued at 0.8x-0.9x. IMO, one of the reasons, is the NPL.

I think the bigger reason is that you cannot buy a majority stake in a Chinese (local) bank... E.g. I know foreign banks are only allowed 49% ownership of local fund management companies.

[freedom]

Is there trusted data for DBS, OCBC or UOB for their NPLs?

Then why only doubt banks from China? not banks all over the world?

People believe what they want to believe, not necessarily the truth.

Is it possible that banks from China hide their NPLs? It is possible, but that applies to all banks in the world.

[Wildreamz]

First of all, there must be good reason(s) for investor to pay close to 2x book value for a HK bank, while SEHK listed China banks are only valued at 0.8x-0.9x. IMO, one of the reasons, is the NPL.

No trusted data on NPL level. It can be as high as alarming 30% as in 1998, a "manageable" 5%-10%, or as <1% as in the book?

Overcapacity is one lingering issue in China, and SOEs seems the major contributors. To solve the issue, the state needs to restructure or even close down those inefficient ones. Those SOEs are likely the borrowers of the NPL.

In 1998, when the Big Four banks was fully state-owned, the banks had to do write-down, recapitalization and sell bonds, even after the NPLs were "sold" to asset management companies (AMCs) and additional funds from state. Now, the banks aren't fully state-owned, although still majority-owned. The solution to the NPL will never be as generous as in 1998.

High interest income margin is unique to China banks. It is due to lending above benchmark rate, and deposit rate is way below. The liberalization of the rate, will not cause a price war, but will slowly reduce the margin, thus lower revenue for the banks.

(not vested)

Very fair point in all. Just a comment, there is always a reason why some companies are valued way lower or way higher then their peers. The next question is always, whether the under or over valuation is justified.

That said I don't have a good answer for that.

But historically, the market usually over compensate for both good news and bad news.

(vested)

[CityFarmer]

Is there trusted data for DBS, OCBC or UOB for their NPLs?

Then why only doubt banks from China? not banks all over the world?

People believe what they want to believe, not necessarily the truth.

Is it possible that banks from China hide their NPLs? It is possible, but that applies to all banks in the world.

That is reason to doubt, because it happened once in 1998 with a unique solution of asset management companies to "absorb" the NPLs, which is estimated as 30%. The actual number still unknown.

[CityFarmer]

First of all, there must be good reason(s) for investor to pay close to 2x book value for a HK bank, while SEHK listed China banks are only valued at 0.8x-0.9x. IMO, one of the reasons, is the NPL.

No trusted data on NPL level. It can be as high as alarming 30% as in 1998, a "manageable" 5%-10%, or as <1% as in the book?

Overcapacity is one lingering issue in China, and SOEs seems the major contributors. To solve the issue, the state needs to restructure or even close down those inefficient ones. Those SOEs are likely the borrowers of the NPL.

In 1998, when the Big Four banks was fully state-owned, the banks had to do write-down, recapitalization and sell bonds, even after the NPLs were "sold" to asset management companies (AMCs) and additional funds from state. Now, the banks aren't fully state-owned, although still majority-owned. The solution to the NPL will never be as generous as in 1998.

High interest income margin is unique to China banks. It is due to lending above benchmark rate, and deposit rate is way below. The liberalization of the rate, will not cause a price war, but will slowly reduce the margin, thus lower revenue for the banks.

(not vested)

Very fair point in all. Just a comment, there is always a reason why some companies are valued way lower or way higher then their peers. The next question is always, whether the under or over valuation is justified.

That said I don't have a good answer for that.

But historically, the market usually over compensate for both good news and bad news.

(vested)

Yes, indeed. Mr. Market hates unknowns, which mean uncertainties and risks.