ICBC : Industrial and Commercial Bank of China (1398)

[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.

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.

Not exactly.

What happened in 1998 is not different from what US government and the Fed did to the US banks during the financial crisis or the ECB and EU governments did to the European banks or the UK government and BoE did to UK banks.

Of course, when US government and the Fed did it, they are heroes to save the world. When the Chinese government did it, it is evil.

For Citi or AIG or whatever European financial institutions or local banks during AFC, they did not hide their NPLs, they just can't predict the NPLs. NPLs are not constant, they are changing every minute with the development of the economy of the world.

The loans on the Chinese banks are not non-performing if the interest and the principal are being paid. By any standard, you can't just call it non-performing. Of course, if the economic development worsens, some loans become non-performing. But before they go bad, they are performing loans.

[freedom]

I don't know how long Soros has stayed in China or how many companies he has done research on. But I am pretty sure that the Chinese government has done more research and has far better understanding of the credit situation in China than him or a lot of financial analysts and reporters.

I can't vouch for the creditability of the Chinese government. But I am sure that the data from the Chinese government is far more complete than the external financial analysts and reporters who has done little research.

[GFG]

I don't know how long Soros has stayed in China or how many companies he has done research on. But I am pretty sure that the Chinese government has done more research and has far better understanding of the credit situation in China than him or a lot of financial analysts and reporters.

I can't vouch for the creditability of the Chinese government. But I am sure that the data from the Chinese government is far more complete than the external financial analysts and reporters who has done little research.

At the current price of HKD 4.88, the shares are quite undervalued. The main issue, short term, weighing down the shares is the potential of default and the need for the bank to bail out the investors.
But let's consider the facts:
- ICBC is not LEGALLY required to bail out the investors. They MAY do so eventually to protect the implicit guaranty by these state owned institutions, but even then, it is unlikely to be a complete bailout without any losses from the investors
- Excluding qualitative factors, the financials for ICBC has been nothing short of stellar for the past few years. The chinese banks, including ICBC are valued at around 1.1 times current book value.
- ICBC, like it or not, is here to stay in the long term
- Although I agree their profitability can be affected by the liberalization of the banking sector in China, I think the opening up of the sector is something that will take several years to materialise, and it will be done in a gradual manner. IMO, the market has over compensated for the "bad news", forgetting the valuations
- Many analysts express disbelief at the NPL ratio of around 1%, whereas other major banks NPL ratio is easily 2-3%
Of course I dont think anyone will really know for sure, and this is one of the risks investing in ICBC: the data you have is not correct. But then, this can be said of many other china companies as well, and ICBC, IMO, would have much lower risk compared to them.

<Invested> 150 lots and looking to add more at HKD 4.8

[minimax]

Dubious Non-performing Loan Rate

April 2013 Issue | by News China Magazine

Despite the growing number of private enterprises going bankrupt due to the sluggish economy, official statistics show less than a 1 percent non-performing loan rate at China’s banks, a figure analysts have been reluctant to accept.

Industry insiders have revealed that in the first half of 2012 alone, China’s 16 listed banks saw an almost 126 billion yuan (US$20bn) increase in the value of overdue loans, indicating an estimated non-performing loan rate of more than 5 percent, with some ailing industries like steel and solar power exceeding 10 percent.

The questionable figures are believed to be due to falsified statistics from local banks, for whom non-performing loans can result in official sanctions. Analysts are calling for higher tolerance to non-performing loans, and the establishment of a credit system.

[freedom]

What a lot of analysts don't understand is that major banks in China don't lend much to SMEs or weak companies. Why do you think that shadow banking is huge in China? Because the major banks are not lending to them. The banks will lend to them when there is a junior lien before them. Quite some shadow banking lending or wealth management products are junior liens to the banks' lending or could be worse, the protection to the banks' lending(still remember CDS, minibond?). The banks will take loss when all the junior liens took most of the loss already. That's why the Chinese government is more worried about the shadow banking or wealth management products than the lending quality of the banks. The banks are okay if the shadow banking or wealth management products are not too badly hit.

[CityFarmer]

What a lot of analysts don't understand is that major banks in China don't lend much to SMEs or weak companies. Why do you think that shadow banking is huge in China? Because the major banks are not lending to them. The banks will lend to them when there is a junior lien before them. Quite some shadow banking lending or wealth management products are junior liens to the banks' lending or could be worse, the protection to the banks' lending(still remember CDS, minibond?). The banks will take loss when all the junior liens took most of the loss already. That's why the Chinese government is more worried about the shadow banking or wealth management products than the lending quality of the banks. The banks are okay if the shadow banking or wealth management products are not too badly hit.

I agreed that NPLs are mostly not with SMEs, since they got the least support from major banks. SOEs are key contributor to the NPLs. The state government has been providing financing, even for those money-losing SOEs, due to their major role in providing the employment, and also the social safety net. Will things change? May be under the recent reform.

[artreal]

Vested. I just know almost every Chinese family has one or two accounts with one of the big four.... It's the DBS in Singapore, with 1.5 billion population coverage. Ppl talk about the Npls, becoz they want to enter cheap. China stock market has not yet recover from Gfc yet, how much further can it go?

[freedom]

What a lot of analysts don't understand is that major banks in China don't lend much to SMEs or weak companies. Why do you think that shadow banking is huge in China? Because the major banks are not lending to them. The banks will lend to them when there is a junior lien before them. Quite some shadow banking lending or wealth management products are junior liens to the banks' lending or could be worse, the protection to the banks' lending(still remember CDS, minibond?). The banks will take loss when all the junior liens took most of the loss already. That's why the Chinese government is more worried about the shadow banking or wealth management products than the lending quality of the banks. The banks are okay if the shadow banking or wealth management products are not too badly hit.

I agreed that NPLs are mostly not with SMEs, since they got the least support from major banks. SOEs are key contributor to the NPLs. The state government has been providing financing, even for those money-losing SOEs, due to their major role in providing the employment, and also the social safety net. Will things change? May be under the recent reform.

not exactly true. Most SOEs are very profitable. only a handful are loss making, such as Cosco/Chalco/Rails etc. Overall, SOEs are very profitable. Plus most SOEs are listed. They are more transparent than before and they can tap equity market/debt market easily. Banks are not their only funding choice.

SMEs and local governments are still the biggest contributor to NPLs. But either the SMEs or local governments getting lending from banks are relatively strong or the banks have other creditors in front of them taking loss(the banks are the most senior creditors). That's why NPLs of the banks are low. But the loss to the total credit market could be extremely high. Banks are going to take a small loss, but the shadow banking system are going to take most of the loss.

Something similar to what happened in the 2008 financial crisis. The banking system did not exactly take most of the loss, the banks recovered quickly and most have repaid what the government injected. The shadow banking system took most of the loss. Today, the banking system in the US provides more credit than prior to the 2008 financial crisis. The shadow banking never recovers, only about 1/3 of the size prior to the financial crisis.

[freedom]

some data from PBOC about aggregate financing to the economy(incremental, not total).

http://www.pbc.gov.cn/publish/html/kuang...013s18.htm

from Jan 2013 to Dec 2013, bank loans dropped from 1,072.1 B to 482.5B, as a percentage of the total from 42% to 39%, went to as high as almost 60%.

Trust loan, lowest: 43.1B, highest: 431.2B. as a percentage, lowest: 5%, highest: 17%.

Entrusted loan, quite stable over the period, around 200B. as a percentage, lowest: <10%, highest: 22%

It does not surprise me that banks' NPL is as low as reported as shadow banking are providing significant credit to the economy.

[CityFarmer]

What a lot of analysts don't understand is that major banks in China don't lend much to SMEs or weak companies. Why do you think that shadow banking is huge in China? Because the major banks are not lending to them. The banks will lend to them when there is a junior lien before them. Quite some shadow banking lending or wealth management products are junior liens to the banks' lending or could be worse, the protection to the banks' lending(still remember CDS, minibond?). The banks will take loss when all the junior liens took most of the loss already. That's why the Chinese government is more worried about the shadow banking or wealth management products than the lending quality of the banks. The banks are okay if the shadow banking or wealth management products are not too badly hit.

I agreed that NPLs are mostly not with SMEs, since they got the least support from major banks. SOEs are key contributor to the NPLs. The state government has been providing financing, even for those money-losing SOEs, due to their major role in providing the employment, and also the social safety net. Will things change? May be under the recent reform.

not exactly true. Most SOEs are very profitable. only a handful are loss making, such as Cosco/Chalco/Rails etc. Overall, SOEs are very profitable. Plus most SOEs are listed. They are more transparent than before and they can tap equity market/debt market easily. Banks are not their only funding choice.

SMEs and local governments are still the biggest contributor to NPLs. But either the SMEs or local governments getting lending from banks are relatively strong or the banks have other creditors in front of them taking loss(the banks are the most senior creditors). That's why NPLs of the banks are low. But the loss to the total credit market could be extremely high. Banks are going to take a small loss, but the shadow banking system are going to take most of the loss.

Something similar to what happened in the 2008 financial crisis. The banking system did not exactly take most of the loss, the banks recovered quickly and most have repaid what the government injected. The shadow banking system took most of the loss. Today, the banking system in the US provides more credit than prior to the 2008 financial crisis. The shadow banking never recovers, only about 1/3 of the size prior to the financial crisis.

Base on the research done, I am not so sure the SMEs and local governments are the key contributors of the NPLs. My overall picture shows SOEs are the culprit.

Instead of stopping at the opinion level, one good source of info is the recent IPO prospectus of Cinda, one of the four AMCs which bought the NPLs from Big Four banks in 1998

Instead of referencing to various numbers and statements, which might confuse rather than clarify the point, I tried a way which commonly used by reporters on China official paper, i.e. the occurrence of keyword.

I searched "SME" and "SOE". The result was SME, 4 instances, while SOE, 36 instances.