ICBC : Industrial and Commercial Bank of China (1398)

[CityFarmer]

Firstly the SOE may have started the trust loan/ wealth Mgt products trend during 2009 when Chinese govt tried to pump primp the economy with $4tr stimulus. The mistake was that they send a directive to the provinces without helping them to finance it. Hence creative Chinese thought of these products. "Arbitraging the credit of SOE" is just like any fixed income swap deal... with spectacular consequences demonstrated by the GFC if people assume it is a riskless "arbitrage"

Secondly these products by itself it not new. When you buy a CLO fund you are also doing underground financing as these are disintermediation products that are not bearer based. Hence the these products are part and parcel of a developed financial system

The problem is the intrinsic assumed guarantee of the govt and banks even though they are just a middle man. Under Hu and Wen there is a high likelihood that the govt will step in. From the signalling of Xi & Li, I am not sure they will step in immediately. I am pretty sure they will let the RMB3b trust go bust on 31 Jan. Watch that date. Then the market will be more rational about these loans. Question is how to manage the short term market adjustments.

The more important question here is who are the market casualties, during the adjustments. SOEs (again?), banks (?) or state govt?

[specuvestor]

This is not the 1st ever. There was one slightly a year ago but smaller quantum:
http://www.reuters.com/article/2012/12/1...GV20121219

Point is that these products are not new or exotic as some commentators deem it to be. Neither is implicit guarantee which US is trying to explicitly exclude GSE like Fannie and Freddie.

Issue is how China will tackle the possible run on these products when people realise it is not guaranteed and more skeletons come out of the closet.

Wildreamz will likely have a 3 months Wildride

Chinese banks will be affected simply because it will hit their non interest income

That's the reason why ICBC share price has tanked: nobody really knows how the market will react to a default for a WMP. Its the 1st ever. Regardless of that, in the long run, I believe the default wouldnt affect ICBC profitability. As it stands currently, ICBC is already not legally required to compensate.
Although in China, there are many things that you have to do sometimes, even if you are not legally compelled to.

[GFG]

This is not the 1st ever. There was one slightly a year ago but smaller quantum:
http://www.reuters.com/article/2012/12/1...GV20121219

Point is that these products are not new or exotic as some commentators deem it to be. Neither is implicit guarantee which US is trying to explicitly exclude GSE like Fannie and Freddie.

Issue is how China will tackle the possible run on these products when people realise it is not guaranteed and more skeletons come out of the closet.

Wildreamz will likely have a 3 months Wildride

Chinese banks will be affected simply because it will hit their non interest income

That's the reason why ICBC share price has tanked: nobody really knows how the market will react to a default for a WMP. Its the 1st ever. Regardless of that, in the long run, I believe the default wouldnt affect ICBC profitability. As it stands currently, ICBC is already not legally required to compensate.
Although in China, there are many things that you have to do sometimes, even if you are not legally compelled to.

Thanks for the link
"Beijing has not forced Hua Xia Bank to pay back the estimated 500 investors hit by the default."

Seems like these concerns about WMP, loss of confidence, resulting bank runs from defaults, issuing banks having to pay for the defaults etc have been around and debated on for at least the past 3 years.

[create8value]

WMP may indeed dent the non-interest income. And interest liberalization will lower the net interest margin. But at current trading price of HKD 4.90, it's only selling at 5.3x PE, with 6.1% dividend. ICBC has been paying increasing dividend over the past 5 years. It shows that the cash flow is sound.

ICBC's growth is pegged to Chinese economy and it is growing at quite a impressive rate. How much would you pay for a growing company? In US, investors are willing to fork out 20x PE. Let's assume some disaster happen to ICBC and it's profit is slashed by 50%. It's still selling at a very reasonable price of 12x PE. I would put $ into ICBC anytime than to buy ANY of the local banks at 12x PE.

Currently, only about 5% of ICBC's earning is from oversea operation as compared to 50% by Citi. There's still so much room for growth, not just within China but worldwide. The Chinese government's aggressive push for SOE to expand overseas will benefit ICBC. Oversea SOE will depend on ICBC for all kinds of financial services.

[GFG]

WMP may indeed dent the non-interest income. And interest liberalization will lower the net interest margin. But at current trading price of HKD 4.90, it's only selling at 5.3x PE, with 6.1% dividend. ICBC has been paying increasing dividend over the past 5 years. It shows that the cash flow is sound.

ICBC's growth is pegged to Chinese economy and it is growing at quite a impressive rate. How much would you pay for a growing company? In US, investors are willing to fork out 20x PE. Let's assume some disaster happen to ICBC and it's profit is slashed by 50%. It's still selling at a very reasonable price of 12x PE. I would put $ into ICBC anytime than to buy ANY of the local banks at 12x PE.

Currently, only about 5% of ICBC's earning is from oversea operation as compared to 50% by Citi. There's still so much room for growth, not just within China but worldwide. The Chinese government's aggressive push for SOE to expand overseas will benefit ICBC. Oversea SOE will depend on ICBC for all kinds of financial services.

It may not be fair to compare china banks with the US banks or local banks. The low PE valuations for the china banks may be here to stay for many many yrs, simply because they operate in a different environment, and operate very differently from the other banks.

Having said that, I totally agree on the valuations.
Just want to add that the dividend yield is likely to be higher, as ICBC has been declaring increasing dividends every year for the past number of years.

<vested>

[specuvestor]

WMP may indeed dent the non-interest income. And interest liberalization will lower the net interest margin. But at current trading price of HKD 4.90, it's only selling at 5.3x PE, with 6.1% dividend. ICBC has been paying increasing dividend over the past 5 years. It shows that the cash flow is sound.

ICBC's growth is pegged to Chinese economy and it is growing at quite a impressive rate. How much would you pay for a growing company? In US, investors are willing to fork out 20x PE. Let's assume some disaster happen to ICBC and it's profit is slashed by 50%. It's still selling at a very reasonable price of 12x PE. I would put $ into ICBC anytime than to buy ANY of the local banks at 12x PE.

Currently, only about 5% of ICBC's earning is from oversea operation as compared to 50% by Citi. There's still so much room for growth, not just within China but worldwide. The Chinese government's aggressive push for SOE to expand overseas will benefit ICBC. Oversea SOE will depend on ICBC for all kinds of financial services.

Chinese banks are not expensive, that much I agree. But since you know NIM and NII will be impacted in future, how is that connect with their past 5 years dividend payments? If 50% profit is slashed, what will happen to dividend?

Things might change but traditionally overseas business is spearheaded by Bank of China.

[create8value]

Chinese banks are not expensive, that much I agree. But since you know NIM and NII will be impacted in future, how is that connect with their past 5 years dividend payments? If 50% profit is slashed, what will happen to dividend?

Things might change but traditionally overseas business is spearheaded by Bank of China.

The important thing here is not the dividend, but Margin of safety. Since it's not expensive, that's good for investors. Dividend is just a bonus. It is also a sign that the earnings posted by ICBC has some reliability, unlike those S-chips here. ICBC's profit may take a hit in the short run. But if Chinese economy continues to grow, it's not an issue.

In the past, BOC is the leader for international business until recently. The central bank of China has granted offshore RMB trading license to ICBC.

[GFG]

Chinese banks are not expensive, that much I agree. But since you know NIM and NII will be impacted in future, how is that connect with their past 5 years dividend payments? If 50% profit is slashed, what will happen to dividend?

Things might change but traditionally overseas business is spearheaded by Bank of China.

The important thing here is not the dividend, but Margin of safety. Since it's not expensive, that's good for investors. Dividend is just a bonus. It is also a sign that the earnings posted by ICBC has some reliability, unlike those S-chips here. ICBC's profit may take a hit in the short run. But if Chinese economy continues to grow, it's not an issue.

In the past, BOC is the leader for international business until recently. The central bank of China has granted offshore RMB trading license to ICBC.

Yes, precisely.
The dividends indicate that cash flow is at least not something falsified like some S chips.
The low valuations indicate a large MOS. While you can argue that earnings may be hit by the liberalization of rates, this is not an event that is sudden, or catastrophic. It wont change drastically the company's business prospects, or render ICBC obsolete overnight. Maybe earnings may dip, but current PER is almost suggesting it TANKS.

[Wildreamz]

By the way, another reason I favor ICBC over the other 3 state owned banks is due to this guy.

It may be an innate bias, but I generally find businessmen with background as an academic more trustworthy.

[GFG]

Can I ask the pros who are invested, what is your calculated intrinsic value, or the price at which you would think it's fair/over valued and would consider selling out?

My personal calculation, which gives due consideration that china banks have traditional been at lower PERs, is around HKD 6