ICBC : Industrial and Commercial Bank of China (1398)

[freedom]

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.

Exactly.

The oversea expansion and other than deposit-taking and loan business in China is the future of ICBC.

Don't just look at PE. PB is more important for a bank than PE. Currently ICBC trades around PB=1. How much loss is ICBC going to take from its equity after the crisis if it happens in the near future.

Look at the large and well-run US banks(JPM, GS and Wells Fargo) after the financial crisis. They were not smaller, instead they grew larger. The same could happen to the good and large Chinese banks.

[Greenrookie]

hi all,

In the case of the trust defaulting, who get the mine licensing rights?

It seem quite weird to me there is no mention of collateral throughout this saga. Does it goes back to the government?

I Do not have the details, but it seems the problem is with the license, not the actual mine, and that the boss did some illegal fund raising, shouldn't the mine rights be used to "compensate" either of the 4 parties? AS such, shoudn't the sum be less than initially thought?

[freedom]

The mining rights belong to the equity owner of the company if issued. Whoever in the end owns the equity owns the mining rights.

[create8value]

Just realized the entire 3Billion RMB product is less than 1% of ICBC last full yr profits
And it's unlikely icbc will have to take 100% responsibility
So the fear is systemic, rather than specifically due to this WMP

Total earning from Non-interest income only contribute 20% of ICBC's net profit last year. So, if there's any strict regulation on WMP, the impact isn't going to be quite significant.

Most of ICBC's earning come from Interest income, around 80%. That is high compared to international banks at 45%. As competition in interest rate heats up in China, it may pose some risk to ICBC.

Here's the but -- China's big four banks have NIMs (net interest margin) in the range of 2.5% MUCH LESS than an American bank such as Wells Fargo's NIMs of 4%. Despite central banks attempt to push for rate liberalization in mid 2012, which allow bank to grant up to 20% discount on loan rates & up to 10% premium on deposit rate; the big five state owned banks adopted unified pricing on deposits. Market concentration & lack of major threat of meaningful new entrants will mitigate downward pressure on bank margins.

[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.

Exactly.

The oversea expansion and other than deposit-taking and loan business in China is the future of ICBC.

Don't just look at PE. PB is more important for a bank than PE. Currently ICBC trades around PB=1. How much loss is ICBC going to take from its equity after the crisis if it happens in the near future.

Look at the large and well-run US banks(JPM, GS and Wells Fargo) after the financial crisis. They were not smaller, instead they grew larger. The same could happen to the good and large Chinese banks.

IMHO China government is now more conscious about it's International image and local consumer confidence. They will do ALL the best to mitigate any crisis, nipping it in the bud at the first sign of trouble.

Hence, I'm not too concerned about it's book value. If there's any sign of danger to the banking system, government will use its "Asset management company" aka "toxic debt absorber" to clear those bad debts off the balance sheet; similar to what Maybank enjoyed during the 1990s.

[freedom]

Exactly.

The oversea expansion and other than deposit-taking and loan business in China is the future of ICBC.

Don't just look at PE. PB is more important for a bank than PE. Currently ICBC trades around PB=1. How much loss is ICBC going to take from its equity after the crisis if it happens in the near future.

Look at the large and well-run US banks(JPM, GS and Wells Fargo) after the financial crisis. They were not smaller, instead they grew larger. The same could happen to the good and large Chinese banks.

IMHO China government is now more conscious about it's International image and local consumer confidence. They will do ALL the best to mitigate any crisis, nipping it in the bud at the first sign of trouble.

Hence, I'm not too concerned about it's book value. If there's any sign of danger to the banking system, government will use its "Asset management company" aka "toxic debt absorber" to clear those bad debts off the balance sheet; similar to what Maybank enjoyed during the 1990s.

I can't agree with the solution proposed. Not only it is a moral hazard for the banks to continue to take risk without consequences, but the loss should not be borne by the government or the people if the people have done nothing wrong. The private sector has to take their loss first. If the private sector can't take the loss, the government can come in and wipe them out.

I do believe that the government should only intervene as the last resort.

[create8value]

Morally you are right. Big Chinese banks operate more like a family business. Sometimes they do not have a choice of who to lend to. It's under the direction of State. If the government wants ICBC to help solar companies, so they can be price competitive. ICBC has to lend, no matter how bad is those solar companies' credit rating. But if all these companies default their loan, ICBC shouldn't be made fully liable.

For the recent WMP case, ICBC can definitely take up the responsibility without any issue. Even it's a full compensation for possible misrepresentation in sales, it's only a small amount in their earnings.

[freedom]

Morally you are right. Big Chinese banks operate more like a family business. Sometimes they do not have a choice of who to lend to. It's under the direction of State. If the government wants ICBC to help solar companies, so they can be price competitive. ICBC has to lend, no matter how bad is those solar companies' credit rating. But if all these companies default their loan, ICBC shouldn't be made fully liable.

For the recent WMP case, ICBC can definitely take up the responsibility without any issue. Even it's a full compensation for possible misrepresentation in sales, it's only a small amount in their earnings.

Not exactly.

Yes, ICBC will lend if there are incentives for ICBC to lend to the solar industries. But they are not stupid and do have other means. They can have a trust or a WMP junior to their lending. That's the whole purpose of shadow banking, to take the credit risk the banks are not willing to take. If the companies go bust, the banks are going to take loss. But the loss has to be taken by the junior debt obligation holders first. In such case, the banks are protected in a way. And this should be the model the banks operate in China.

[create8value]

Not exactly.

Yes, ICBC will lend if there are incentives for ICBC to lend to the solar industries. But they are not stupid and do have other means. They can have a trust or a WMP junior to their lending. That's the whole purpose of shadow banking, to take the credit risk the banks are not willing to take. If the companies go bust, the banks are going to take loss. But the loss has to be taken by the junior debt obligation holders first. In such case, the banks are protected in a way. And this should be the model the banks operate in China.

Excellent! Then you don't have to worry about the book value, since banks are not stupid and very capable at diverting credit risk.

[freedom]

Not exactly.

Yes, ICBC will lend if there are incentives for ICBC to lend to the solar industries. But they are not stupid and do have other means. They can have a trust or a WMP junior to their lending. That's the whole purpose of shadow banking, to take the credit risk the banks are not willing to take. If the companies go bust, the banks are going to take loss. But the loss has to be taken by the junior debt obligation holders first. In such case, the banks are protected in a way. And this should be the model the banks operate in China.

Excellent! Then you don't have to worry about the book value, since banks are not stupid and very capable at diverting credit risk.

I did not worry about book value at all. That's why I always look at PB as an indicator for investment into banks. Book value is the margin of safety for healthy financial institutions.

Though they can divert as much credit risk as they want/can, banks, as the final shock absorber will always be impacted if the crisis goes full blown. Everybody owes the banks one way or another.