ICBC : Industrial and Commercial Bank of China (1398)

[GFG]

If the losses didn't get socialized, many major US corporations would cease to exist today...

U can bailout by taking an equity stake, gov can buy bonds at low yields, gov can discreetly force another company to buy your toxic assets, or broker a sale at a price that otherwise will not happen if determined by the markets, or do a combination of all these (like huarong)

It's all socializing losses.

[create8value]

If you are worrying about the book is phoney, it does not matter what you are looking at any more.

If the book is phoney, won't the earning be too?

True... earnings CAN be phoney too. But if you cheat on earnings, you get more trouble.

1. You need to answer to your shareholders why you cannot keep up your earning spree?

2. Why you cannot pay higher dividend, since you have a bumper year?

3. Why should you cheat on earning, when 70% of your shares are state-owned?

4. You are not allowed to PLAY the share price. And you receive little performance bonus, as you, as a CEO, is a State employee?

5. Why should you give one more reason for Western media to shoot your financial system? You have been enjoying questions about "human rights"?

6. You are not keen to make RMB a reserve currency?

[GFG]

Congrats, your decision to enter today seems to be market timing at it's best

But still not sure how the market will react. Will the market discount further due to the moral hazard involved, or will it find an excuse to rally?

The funny thing is, the actual material impact on ICBC itself (whether they shoulder the responsibility or not) is almost negligible.

Depending on how Dow perform today, the impact on the price tomorrow should be positive for speculators and negative for long term investors.

Not really, I don't believe in market timing personally.

But I do think the hype over the default and the potential credit risk is overblown in the short term
Optimistic about the prospects of ICBC within a 1 yr frame
In the long run there is a case for moral hazard etc, but that could be said of the bailed out American corporations 4yrs ago. Today, many of them are registering record profits, their share prices have gone up substantially and suddenly there are no more protests and nobody uses the word moral hazard on them anymore

[freedom]

You call that socialized loss? Are you sure that it is loss? not gain? No one can deny that the US government has injected capital into various companies, such as AIG, Citi, Fannie Mae & Freddy Mac, etc. Maybe the US government has some paper loss or realized loss of maybe tens of billions up to 100 billion at most?

How much have equity owners and creditors of Lehman Brother lost? Mind you, that's not paper loss, that's permanent loss. How much have equity owners and creditors of Citi/AIG/Fannie Mae/Freddy Mac/Merrill Lynch/Bear Sterns/CountryWide lost? At least 1 trillion dollars. By the time Lehman Brothers' bankruptcy, the private sectors had already taken trillions of dollar in loss before the government came in and prevented further loss.

Merely less than 10% of loss MAY be incurred by the US government. more than 90% of the loss are taken by the private sectors. And populists called it socialized loss? That's just how capitalism works.

What a joke!

[GFG]

I am not saying equity owners didn't lose anything.
But as u said it yourself, the US gov has injected capital, and potentially has losses.

That's socializing losses already.

Nobody here is comparing who lost more.

[freedom]

If the losses didn't get socialized, many major US corporations would cease to exist today...

U can bailout by taking an equity stake, gov can buy bonds at low yields, gov can discreetly force another company to buy your toxic assets, or broker a sale at a price that otherwise will not happen if determined by the markets, or do a combination of all these (like huarong)

It's all socializing losses.

If you called the way how Chinese government saved the Chinese banks before 21st century. I can agree that it is socializing losses.

But if you called the US government saving everybody from the financial crisis socializing loss, that's complete joke.

That's simply how capitalism works. The US government or public sector does not exactly incur loss, maybe some paper loss. The social benefit created from it far exceeds the cost of saving itself. If that's not called profiting, I don't know what is.

[freedom]

I am not saying equity owners didn't lose anything.
But as u said it yourself, the US gov has injected capital, and potentially has losses.

That's socializing losses already.

Nobody here is comparing who lost more.

I would call it investment, other than socializing loss.

Unless you are saying that the action of US government is trying to take loss, not take profit.

[create8value]

I would call it investment, other than socializing loss.

Unless you are saying that the action of US government is trying to take loss, not take profit.

Yes, it is taking a lost. It's NOT an investment. It's socializing the cost.
That's why it's a MORAL HAZARD.

Fed created financial jargon to hide the true intention. Calling it "quantitative easing" instead of "money printing". Where all these freshly printed notes go to? Investment? Nah...

Try looking at why the Americans occupy Wall street couple of years back... You will understand what happen behind the scene.

I thank you for asking all these question, to make everyone understand the situation better. In return, please thank me for spending my precious time to explain to you about all these stuff. I hope they will help everyone avoid some costly mistake down the road. Cheers!

[create8value]

I'm trying to convince buddies to buy ICBC, because I feel it is a good investment. But at the same time, I'll greatly appreciate to hear opposing views. I will clear all my shares if we agree that it's a bad choice.

[specuvestor]

Firstly state owned banks take direction from the state, especially in a communist state, in case we forgot. Whether mgt is intelligent or not only reduces the risk, it doesn't do away. There are valid reasons why people thought these products are guaranteed by the states or the banks.

Secondly 20% of profit is not minor when you have 10X PE. How much market cap do you think that is? Neither is foray into international markets a given plus. It depends on mgt execution or are they just following the corporates' money trail. Those old enough will remember the mega Japanese banks of the 90s.

3rdly as per posted all these shadow banking products pose a systemic risk to the system with estimates around US$4tr. The question is how the govt arrest the issue and spread out the PERCEIVED credit risk. Based on the govt's past track record, I think they will be able to manage it well but a short pain is expected if they really let the 4 entities take 25% of the loss.

1st, Yes I agree to that.

2nd, Excuse me. The PER is 5.5x, not 10x. So there's reasonable margin of safety in case of any shock.

3rd,Correct there's risk. However, most of the highly profitable companies are state owned. NO MATTER how the money flows, government at some point will absorb it back to their reserve. If you observe the value chain, from mining, manufacturing, retail, financing, etc, the government has some strong SOE running them. Most of the money will eventually flow back to government.

In case of crisis, the government will just pump back the money by absorbing through their "Asset management company". Why should government do that? To prevent a full-blown crisis, so they can earn MORE money in long run. Make some sense bro?

Though I question the 5.5X Forward PE with a more competitive interest rate regime, reducing NII and likely higher NPL provisions going forward, my point is people underestimate the market impact on earnings, especially on the banking system which is usually big cap. ICBC alone is HKD1.4tr so even a 20% impact on earnings is significant to the stock market. In any case my previous posts will tell you I am not a believer of PE, this is just an illustration and it makes more sense to say that you like the stock at 1X Book and at x% ROE.

If SOE are highly profitable then I guess Deng to Xi shouldn't need to change their communist system to market driven. As grubb pointed out, the devil is in the detail

Fundamentally bailing out so that it can make more money in future doesn't make sense and cannot be a long term strategy. Even Japan has shown that they can't sustain it. The stakeholders including the shareholders have to bear loses so their incentive system will change.

If the rumours are true that the AMC are bailing out, then it is actually negative to recently listed Cinda AMC and medium term we should not see Chinese banks return to global fair value. It is a disappointment in execution.