China Banks

[greengiraffe]

Temasek has a much longer term perspective than investment banks
Even if china growth drops drastically to 6%, compared to other mature economies, even to sg, 6% is still way way ahead
On top of that valuations are very attractive. Of course this is only if u take a long term view.

Sometimes, i become quite wary when people start using words like 'long term' as the main selling point/justification for their deals.

Let's see what happened before the start of GFC2008:
In a news release, GIC's deputy chairman and executive director, Tony Tan, said the company looks for returns on a long-term basis. He believes GIC's latest Citigroup investment will meet that objective. Dr Tan said: "GIC is a financial investor seeking commercial returns on a long-term basis ... We believe that the investment in Citigroup will meet our long-term investment objective in terms of risk and return."

But, speaking at a news conference, Dr Tan, who is also Singapore Press Holdings' chairman, said GIC has confidence in UBS' wealth management business - which mainly serves global wealthy figures. He said GIC believes in the long-term prospects of the Swiss bank. Dr Tan added that GIC is very satisfied that UBS, which had asked GIC to subscribe to the issue of new capital, has taken a 'very conservative view' of its investments exposed to US sub-prime problems. GIC has no direct exposure to investment products packaged from risky US mortgages.

Senior Managing Director of Temasek, Frank Tang said, "We are pleased to have this opportunity to invest in Barclays. We look forward to supporting them in their strategy to create opportunities for a higher level of sustainable growth. This investment fits well with our interest for long-term exposure to strong players in the financial services sector."

Of course, there is a high degree of hindsight bias in my postings here. I can imagine hypothetically someone in their ivory tower will be arguing 'you need to judge our past decisions based on the proper context and information available at that point of time'. My personal opinion is that these purchases looked like great timing to outsiders (including myself in 2007/8), but unknown to those folks in their ivory towers, the insiders already knew. So the hard questions are, besides trying to raise/recycle capital for the tier1 ratio/meet new rules, are there anything else that those US banks know (and want to sell at such 'attractive' valuations) but most probably the outsiders do not? I think this is really what we can learn from history.

IIRC, the valuations at that point of time on UBS/Barclays/Citigroup purchases were also 'attractive'. The current investments in these Chinese banks are also attractive...but on what? On price/book or price/earnings? Past valuations can rapidly change to look expensive because mathematically, the denominator (book/earnings) has a greater impact on such multiples.

SWFs - strategic view... long... wrong term???

For small folks like us... hopefully, we merely focus on the bottomline and what matters most to us...

GG

[specuvestor]

A bit OT but a follow up on our previous discussion and how capital flows can affect banks, even Chinese banks. the connection is complex but it can be foreseen.

Nov. 27 (Bloomberg) -- Russia’s biggest state-run banks are
seeing profits plunge, forcing some to seek government help,
after the U.S. and European Union slapped them with sanctions
over the conflict in Ukraine.
A drop in earnings led VTB Group, Russia’s second-largest
bank, to eliminate more than a third of its staff in Europe and
seek state support to replenish capital. OAO Gazprombank, the
nation’s third-largest lender, and Russian Agricultural Bank,
are also seeking government aid. OAO Sberbank, the largest,
yesterday cut its profitability forecast for 2014.
The conflict is saddling Russian banks with widening losses
in Ukraine, even as the sanctions restrict their access to
international capital markets. Sputtering economic growth at
home looks set to push up loan losses in Russia, further eroding
capital and profitability.
“Russian banking is moving slowly along the crisis path
with all classic aspects of capital, funding, asset quality and
liquidity feeling the stress as we go,” David Nangle, head of
research at Renaissance Capital, wrote in a note to clients.
“The main risk we see is on the longevity of sanctions and
specifically closed funding markets.”
Sberbank reported a 25 percent decline in third-quarter
profit after setting aside 104.5 billion rubles ($2.2 billion)
for doubtful loans, more than double the amount in the same
period of 2013. The bank, run by President Vladimir Putin’s
former economy minister, Herman Gref, said return on equity, a
measure of profitability, will be 15 percent this year, below
its previous forecast of 20 percent.

Ukraine Loan

Risks tied to Ukraine are hurting the three largest state-
controlled banks the most, a report from Standard & Poor’s said.
Their combined operating income will be reduced by about 420
billion rubles this year, or 25 percent, because of events in
Ukraine, analyst Sergey Voronenko estimated.
Sberbank expects to continue boosting corporate loan
provisions on Ukraine in the fourth quarter, Senior Vice
President Anton Karamzin said yesterday on a conference call.
Putin has asked why the U.S. and European Union are
limiting Russian banks’ access to global capital markets if
their aim is to help Ukraine.
“Russian banks have currently extended a $25 billion loan
to the Ukrainian economy,” Putin, 62, said in an interview with
German TV ARD earlier this month. “Do they want to bankrupt our
banks? In that case they will bankrupt Ukraine.”
VTB, which converted a more than 200 billion-ruble
subordinated loan from the government into preferred shares to
boost capital, asked for additional state support of 250 billion
rubles, Finance Minister Anton Siluanov said last week.

Curbing Lending

The Moscow-based lender, which posted a 90 percent slump in
third-quarter profit, eliminated more than 600 positions in
Europe in the three-month period and said it may review its
strategy. Losses related to Ukraine reached 14.4 billion rubles
in the quarter, Chief Financial Officer Herbert Moos said.
Banks will have to curb growth or turn to the state for
additional funding after the sanctions shut them out of foreign
capital markets, said Nadezhda Bozhenko, a fixed-income analyst
at UralSib Capital.
“Gazprombank needs to contain their loan-book growth or
rely on the government,” Bozhenko said by phone. “The state
has offered to convert existing loans into preference shares,
but the terms aren’t clear and it may be very expensive.”
Natalia Yalovskaya, a director of financial institution
ratings at S&P, said Gazprombank will “sooner or later”
convert its loans to increase capital. The lender’s press
service didn’t return calls or e-mails seeking comment.
Retail lending growth slowed to a 16.6 percent annual pace
in October from 18 percent in September, data published on the
central bank’s website show. Corporate lending growth
accelerated marginally to 13.4 percent in October.

Banks Stretched

“The financial system is going to be under a lot of
pressure in coming months,” Matias Pino, an emerging markets
analyst at GoldenTree Asset Management, which sold its holdings
in Russian banks’ bonds months ago, said in e-mailed comments.
“Bad loans, a slowdown in consumer demand for credit and a
need to support Russian companies with limited access to foreign
capital is stretching the banks,” Pino said. “Not to mention
the run on foreign currency and the devaluation effect on
inflation, which should lead to an increase in local rates.”
Sberbank raised its forecast for corporate loan growth in
2014 to more than 20 percent from between 12 percent and 14
percent, as more companies turn to state-run banks for funding.
Russia’s ruble has depreciated about 30 percent this year
against the dollar, the worst performance after Ukraine’s
hryvnia among about 170 global currencies tracked by Bloomberg.
The seven-company Micex financial index has tumbled 28
percent this year, compared with a 2.2 percent gain for the
wider 50-stock benchmark Micex index. Sberbank tumbled 27
percent and VTB dropped 4.9 percent.

‘Grim’ Prospects

Banks unaffected by sanctions have been able to tap capital
markets this month. Alfa Bank, Russia’s largest privately-owned
lender, raised $250 million by selling a subordinated bond
yielding 9.5 percent on Nov. 13. Promsyvazbank got a $120
million syndicated loan on Nov. 17, five days after Bank
Otkritie Financial Corp. borrowed a similar amount, according to
data compiled by Bloomberg.
Russia’s economy is set to expand 0.3 percent this year and
stagnate in 2015, according to the central bank’s main outlook,
which assumes oil prices will average $95 a barrel next year and
sanctions will stay in place through 2017.
Russia, the world’s largest energy exporter, has also had
to contend with a 31 percent slide in the price of crude oil
since June, leaving it on the brink of recession. Brent crude
oil futures fell as low as $77.30 a barrel in London yesterday.
“We see the macro prospects as relatively grim even in our
base-case scenario,” Natalia Berezina, a banking analyst at
UralSib Financial Corp., said by phone. “There are also
increasing risks that our more negative scenario of economic
recession could materialize. In this scenario, all banking
stocks would be much overvalued at the current levels.”

The problem in Argentina and Russia has no bearing on China. The economic structure and dynamic is so different. Sorry that you have to expand further on Russia devaluing its currency as I don't see anything related to banks yet. If you are talking about how bad the economy in Argentina and Russia, there are too many causes which does not relate to the banks there.

Your question was: "What reserves has to do with the solvency of the mega banks in China?"

Banks being part of the local financial system and global payment system will be affected when there is a cash crunch. Whenever there is a financial crisis the banks get hit first as their interest rate and asset/liablity gets mismatched by the volatility and the underlying counterparty risk increases, their leverage and dependence of capital markets exacerbates their problem.

http://www.valuebuddies.com/thread-5237-...l#pid96247

[CityFarmer]

An important policy for banking system in China...

China drafts deposit insurance in move to free interest rates

SHANGHAI (Nov 30): China will start an insurance system for bank deposits, a move toward scrapping remaining controls on interest rates and allowing lenders to fail in a more market-driven economy.

The government will insure deposits of as much as 500,000 yuan (US$81,367) per saver at each bank covered, the People’s Bank of China said in a draft rule on its website today.

It didn’t give a start date or detail what premiums banks may pay, saying only that they may differ depending on lenders’ management and risk conditions.

The PBOC is seeking feedback through Dec 30.
...
http://www.theedgemarkets.com/sg/article...rest-rates

[AlphaQuant]

Interesting read from http://www.chinafirstcapital.com/blog/archives/4609

*****************

Do you have the financial acumen to run the lending department of one of China’s giant state-owned banks? Let’s see if you qualify. Price the following loan to a private sector Chinese company. Your bank is paying depositors 0.5% interest so that’s your cost of capital. The company has been a bank customer for six years and now needs a loan of Rmb 50mn (USD$8 mn). The audit shows it’s earning Rmb 60mn a year in net profits, and has cash flow of Rmb 85mn.

You ask the company to provide you with a first lien on collateral appraised at Rmb 75mn and require them to keep 20% of the loan in an account at your bank as a compensating deposit. Next up, you ask the owner to pledge all his personal assets worth Rmb 25mn, and on top, you insist on a guarantee from a loan-assurance company your bank regularly does business. The guarantee covers any failure to repay principal or interest. What annual interest rate would you charge for this loan?

If you answered 5% or lower, you are thinking like a foreigner. American, Japanese or German maybe. If you said 13% a year, then you are ready to start your new career pricing and allocating credit in China. At 10% and up, inflation-adjusted loan spreads to private sector borrowers in China are among the highest in the world, particularly when you factor in the over-collaterallization, that third-party guarantee and fact the loan is one-year term and can’t be rolled over. As a result, the company will actually only have use of the money for about nine months but will pay interest for twelve. Little wonder Chinese banks have some of the fattest operating margins in the industry.

Chinese private businessmen are paying too much to borrow. It’s a deadweight further slowing China’s economy. We are quite keen, by the way, on private debt investing in China.

The high cost of borrowing negatively impacts corporate growth and so overall gdp growth. It is also among the more obvious manifestations of an even more significant, though often well-hidden, problem in China’s economy: the fact that nobody trusts anybody. This lack of trust acts like an enormous tax on business and consumers in China, making everything, not just bank credit, far more expensive than it should be.

Online payment systems, business contracts, visits to the doctor, buying luxury products or electronics like mobile phones or computers: all are made more costly, inefficient and frustrating for all in China because one side of a transaction doesn’t trust the other. One example: Alibaba’s online shopping site, Taobao, will facilitate well over USD$200bn in transactions this year. Most are paid for through Alipay, an escrow system part-owned and administered by Alibaba. Chinese shoppers are loathe to buy anything directly from an online merchant. They generally take it as a given that the seller will cheat them.

Most of the world’s computers and mobile phones are made in China. But, Chinese walk a minefield when buying these products in their own country. It’s routine for sellers to swap out the original high-quality parts, including processors, and replace them with low-grade counterfeits, then sell products as new. Chinese, when possible, will travel outside China, particularly to Hong Kong, to buy these electronics, as well as luxury goods like Gucci shoes and Chanel perfume. This is the most certain way to guarantee you are getting the genuine article.

In the banking sector, loans need to have multiple, seemingly excessive layers of collateral, as well as guarantees. Banks simply do not believe the borrower, the auditors, their own in-house credit analysts, or the capacity of the guarantee firms to pay up in the event of a problem.

Disbelief gets priced in. This is the reason for the huge loan spreads in China. Banks regard their own loan documentation as a work of fiction. It stands to reason that if a company’s collateral were solid and the third-party guarantee enforceable, then the cost to borrow money should be at most a few points above the bank’s real cost of capital. Instead, Chinese companies get the worst of all worlds: they have to tie up all their collateral to secure overpriced loans, while also paying an additional 2%-3% a year of loan value to the third-party credit guarantee company for a guarantee the bank requires but treats as basically worthless.

In the event a loan does go sour, the bank will often choose to sell it to a third party at 50% of face value or lower, rather than go to court to seize the collateral or get the guarantee company to pay up. The buyer is usually one of the state-owned asset recovery companies formed to take bad debts off bank balance sheets. Why, you ask, does the bank require the guarantee then fail to enforce it? One reason is that Chinese private loan-assurance companies, which usually work hand-in-glove with the banks, are usually too undercapitalized to actually pay up if the borrower defaults. Going after them will force them into bankruptcy. That would cause more systemic problems in China’s banking system.

Instead, the bank unloads the loan and the asset recovery companies seize and sell the only collateral they believe has any value, the borrower’s real estate. The business may be left to rot. The asset management companies usually come out ahead, as do the loan guarantee companies, which collect an annual fee equal to 2% to 3% of the loan value, but rarely, if ever, need to indemnify a lender.

Don’t feel too sorry for the bank that made the loan. Assuming the borrower stayed current for a while on the high interest payments, the bank should get its money back, or even turn a profit on the deal. Everyone wins, except private sector borrowers, of course. Good and bad like, they are stuck paying some of the highest risk-adjusted interest costs in the world.

When foreign analysts look at Chinese banks, they spend most of their time trying to divine the real, as opposed to reported, level of bad debts, devising ratios and totting up unrealized losses. They don’t seem to know how the credit game is really played in China.

Most of the so-called bad debts, it should be said, come from loans made to SOEs and other organs of the state. Trust is not much of an issue. SOEs and local governments generally don’t need to pledge as much collateral or get third-party guarantees to borrow. A call from a local Party bigwig is often enough. The government has shown it will find ways to keep banks from losing money on loans to SOEs. The system protects its own.

Chinese banks should be understood as engaged in two unrelated lines of business: one is as part of a revolving credit system that channels money to and through different, often cash-rich, arms of the state. The other is to take in deposits and make loans to private customers. In one, trust is absolute. In the other, it is wholly absent.

Many Chinese private companies do still thrive despite a banking system that treats them like con artists, rather than legitimate businesses with a legitimate need for credit. The end result: the Chinese economy, though often the envy of the world, grows slower and is more frail than it otherwise would be. Everyone here in China is paying a steep price for the lack of trust, and the mispricing of credit.

[specuvestor]

Quite a well written note on chinese culture. The low quality and doubtful integrity of the system has come around to haunt them

Hopefully the anti-corruption drive and the paradigm shift on quality over quantity will reduce their credit cost soon.

[CityFarmer]

A good article to illustrate the issue of credit lending in China, mainly on big five banks now.

That is one of the main reasons, for the existence of shadow banking in China. The shadow banking isn't necessary more risky than main-stream banking, if done right.

The China authority recognized the issue, but it is a corporate cultural issue, and take time to solve. The recent policy changes to allow private banks, is a measure to help the SME on the credit support.

[specuvestor]

In a confidence crisis foreign investors would be withdrawing hard currencies from the system. Without sufficient reserve and confidence the country's machinery will groan as we can see from Argentina and to a lesser extent Russia. That has been the root of global crisis since Brady Bonds as far as I can personally remember. And most hedge funds look at foreign reserves as a proxy on whether it is "attack-able". That's why the Bernanke currency swap is IMHO ingenious

Ironically we are seeing Russia groan more than Argentina now Russia obviously doesn't have a currency swap with US to access US$

It suddenly just occurred to me that a good example how a pte enterprise, excluding the banks, can have a moral hazard as well is Petrobras.

Petrobas has debt that is roughly 1/3 of Brazil's foreign reserves. With oil crash I think it is an accident waiting to happen.

That is why on aggregate policy makers need to monitor and control the pte enterprises instead of just leaving all to the dogmatic "invisible hand" cause you never know when the "invisible mouth" will come back to bite you

[CityFarmer]

In a confidence crisis foreign investors would be withdrawing hard currencies from the system. Without sufficient reserve and confidence the country's machinery will groan as we can see from Argentina and to a lesser extent Russia. That has been the root of global crisis since Brady Bonds as far as I can personally remember. And most hedge funds look at foreign reserves as a proxy on whether it is "attack-able". That's why the Bernanke currency swap is IMHO ingenious

Ironically we are seeing Russia groan more than Argentina now Russia doesn't have a currency swap with US

It suddenly just occurred to me that a good example how a pte enterprise, excluding the banks, can have a moral hazard as well is Petrobras.

Petrobas has debt that is roughly 1/3 of Brazil's foreign reserves. With oil crash I think it is an accident waiting to happen.

That is why on aggregate policy makers need to monitor and control the pte enterprises instead of just leaving all to the dogmatic "invisible hand" cause you never know when the "invisible mouth" will come back to bite you

Market is unpredictable, isn't it? It is never in our mind, Russia will suffer more than Argentina, months ago.

SembMarine has larger exposure with Brazil, IIRC.

Monitor? Yes, of course. Control? Er... I assume you means "Manage". There is limited "control" with unpredictability of market i.e. the invisible hand. "Manage" means to get ready with contingency plans, rather to "control" the outcomes.

[specuvestor]

You can control the amount of aggregate exposures as well as individual exposures with policies, including foreign debt raising. You can use the nicer word "manage" but end of day the one who is going to clean up the mess after the party should have a certain amount of "control"... like I always tell my kids

The unpredictability comes when the market dictates your action and you have little choice. China govt is very wise to "control" events before it gets out of hand. Stitch in time saves nine. The difficult part is how to control while providing an environment of freedom to play within the boundaries. I don't believe in lassez faire economics like the Austrian school, as much as I believe in lassez faire soccer Even Apple software works better because of sandboxing.

As you know I am not hostage to ideologies. I am hostage to what actually works in real life. My favourite phrase is from Keynes: "When the facts change I change my mind... what do you do Sir?"

[CityFarmer]

Another stimulus from China authority, which is a pretty decent one, instead of mini-stimulus as before?

China first-world quandary exposed as US$800-billion lending freed

SYDNEY (Dec 29): China's central bank is joining the balancing act of developed-world counterparts as it moves to free up at least US$800 billion in funds for lenders, seeking to support growth without further inflaming financial risk.

The world’s largest emerging market will broaden the definition of a deposit in 2015, boosting the lending capacity of Chinese banks that have to cap loans at 75 percent of funds held.

The relaxation, reported by the official Xinhua News Agency yesterday, could make an additional five trillion yuan (US$800 billion) to 5.5 trillion yuan available, according to analysts at Credit Agricole and Guotai Junan Securities.

“The change in rules allows the extension of additional loans worth half of this year’s new lending,” said Dariusz Kowalczyk, an economist at Credit Agricole in Hong Kong.

“Policy makers across the globe are trying to boost demand by increasing bank lending, especially to businesses, so in this sense China’s efforts to boost lending fit well into the picture.”
...
http://www.theedgemarkets.com/sg/article...ding-freed