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China's big banks are not reason for a downgrade | Advantage China

The Macroeconomic certification for China

An above 6% inflation rate continued in August, with Services PMI scraping the neutral line at 50.6 in the HSBC MarkIt survey while the overall non mfg indices with other providers were as high as 57. the trending downwards of the PMI but staying positive was an unexpected surprise for China watchers and we look at China maintaining its 10% IIP and 9% GDP growth even as Services is only 50%

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of the national GDP compared to the US where the ISM NON MFG index probably covers 90% of the GDP

At this stage the government is going to plan running off the monetary tightening path with sweeteners to the SMB sector  and China will have to manage state challenges in managing its energy assets, its plateauing in International FDI exports especially as it has denominated its FDI in Yuan itself and probably back up from its aggressive stance with the US government

China’s investing insights and the bank loan problem

Though Chinese agency Dagong beat the drums very loud last month as it downgraded USA, the state itself has been actively deploying its surplus of $3 tln in global investments in its own quest to diversify China’s risk and develop a new alternate basket as the world’s reserve currency while growing yuan’s role in the trade economy. The far reaching reforms envisaged in the new 5 year plan for the state also means a new focus as statistics run awry and give rise to a global discussion on “What’s wrong with China” A month ago more than $1.5 tln loans from China’s banks were off balance sheet , mainly to Local city governments . But already a third of them have been brought to the bank book, and the rest counted by reserves. That does mean the banks need new Capitalization to add new loans and maintain the growth but I doubt if Fitch’s reaction in putting them on ratings watch with bereft cousin Japan is due

Non performing Loans at China;s banks are a high single digits though and the situation after a state bailout in 2004-05 and the recent removal of off balance sheet impediments remains a visible and an aggravated one. M&A activity originated by China has doubled in retail and industrial sectors but Deals likely get stuck when China tries for big ticket investments given its poor corporate governance record ( Sino Forest and other accounting tea storms) and its inability to be diplomatically delicate when trying to press home its fiscal advantage

Assuming that the Yuan cannot grow faster than 10% in 3 years is probably just conservative state policy too as the Yuan surge can easily digest its inflationary trade surplus which refuses to come back in control. Also the state backed Big 4 banks have performed independently and can very well manage capitalisation on their own so any backing China gives them in terms of additional Huijin stakes will also be welcomed by investors when the banks tdo tap Equity and FI capital markets, not being comparable to AIG and BoA failures despite all the press biting 30 M&A investments have been announced in Europe byu Chinese companies apart from China directly picking up small stake in the peripherals debt issues

Sterling $57 bln profits at china’s Big Four

Even before China’s banks reported their first half numbers for this year the PBOC reports and other banking sources have indicated that the Banking system that produced $140 bln profits in 2010 from only a $100 bln in 2009 was going to continue a very profitable 2011. That’s because despite the quick cacophony of rate hikes, banks still have a “guaranteed margin” of 300 bp based on deposit floors etc

This year the Top 4 banks have already announced $57 bln in after tax profits in the first 6 months based on a loan portfolio where 80% of their Operating Income is from their credit spreads

The banks as a whole could easily report  $175 bln in after tax profits for 2011 with the Top 4 banks making almost two thirds of that, on a combined loan book of just $3.3 tln ( as of March)

Non performing loans at each of the big Four remain near 1% and below even in local govt portfolios and less than half percent overall, letting rating agencies to otherwise ratify their likely performance in Basel 3’s strict capital ratings however Daiwa had recently reported that loan defaults less than 90 days had increased between 10-40% at the four banks rasing the spectre of a sudden increase in non performing loans


Local Government Financing Vehicles make up 10-20% of the loan books at the big four with ICBC outstanding reported in July at $150 bln and BOC at $100 bln. At that times banks had asserted availability of cash flows backing 80-90% of such loans. state auditors had pointed out incomplete processes in a significant portion of the $55 bln fresh loans it had verified in its report in June/July of this year

Even the Citic Bank held up margins and based on a Net interest income of $4.66 bln, produced a net profit of nearly $2.35 bln growing 41% over last year while China Minsheng Bank and Shenzen Development Bank rose the fastest in the Top 10 growing profits by 56% each. Bank of China reported a $11 bln After tax profit and AgBank the no. 3 overall lender reported $10 bln in profits. ICBC is the largest lender followed by Bank of China.

The two negatives of rising NPLs and the appreciating Yuan on foreign loan assets may each strip the growth of 5-6% each int he remaining half of the year but then als0 a growth of 20% as promised by the regulator seems more than likely on top of the 35% growth in profits last year. FDI increase by china’s banks mostly limit themselves to Brazilian and ALtAm resources and Financial investments. chinese banks are currently undervalued because of the macroeconomic commentary to not mare than 7-8 times multiple for even the largest ICBC that reported a  $17 bln profit on its own. The Top 10 banks maintain not more than 33-37% in Cost Income ratio though the cost structure varies from its Western counterparts

NPL practices at the Big 4 vary between themselves as AgBank with a 12% new default rate in less than 90 days does not count defaults till Principal is defaulted while ICBC counts defaults less than 90 days at 28.6% growth counting n late instalments for a default

BOC roadshows have already begun for the new IPO and the Tp 4 seemingly hold nmore than 10% in Basel Capital and Tier I common reaching approximately 9%

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