April 18 2015 – The Chinese Large Cap Financials Still Priced at 40% Discounts (Reblogging)

read the full link here : http://www.valuewalk.com/2015/04/value-hunters-china/

Chinese Banks Have an Asset Base That Is 35% Larger: The total market capitalization of the four major Chinese banks is USD 876 billion, while the four largest U.S. banks amount to USD 826 billion. While their market capitalizations are comparable, total assets of the four major Chinese banks add up to USD 11.05 trillion, while the total assets of the four major U.S. companies sum to USD 8.21 trillion.

• On Average, Chinese Banks Have Return on Equity (ROE) That Is Double That of U.S. Banks: The largest four banks in China have ROE of 18.8%, roughly twice that of the four largest U.S. banks, which average 9.1%.

• Chinese Banks Have Income-Generating Potential: The four Chinese banks have on average a 5.7% dividend yield, which is 3.4 times that of the U.S. banks.
• Retained Earnings Building Equity: Importantly, the dividends are all very well covered by earnings, as the average dividend payout ratio from these banks is only 35.7%, meaning 64.3% is retained earnings that can help build greater equity cushions in case more loans start to turn bad and impact future write-offs.

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chinese financials

read this too:

China Banking Regulatory Commission (CBRC) released the second quarter data for Chinese banking industry recently. It shows the industry average Non-Performance Loans (NPLs) Ratio increased 0.08% from 2013 to 1.08% at the end of June 2014. Banks’ new NPLs increased 102.4 billion RMB from the end of 2013.

china big five npl

The recent small uptick needs to be put into historical context: NPLs were 40% as recently as 2004; the past decade has seen a remarkable fall in NPLs until 2001, when they fell below 1%. Between June of 2011 and June of 2014, the NPL ratio has remained virtually unchanged – only increasing by 0.1 percentage points.

So why have we seen newspaper headlines like “China’s bad loans threaten to bust world economy” (Chicago Tribune)

One reason is that while the ratio is stable, the actual number of bad loans has grown just as quickly as the number of outstanding loans; as can be seen from the graph below. This is simple maths: the denominator and numerator are both growing – this is not in itself anything to worry about.

The second reason this has attracted attention is that it is a data-point related to a wider narrative; concerns about the growth of credit within China’s economy. Journalists and commentators have seen the latest data as evidence that China’s post 2008 credit binge is turning sour. The evidence does not point to a smoking gun: an uptick from 1 to 1.08% over a year (and down from 40% a decade ago) is hardly earth-shattering. A similarly small rise about 12 months ago also lead to a flood of reports predicting a blow-up in China’s banks which has not come to pass.

That China faces a rapid growth in credit (in absolute terms, as well as a % of GDP) is undeniable – almost doubling from 120% of GDP to 200% of GDP since the financial crisis. Any deterioration in this credit needs watching closely.

So unpicking this data, what can be seen?

  • Geographically, banks’ new NPLs are mainly at Circum-Bohai Sea Region, Yangtze River Delta, Pearl River Delta Region and the west area. This is because business capital got tight in the export-oriented enterprises in the coastal regions due to increasing costs and decreasing orders. And, the slump in coal price in west provinces caused a lot of loan defaults.
  • Industrial sectors, the new NPLs are concentrated in manufacturing, wholesale and retail, and transportation industries, such as on steel and iron trades, shipping, and small and medium companies.
  • Real estate – interestingly, the sector where many analysts are fearing the worst, the NPLs to the real estate industry were basically flat this year.

    So what?

    The official data is not as robust as many commentators would wish. Real NPLs are universally thought to be higher; up to 6% has been touted. So too much should not be read into a small change in the numbers.

    An increase in the official NPL figure could either be a good or a bad thing. Increasing NPL ratio may reflect increasing robustness in the numbers, better accounting, and better banking regulation: all good. Or it could reflect that underlying NPLs really are increasing, and even the imperfect official measure nevertheless needs to increase in line with an underlying deterioration of credit. So too much should not be read into a single data-point.

https://www.gov.uk/government/publications/china-details-on-banks-non-performing-loans/china-details-on-banks-non-performing-loans

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