EQUITIES UPDATE: China Bank Earnings and Foreign Stakes
China Bank Earnings and Foreign Stakes
China’s largest bank shares are down almost 25% from their year-to-date highs on fears over a US-China trade war, a slowing Chinese economy and general EM underperformance. This week, the sector will begin to report first half results with analysts expecting modestly higher profits and net income margins (NIMs) as government efforts to clamp down on shadow banking and provide liquidity is spurring on-balance sheet loan growth. Thomson Reuters is estimating that the top five financial institutions will see 4.7-7% profit growth, vs. 2.8-5% last year. There will be a strong focus on guidance for the second half as investors are divided about the degree to which government guidance can continue to drive credit creation and NIMs.
Over the past few months, the Chinese economy hit a soft patch increasing investor anxiety about the second half of the year. In the 2Q, economic growth slowed slightly to 6.7% y/y with some key indicators falling more sharply. Of note, in July, fixed-asset investment grew at its slowest pace on record and the Caixin/Markit Purchasing Manager's Index hit an eight-month low as new export orders fell by their fastest rate in more than two years. Additionally, the 2Q official data for the banking sector’s non-performing loan ratio reached 1.86%, its highest since 2009 with bad loans growing 183 billion yuan ($26.62 billion), the biggest quarterly jump since the government starting releasing data in 2003.
Since then, Beijing has taken a more targeted approach to help stimulate the economy. The State Council has called for more proactive fiscal policy, infrastructure spending and new lending, particularly for small and medium sized firms. The People's Bank of China is also increasing its liquidity injections into the financial system and reducing the amount of deposits commercial lenders are required to hold. On Friday, the PBoC injected Rmb149bn ($22bn) into the system through loans to commercial banks. In particular, it’s using it Medium-term Lending Facility (MLF) to help banks, insurance companies and investors increase their purchases of local government and corporate bonds.
Beijing is hoping that these efforts will boost growth into the end of the year without derailing their de-leveraging strategy. Optimists on the Chinese banks are betting that these efforts will be successful and that the trend that has been evident over the past year of increasing loans and improved NIMs will continue.
Another small positive for the sector was last Thursday’s announcement from the China Banking and Insurance Regulatory Commission (CBRC) providing more details on its plan, initially released last November, to open up China’s financial system to international firms. The Agency said it will remove all caps to foreign ownership, currently limited at 20% for a single institution and 25% for a group, on its banks and bad-debt asset managers.
While a constructive step towards greater economic liberalization, it is unlikely that many international firms will increase their stakes anytime soon. The banks are still overburdened with high levels of bad loans whose true size is still completely unknown and many of these institutions are still heavily directed and regulated by the State. Additionally, China still struggles with the bigger issue of a free-floating currency and an open capital account that makes large investments and commitments by overseas entities difficult. Finally, with the big internet companies like Alibaba and Tencent, and the more innovative insurance companies like Ping An, playing a more dominant role in the financial sector, a stake in a Chinese bank doesn’t look overly compelling.