China Weakness No Match For World's Largest Bank

Mar 30 2014, 12:58pm CDT | by

China Weakness No Match For World's Largest Bank
Photo Credit: Forbes Business

China’s economy may be slipping, but tell that to the world’s largest bank, which also just happens to be Chinese.

Profits might not be growing as much as they were a year or two ago, but that’s stating the obvious. The bears will point that out, as it makes more dramatic television and better reading on the op-ed pages. The good news here is that non-performing loans are below the national average.

Over the weekend, the trillion dollar Industrial and Commercial Bank of China reported a 10.2% increase in 2013 profits to $42.3 billion. The Wall Street Journal yawned at the numbers. What was most interesting in the numbers was the data on non-performing loans.  ICBC recently watched one of its trust fund products default on more than $400 million, requiring a government bail out after a bad investment in a municipal coal producer.  The bank has not been the source of good news. Nor has the entire financial sector in China.  Still, despite problems in the real estate markets, non-performing loans as a portion of the bank’s real estate portfolio was just 0.72%.

Overall, ICBC’s non-performing loans ratio was 0.94% , up just 0.09 percentage points from the previous year.  China’s non-performing loan data comes from the government, which basically runs the entire financial sector in the country. Many naysayers believe that the data is inaccurate, arguing that Beijing is not going to make its banks look bad. If China’s data is correct, then non performing loans in China’s banking system is below that of the United States and the world average, according to the World Bank.

“China’s financial sector is going through a tough patch, but we don’t think it is a problem in the near or medium term for the economy,” Allan Conway, Head of Emerging Markets Research at Schroders told FORBES in New York last week.

China’s financial sector, led by the People’s Bank of China (PBoC), has been made more aware of the shaky ground on which it walks. Last summer, money market rates skyrocketed to double digits due to local fears of a pending crisis at municipal lenders.  The PBoC has pledged support of those smaller, provincial banks, but it comes with a price.  The central bankers are supposedly carefully watching the loan portfolios at government lenders.

ICBC, the world’s largest bank by market cap, cut lending in risky sectors facing overcapacity, like solar, auto and real estate. Last year, ICBC’s outstanding loans to local governments, real estate developers and industry declined by 94.3 billion yuan, 8.6 billion yuan and 19.9 billion yuan, respectively, the bank said on Friday.

ICBC is closely tied to China’s real estate market, too. In their personal loan segment, mortgage lending accounts for 55.6% of the bank’s lending. Mortgage lending rose 12.7% in 2012, the most recent year for compiled data.  That same year, ICBC wrote-off 214 loans to commercial developers valued at 9.4 billion yuan ($1.5 billion), up from 144 write-offs worth 6.4 billion. Commercial real estate trailed wholesale/retail lending and manufacturing loans, the worst hit of them all, in the impairment category for ICBC in 2012, according to the bank’s Annual Report.  Commercial real estate lending accounts for 8.3% of the bank’s corporate lending.

On balance, China’s average real estate price is in line with historic norms. But when major eastern seaboard cities are thrown into the mix — especially Shanghai and Hong Kong — China’s housing market looks to be bubbling over.  And while China’s real estate bubble is different from the leverage induced bubble in the U.S. that led to the 2008 foreclosure crisis and economic turmoil, the market has been treating real estate as one of two linchpins threatening to derail China.

According to government data reported on Sunday by Xinhua newswire, China’s residential real estate market is showing signs of cooling down, with some new housing projects cutting prices. Cuts were reported in the cities of Beijing, Hangzhou and Shenzhen, where property sales have been strong for years. A new real estate project in suburban Beijing priced its apartments lower than the market estimate by 12% or about 3,000 yuan ($490.2) per square meter to 21,000 yuan in mid-March.

Since 1998 when housing reform began in China, the sector has become more market-oriented, with rapid growth in residence investment and new supply coming on line in cities with high demand, like Shanghai and Hong Kong.  Low interest rates in the country, and a very volatile casino-like securities market, keep middle class and richer Chinese in the housing market, too. Investment in urban properties rose from 431.1 billion yuan in 1998 to 5.9 trillion yuan in 2013, with annual growth of 19%, according to Wind Information Co.

ICBC remains a victim of both housing and a developing credit crisis.  The bank’s  H-shares are down 6.71% year-to-date ending March 28, underperforming the MSCI China Index by around 300 basis points.

See: Prepare For Pop Of China Property Bubble – China Daily

China’s Biggest Banks Post Slower Growth – WSJ

China Developers Face End Of Easy Money – Bloomberg

World's Largest Debtor Governments, 2013

Source: Forbes Business

 
 

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