The FT's Lex Column thinks foreign banks are stupid because many of them are currently selling their stakes in China's big banks. According to Lex, Chinese banking is a wonderful growth market, and "there is still fortunes to be made".
In other words, he thinks Chinese banking stocks are undervalued.
Today, ICBC's 2008 results came out (the condensed version, annual report to follow later): Record profits of 111 bn RMB, 20 % RoE.
ICBC's Hong Kong market cap stands at 1.2 tr RMB, i.e. P/E = 9. Not expensive at all, if one assumes solid long-term growth potential.
Unfortunately, things can change quickly in the banking world, as the shareholders of nearly all non-Chinese banks have learned the hard way over the last two years.
But China is different.
Is China different?
Maybe. Maybe not.
Some things jump out at you when looking at ICBC's 2008 results:
- ICBC has a cost/income ratio of 30 %. No Western bank ever managed to sustain such a low ratio. Competition doesn't allow it. In other words: Profitability compared to business volume is very high by international standards.
- The main reason is a huge interest margin: ICBC charged 7.1 % on loans, but paid only 2.2 % on deposits. As both loan and deposit interest-rates are tightly regulated, that's essentially a political gift granted by the regulator. It need not stay that way forever.
- Non-performing loans are extremely low, at 2.3 % (and reserved at 130 %). Maybe that's correct as of 31/12/08 using HK GAAP accounting standards. I have no reason to doubt it. But does anybody believe NPLs won't be up sharply in 2009?
I suppose it suited the authorities to make loans expensive in 2008, because they wanted to slow down the economy. And it conceniently allowed the banks to shore up their balance-sheets via profits, in preparation for worse times to come.
And things will get worse quite soon. There will be trouble with real estate. And there will be trouble with state-owned enterprises in certain sectors. Plus, banks have been directed to lend aggressively. Economic growth needs to be assured. Aggressive lending in recessionary times. It may be good for the economy. It isn't normally good for a bank's balance-sheet quality, though.
The big question: How bad will it get? Just a little, or quite nasty? I have no idea, but I know that solid-looking banks can turn out to be very shaky very quickly. It won't necessarily happen to Chinese banks. But it may. We shall see.