ICBC: Maintaining Profits, As Shareholders Foot the Bill

What a difference a multibillion-dollar capital raising makes! ICBC (HKEx: 939; Shanghai: 601939) has just reported its first-quarter results, which show its profit rose an impressive 29 percent as it benefited from a growing interest margin spread fueled by China’s recent rate hikes. (English announcement; Chinese announcement) What’s less impressive is the fact that its earnings per share grew quite a bit less, at about 25 percent, as shareholders saw their equity significantly diluted last year after ICBC and China’s other major banks raised over $100 billion through a series of rights offers to boost their shaky balance sheets. While many are congratulating ICBC and its peers on keeping their non-performing loan rates low at around 1 percent, I would advise people to focus on the fact that Beijing has indicated that billions more in capital raising is likely to come (previous post). That means that EPS growth will sharply lag actual earnings growth, even if earnings growth itself remains strong, which is far from certain. I still see a mild to moderate downturn in China’s housing market coming, which will undoubtedly pressure ICBC and its peers in the next year or two and will ultimately draw attention to the tenuous position these banks are in.

Bottom line: ICBC and China’s other major banks will continue to remain risky plays for at least the next 2 years due to uncertainties about China’s real estate market.

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