BANKING: Bank IPOs Sag as Bad Loans Climb, Profits Tumble
Bottom line: Weak debuts for 2 China bank IPOs in Hong Kong and anemic profit growth for ICBC and Bank of China reflect the industry’s building bad loan problem, which could erupt into a full-blown crisis by the end of this year.
The headlines are littered with negative stories about Chinese banks as we reach the climax of the latest earnings season, reflecting the dismal outlook for this group of lenders staring at a major bad loan crisis. Often I like to be contrarian in this kind of situation and say it could represent a good buying opportunity, since Chinese bank stocks now trade at very low price to earnings (PE) multiples. But in this case I really do think far worse is still to come before the building crisis subsides, meaning there’s still plenty of downside for these stocks.
The bleak outlook was reflected by new Hong Kong IPOs for 2 local commercial lenders, whose shares both priced near the bottom of their range and ended flat on their first trading day. At the same time, 2 of China’s top 4 banks, ICBC (HKEx; 1398; Shanghai: 601398) and Bank of China (HKEx: 3988; Shanghai: 601398), both posted their latest quarterly results that continued to show their profits were sapped by growing bad debt.
The 2 new listings came from regional lenders Zheshang Bank (HKEx: 2016) and Bank of Tianjin (HKEx: 1578), whose urgent need for cash forced both to go to Hong Kong over China, where waiting times are longer but new stocks generally get a better reception. The pair collectively raised about $2.6 billion, including $1.7 billion by Zheshang and another $950 million by Bank of Tianjin.
Zheshang’s IPO probably would have been even more dismal if not for backing by e-commerce giant Alibaba (NYSE: BABA), which is also based in the bank’s home province of Zhejiang and probably brought the shares to curry favor with local government officials. Zheshang’s shares priced near the bottom of their range and then dipped after the opening, but managed to end their first trading day at their IPO price of HK$3.96.
Parallel Performance
Bank of Tianjin looked similar, pricing its shares at the lower end of their range, and then closing flat on their first trading day at their IPO price of HK$7.39. I suspect that in both cases, the stocks got support from government-linked buyers who were purchasing shares to avoid embarrassing debuts. That would mean the shares will probably quietly edge steadily downward in the next few weeks, and I wouldn’t be surprised to see them trading around 20 percent below their IPO price a month from now.
Next there’s ICBC and Bank of China, both of which repeated a recurring theme that has seen bank profits drop steadily over the last few quarters. All of these banks, including national ones like ICBC and local lenders like Zheshang, embarked on a lending binge in the years after the global financial crisis as part of Beijing’s massive economic stimulus plan. Many of those loans were to big state-owned enterprises and local governments that mostly wasted the money on worthless projects and are now having trouble repaying it.
ICBC said its net profit for all of last year rose a meager 0.5 percent to 277 billion yuan ($42.8 billion), while Bank of China’s profit rose by a similar 0.74 percent to 170.8 billion yuan. (English article; Chinese article) The similar magnitude of their profit gains almost makes the 2 banks’ earnings look doctored, as if they were ordered by a central authority not to post a loss and manipulated their results to post the smallest profit possible.
ICBC said its bad loan ratio rose to 1.5 percent from 1.1 percent a year earlier, while Bank of China’s rose to 1.4 percent from 1.2 percent. Those figures still look quite manageable, but again many believe the true numbers may be much higher. The only thing stronger than my cynicism towards this group right now is my genuine worry that a true bad loan crisis could erupt by year end, which could create a major mess for Beijing to clean up.
(NOT FOR REPUBLICATION)
