BANKING: ICBC Drafted Into Pakistan, BOC Expands In US
Bottom line: ICBC’s $4.3 billion lending program for Pakistani power projects is being driven by Beijing policy directives, while Bank of China’s US expansion is a commercially driven move to tap Chinese demand for US real estate.
New stories involving 2 of China’s “Big 4” lenders are casting a spotlight on the love-hate relationship that many investors have with these mammoth banks that sometimes act commercially but more often make decisions based on directives from Beijing. The larger item has ICBC (HKEx: 1398; Shanghai: 601398), China’s biggest bank, committing to a massive new $4.3 billion lending program to help develop Pakistan’s energy sector. The other has Bank of China (HKEx: 3988; Shanghai: 601398) planning a modest expansion in the US, as it looks to tap a growing appetite for American real estate by Chinese investors.
I don’t generally follow the domestic performance of China’s big state-run banks, as they all behave in a similarly non-transparent fashion and often show trends that reflect how Beijing wants the world to see them rather than their actual financial condition. I’ve never seen any specific estimates, but I would guess that perhaps up to one-third of their loans are mostly driven by policy directives from Beijing, and perhaps another third also have a component of policy directives included. That would mean that only a third of their loans are actually commercially driven.
But in exchange for that focus, Beijing gives the banks huge leeway to hide their bad loans, and also gives them billions of dollars in new funds by buying their bonds and new shares when their finances start to look shaky. Additionally, their policy-based lending focus also carries the implicit guarantee that Beijing would never let any of these banks fail or even come close to that outcome.
The banks’ policy-lending slant was on full display this week in Pakistan, where ICBC announced its massive $4.3 billion commitment to help fund 4 local energy and electricity projects during a visit to the country by Chinese President Xi Jinping. (English article) China watchers will know that Xi is the author of the recent “One Belt, One Road” policy, which includes efforts to develop infrastructure along the historic land-based Silk Road corridor that runs through Pakistan.
I certainly don’t fault China for pursuing this program, and hope it can help to bring more prosperity to many of the poverty-striken countries along the corridor. But if I were an investor, I would have big objections to Xi’s use of ICBC to help fund his program, since the bank is a publicly traded company. Perhaps some of these projects will ultimately repay their loans under this $4.3 billion lending program, but I expect that at least 1 or 2 will sour and ultimately leave ICBC with $1 billion or more in bad debt.
Next let’s look at the Bank of China news, which has its US president saying he is considering a significant boost in the lender’s local presence by opening up new branches. (English article) Bank of China already has branches in New York, Los Angeles and Chicago, and is now considering 2 additional ones in Washington and San Francisco, according to local chief Xu Chen.
Chinese investors have been on a buying binge for US real estate over the last couple of years, culminating with the record $2 billion purchase earlier this year of New York’s historic Waldorf Astoria hotel by Anbang Insurance. (previous post) Thus this latest move by Bank of China looks smart strategically, as it should easily be able to find new business by helping Chinese investors buy more US properties.
Investors have been aware of this split personality of major Chinese banks for quite a while, so neither ICBC’s nor Bank of China’s latest moves should come as a big surprise. This pair are actually 2 of the more commercially savvy and globally-focused of China’s top lenders, and thus could be well positioned to become major players if and when they are allowed to become true commercial banks. But that day is probably at least 10-20 years away, meaning their performance and stocks are unlikely to see any dramatic improvements anytime soon.
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