BANKING – Minsheng Gets Creative, ICBC Eyes Mexico
Bottom line: Minsheng Bank’s new stock incentive plan and ICBC’s Mexico expansion reflect moves to make China’s banking sector more market-oriented, providing potential upside for the lenders’ undervalued stocks.
Two big stories on the banking front are reflecting the big potential in depressed Chinese bank stocks, even as the sector faces a major bad debt crisis brought on by several years of state-ordered binge lending during the global financial crisis. The first of those will see Minsheng Bank (HKEx: 1988; Shanghai: 600016), China’s first private lender, launch a program that rewards top performing employees with stock at discounted prices. The second has leading state-run lender ICBC (HKEx: 1398; Shanghai: 601398) getting final regulatory approval to open a subsidiary in Mexico, one of the world’s largest developing economies.
These 2 developments spotlight ongoing reforms taking place at China’s biggest banks, as they seek to transform from their roots as policy-driven lenders to true commercial institutions. Poor decisions arising from their policy-lending tendencies have pushed their shares down to very low levels compared with regional peers over the last year, meaning the shares could be a good buy at current levels. (previous post)
Bank stocks could also become attractive with the highly anticipated launch next week of a program that links mainland stock exchanges with Hong Kong. That move would effectively unite all of the major banks’ Hong Kong-listed H-shares with their China-listed A-shares, creating a single huge pool of stock for each lender available to both Chinese and international investors.
While the Hong Kong-China stock exchange connection looks good for technical reasons, it’s moves like Minsheng’s stock incentive plan and ICBC’s move into Mexico that will provide the real long-term attraction for investors to buy Chinese banking stocks. Such moves represent the kinds of steps these banks will need to take to retain top talent and become globally competitive, as they face increasing challenges at home and abroad from better-run foreign rivals.
All that said, let’s start this banking rundown with a look at Minsheng’s innovative new plan to reward top performing employees with discounted stock. (English article; Chinese article) Under the scheme, certain key workers will be allowed to buy Minsheng’s shares at a 10 percent discount to their price from last week.
Minsheng’s shares jumped on the news, rising by 4 percent in Shanghai and Hong Kong as investors also anticipated convergence between the bank’s shares on the 2 exchanges. Analysts predicted other banks could soon roll out similar incentive plans, creating a broader air of bullishness for stocks of Chinese big lenders.
This kind of incentive plan is already quite common in the west, and is even practiced by some more entrepreneurial big Chinese firms like PC giant Lenovo (HKEx: 992). Its roll-out into state-run banks could be part of a push to make the stodgy sector more commercial, and also part of a Beijing drive to lower salaries for top executives at state-run firms and make employee compensation more performance-based.
Next there’s the news that ICBC has received formal approval from Mexico to open a subsidiary in that country, following an earlier nod for such a move from China’s own banking regulator. (company announcement) There’s no word on the size of the bank, which would be an independently capitalized unit rather than just a branch. Based on its previous overseas investments, I would expect ICBC to capitalize the new bank at a relatively high level, with perhaps $5-$10 billion in initial funding.
The move into Mexico is a logical step for ICBC, which has invested in banks and opened branches in a wide range of developing markets from Argentina and Brazil in Latin America, to Thailand and Taiwan in Asia over the last 3 years. The bank has also moved into western markets with a major deal last year in London, and its 2012 purchase of 80 percent of the US unit of Hong Kong’s Bank of East Asia (HKEx: 23)
Only time will tell how all of these overseas forays by ICBC and its peers perform, though most of them look relatively well conceived due to the choice of strong local partners and the heavy focus on developing markets. Likewise, we’ll also have to see if ICBC and its peers adopt similar stock incentive plans like the one at Minsheng. But the early signs certainly look promising, and their current low valuations could make Chinese banking stocks an attractive buy for investors over the next 1-2 years.
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