The Big-Four banks also disclosed that they made a total provision of $14.4b as of end 1H11.
HSBC says strong results have yet to dispel persistent market concerns that non-performing loans may rise materially going forward due to local government financing vehicle loans and a slowing economy.
Here's more from HSBC:
Chinese banks have again produced strong results, with net profits up 29% y-o-y in 1H11 to over RMB410bn for the nine H-share listed banks, or 45% share of MSCI China.
With banking shares down by an average 18% y-t-d, however, it appears that strong results have yet to dispel persistent market concerns that non-performing loans may rise materially going forward due to local government financing vehicle loans and a slowing economy.
At the end of 1H11, total LGFV loans for the Big-Four banks and BOCOM stood at RMB2.9trn, or around 11% of the total loan book for the five banks and 30% share for the whole banking system’s LGFV exposure.
Moreover, the Big-Four banks disclosed that they made a total provision of RMB92bn as of end 1H11, or 3.6% of their total LGFV loans of RMB2.6trn. So, how should investors monitor and measure market perception of the risk of local government debt, while listed banks consistently report below-1% NPL ratios on LGFV loans?
In addition to listed banks’ disclosures, the credit market also provides interesting information on China Development Bank, which is a wholesale funding state policy bank that has the biggest LGFV exposure. For instance, it lent out RMB53bn, or 58% of all banking sector lending to social welfare housing in 1H11. Hence, we can assume 60-70% of its total loan book of RMB4.5trn at end 2010, or RMB3trn, are LGFV loans.
The size is matching, if not beating, that of the top-five listed banks combined. More interesting, the CDS spread for CDB’s 5-year USD bonds has a strong negative correlation of 87% with the performance of the H-share index for the past four years, in which banks have over 40% weighting.
Chinese banks have delivered a 28% EPS CAGR for the past five years, far outpacing that of the MSCI China universe at 16%. But the growth has also been highly capital intensive – HSBC’s Bank Research team estimates over RMB770bn or USD120bn has been raised by Chinese banks from both A- and H-share markets since 2009 – and this is clearly also putting pressure on share price performance and the equity market. The regulator, CBRC, is currently circulating a consultation paper on the new capital adequacy ratio requirement for banks, which may lead to further substantial capital raising activities.
Photo from Kernbeisser
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