Been catching up with some interesting stories from Caixin Online on China. Zeng Gang’s piece on China banking profits is well worth a read. He writes:
Data from the China Banking Regulatory Commission indicates that as of late 2011, total assets of China’s banking industry reached more than 113 trillion yuan, up 18.9 percent from the previous year….. As of late 2011, the amount of outstanding bank loans was 54.79 trillion yuan. Every percentage point increase in the NPL ratio means banks face a potential loss of 548 billion yuan. Assuming 2011 profits were already excluded in NPL provisioning, around 2.1 percent of total loans, it would have been completely consumed if 4.1 percent of loans had been lost. [Full piece here].
While you are at it, check out the Caixin staff reporter’s piece on ‘The false promise of bank profits’.
Regardless of what one says about China’s decisiveness compared to India’s (lest I am misunderstood, I do concede that it is an important advantage for and strength of China), a Bank asset/GDP ratio of around 300% or more and a bank loan/GDP ratio of around 150% are clearly unhealthy and cannot be said to have happened without creating potential for huge problems down the road.
While I thought and still do think that Chinese stocks have discounted domestic bad news more readily than Indian stocks have, stories such as the ones above on their colossal under-provisioning and such as this one on the decline in SoE profits make me rethink:
According to the Ministry of Finance, state-owned enterprises registered a drop in profits during January and February compared to the same period last year. Total profits for the two months hit 363.5 billion yuan, down 10.9 percent year-on-year. Centrally-administered SOEs saw similar decreases in profits, at 212 billion yuan, down 11.5 percent. The figures represent the second decline since 2009. [Link]
The story on the losses in the steel sector is the same: overcapacity and rising input costs:
The China Iron and Steel Association (CISA), a national industry organization, said profitability for the steel industry in the first two months fell 68.4 percent compared to the same period in 2011…………This would be the first time for the whole sector was in the red since this millennium, the official said. [Link]
Interesting to pause and think on its relevance for the banking sector. Overcapacity is clearly the case with China banks. Far too much of credit has been created. It should lead to lower margins, actually. But, the cost of funds has been kept artificially low (low deposit rates). That is how it has escaped the agony of higher input costs. Not to mention, at the risk of repeating myself, under-provisioning.
It is hard to reconcile stories such as this with the amount of provisioning (“the current loan-loss provision ratio of China’s bank loans is at a historic-low of 0.2 percent. “) that Zeng Gang’s article mentions unless something has been lost in translation.
It is fitting to end this post with a link to the interview of Andy Xie and Minggao Shen, Head of China Research at Citigroup by Bernie Lo of CNBC. Start listening from around 2.40 minutes and you will hear what they both think of the current economic slowdown underway in China. Andy Xie thinks it has many more years to run. Minggao, unsurprisingly, thinks that it is a matter of couple of more quarters, at most.