Chinese banks “among the most thinly capitalised”7 May, 2012, 12:24. Posted by Zarathustra
Tags: Chinese Banks
If you can recall, sometime ago I talked about the CBRC’s annual report on the Chinese banking system.
Interestingly, of course, the report says Chinese banks are very well capitalised, with non-performing loans falling every year and capital adequacy ratio rising every year.
You could have guessed that I disagree with that. As I have talked about previously, China simply has much more debt than anyone can imagine, and banks were lending aggressively and indiscriminately to serve the state’s objective of whatever GDP the government was targeting. Simply look at the size of total banking assets and money supply, you know that debts are high. And because all these debts are used to fuel the real estate bubble and finance pointless and/or financially ruinous project like the high-speed rail, a big part of the debt is bound to go bad. The NPL number on the official report (0.96%) is simply impossibly low. Already, real estate companies are all finding it difficult to service there debt, while the Ministry of Railways are apparently losing money.
Last year, Credit Suisse estimated that the true NPL ratios would be 8-12% of loans and that could wipe out quite a bit of banks’ equity capital. That view is echoed by Charlene Chu of Fitch rating, who is being quoted on the Economist that “if a tenth of the banking system’s outstanding credit turns sour over the next two years, all profits and 39% of the system’s equity will be wiped out”. The Economist’s story went on to say “The Chinese banking system is already among the most thinly capitalised in emerging markets (the ratio of equity to assets is 6%)”, even though we somehow get the impression from the consensus that Chinese banks are very well capitalised.
I continue to intensely dislike Chinese banks, as banks are highly financially levered with little capital. Slight reduction in banks’ asset value (through non-performing loans, for example) can have big impact on the value of banks’ equities, particularly during times when banks are not well-capitalised (like in a recession) as the equities are being wiped out. In that, stocks will only behave like a out-of-the-money call option.