Raining on the ICBC parade
By Almerindo Portfolio November 3rd, 2006Here’s a guy who lays out a thoughtful explanation of why the worldwide headlong rush into ICBC (and BOC, CCB, etc) is mortal folly. As he explains it, “I wouldn’t touch a Chinese bank with a ten-foot pole.”
Certainly his argument is compelling. Chinese banks have bad lending practices. They are pressured to make loans to prop up failing SOEs and so end up with a ton of bad debt. They have relied on the government to save them from insolvency with injections of liquidity amounting to billions of dollars.
Not a good business to be in, to be sure. But why then do the likes of Goldman Sachs, Morgan Stanley, and UBS all want a piece of Chinese banks? Probably because the China story is dominating the economic headlines of the day, and growth throughout the country is off the charts. No matter how abhorrent their (former?) practices, China’s banks are going to play an integral role in the country’s development and everybody wants in.
It’s the same as the stock markets here. They’ve been in the tank since they were created 15 years ago and they’re still full of dogs. But eventually they have to turn, because the whole world has an interest in China right now and China is slowly letting them be a part of it. Naturally many of the punters lined up in Hong Kong to quickly turn a profit on a hot stock. But the big money is in China for the long haul - and its effect is bound to be a positive one.
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November 3rd, 2006 at 11:20 am
Well I have to agree, I wouldn\’t Chinese banks, but i did subscribe to their IPOS for fast gain.
I have subscribed all the IPOs from the Chiense banks, always getting one lot of share. I have sold all them, with the exception of China Merchants Banks. Not bad since there was an IPO trend going on. But like the author says, I wouldnt putting my money on the ANY of the Big 4\’s.
CMB is a bank that i will put in a different category, as its business orientated, its main threat for me is that CMB is also exposed to lending a lot to the property developers, which i presume the Central gov\’t have to do more to curb the excessive and irrational growth in the Chinese property market. (Which is outrageously expensive).
Since I lived in Beijing for a little more than 1 year, and visited quite a lot of places in China. CMB brances are usually located in commercial or business centres. I also like the fact that CMB is targeting the affluent classes in China. Since it\’s a widely known fact that the rich and poor gap is extremely serious in China right now, it\’s better to have 1 affluent Chinese client than 100 poor ones.
For now I am looking at CMB\’s service income. As i believe that for the chinese banks to be successful they need to distance themselves from relying too much on lending, just like the banks from the west, where lending should only contribute about 30% of their profit.. If i am correct CMB is also one of the best service banks in China and is in a leading position.
Some other banks that can rival CMB\’s position, are BoCom, Minsheng, and Shanghai pudong.
Lastly despite the fact that CMB is indirectly owned by the central gov\’t, I believe made it clear that the central gov\’t are only interested in keeping control on the Big 4 + No.5 (Bank Of Communications). But of course that\’s ONLY FOR NOW.
On a last note i would like to correct the author that the CMB did not receive a check from the gov\’t to write off their loans, so despite of the chinese banking industry is in poor shape, CMB is one that stands out of the crowd.
My opinions are bias as I still hold 1 lot (500 shares) of CMB.
November 3rd, 2006 at 12:09 pm
I would touch a Chinese bank with a ten-foot pole if it was as a pre-IPO investor and at a price well below the likely trading price - as was the case with Goldman Sachs’ investment in ICBC, Bank of America in CCB, Royal Bank of Scotland and UBS in BOC, etc. All these investors are tied down for a certain period of time but it would take a severe downturn to see them come out of the lock-up period without a profit. I have been told - but do not know for sure - that Goldman’s investment in ICBC is, as it stands, the single most profitable deal in the company’s history.
Mr Chung makes some interesting points about CMB. It has stolen a march on the competition basically by uniting an extremely good IT system with a level of service that you can’t get anywhere else. It’s worth pointing out that CMB has learned to do business the hard way, having gone through severe financial troubles in the past - it comes out of Shenzhen, after all, the land that risk management forgot! We will have to wait and see if CMB can retain its edge in the long term.
November 5th, 2006 at 12:13 am
Well considering that CMB is a smaller bank, changes for the better its easier to be implanted. Not to mention it has already improved its governmance.
On the other hand the Big 4’s are still pretty backward (despite ICBC seems to love to brag how awesome their IT system is). Changes its going to be take a longer time. I am still against anyone thinking of buying in to the Big 4’s, as they to me are nothing BUT BIG TROUBLE.
A side note is that Bank of Communications seems to be doing pretty well with the Help from HSBC. But with the recent new highs its making, i personally dont really think its the best time to own the stock. Perhaps after a correctiion (which i think will happen sooner or later, and it better happen, cause i do not want to see a crash) in the HK market.