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Best China Banks to Buy

China, Stocks

Written by:

Zhi Rong Tan

Due to a slew of factors, including regulatory pressure and the country’s property crisis, Chinese stocks have taken a beating across the board. As a result, most of them are now at a very attractive price, particularly for value investors.

However, crackdowns continue to pose a significant risk to Chinese stocks, especially those in the technology sector. As such, investors are still very cautious, some have already lost faith in the Chinese market altogether.

That being said, Chinese banks today may still be an attractive value proposition. They are not only undervalued after falling more than 20% from their April 2021 high; they can also be seen as a safer choice than others.

The following analysis was originally published in 2021 and has been updated on May 2022.

In this article, we will look at China’s “Big Four”, namely:

  • Industrial and Commercial Bank of China,
  • China Construction Bank,
  • Agricultural Bank of China, and
  • Bank of China
Source: lexisnexis

These banks are not only the biggest in China, but they are also the world’s biggest banks by assets. Together, they have a combined assets value of US$17.321 trillion,  as of 20 September 2021.

Source: companiesmarketcap.com

In terms of market capitalisation, these banks are also among the top 10 in the world, highlighting why we should not overlook them.

Okay, let’s take a look at how each bank has performed so you can determine which is best for you.

Industrial and Commercial Bank of China (ICBC)

HKG: 1398 or SHA: 601398

i) Total assets and net profit

IICBC’s total assets were RMB 37 trillion at the end of the most recent quarter ended 31 March 2022, up 6.04% from just three months ago. Yes, you did not see wrongly; ICBC assets are still growing despite the Chinese economy’s current difficulties. Meanwhile, net profit for the first three months of 2022 was RMB 91.1 billion, up 5.60% from the same period last year.

ii) Loans and advances

Total loans and advances to clients totalled RMB 21.6 trillion, up by RMB 935 billion or 4.53% from the previous year. These loans are made up of 59.8% corporate loans, 37.3% personal loans, the majority of which are related to property mortgages, and 2.9% on others.

In terms of geographical distribution, 93.1% of loans come from China, while 6.9% come from overseas.

iii) Capital ratios

With an annualised net interest margin of 2.10% and a non-performing loan ratio of 1.42%, ICBC’s loan book is in good shape. However, it does have the highest NPL among all four banks, marginally.

All three capital adequacy ratios also met regulatory requirements: the core tier 1 capital adequacy ratio was 13.43%, the tier 1 capital adequacy ratio was 15.04%, and the capital adequacy ratio was 18.25%.

China Construction Bank (CCB)

HKG: 0939 or SHA: 601939

i) Total assets and net profit

CCB’s balance sheet grew too, with total assets approaching RMB 32 trillion, an increase of 5.81%. Its net profit for the first quarter of 2022 was RMB 87.8 billion, up 5.78% from the same period last year.

ii) Loans and advances

In terms of loan profile, CCB’s corporate loans account for around 56.4%, personal loans account for 41%, and others account for 2.6%.

Compared to ICBC, CCB’s loan distribution is more concentrated in China. 96.43% of its loans come from China, and 3.57% come from overseas.

iii) Capital ratios

With a net interest margin of 2.15% and a non-performing loan ratio of 1.40%, CCB’s loan book is likewise in good shape.

The core tier 1 capital adequacy ratio was 17.91%, the tier 1 capital adequacy ratio was 14.21%, and the total capital adequacy ratio was 13.67%, all of which met regulatory requirements.

Agricultural Bank of China (ABC)

HKG: 1288 or SHA: 601288

i) Total assets and net profit

ABC’s total assets were RMB 30.9 trillion at the end of March 2022, up 6.26% from the previous year’s end. They reported a net profit of RMB 70.6 billion for three months ending 31 March 2022, an increase of 6.72% over the same period last year.

ii) Loans and advances

Total customer loans and advances totalled RMB 18.2 trillion, up 5.69% from the previous year’s end. Corporate loans account for roughly 54.5%, personal loans at 40.7%, and 4.8% in other areas.

ABC’s loan book is also highly concentrated in terms of geographical distribution, with 97.5% originating from China and only 2.5% coming from overseas.

iii) Capital ratios

ABC has a net interest margin of 2.09% and a non-performing loan ratio of 1.41%, similar to the other banks.

The core tier 1 capital adequacy ratio was 11.36%, the tier 1 capital adequacy ratio was 13.58%, and the total capital adequacy ratio was 17.18%.

Bank of China (BOC)

HKG: 3988 or SHA: 601988

i) Total assets and net profit

BOC, which operates in 62 countries and regions, including the United States, is the most international of the four.

BOC’s total assets hit RMB 27.4 trillion, 2.76% from the previous year’s end. BOC made a profit of RMB 60.5 billion in the first three months of 2022, up 5.64% from the same period in 2021.

ii) Loans and advances

Total loans and advances amounted to RMB 16.5 trillion, and this split into Corporate, Personal and other loans, accounting for 61%, 38.8% and 0.2%, respectively.

In terms of geographical location, Mainland China accounts for 81%, Hong Kong, Macao, and Taiwan for 12%, and other countries account for 7%.

Compared to other banks, we can now see a difference in loan distribution by geographic area.

iii) Capital ratios

With a net interest margin of 1.74% and non-performing loans of 1.31%, its loan book remains healthy; however, we should note that its NIM is the lowest of the four banks.

The common equity tier 1 capital adequacy ratio, tier 1 capital adequacy ratio, and capital adequacy ratio were all above regulatory requirements at 11.33%, 13.30%, and 16.64%, respectively.

Understanding the risks

Although these banks are relatively safe, there are still underlying risks that investors should be aware of.

State-owned enterprise

While China’s banking sector has experienced significant changes since its opening to the rest of the world, financial operations are still heavily regulated by the government through the People’s Bank of China (PBOC), the country’s central bank. The PBOC not only plans and implements China’s monetary policy; it also oversees all of the banking sector’s clearing, payment, and settlement systems.

These big four banks are still entirely or primarily held by the government and are considered state-owned enterprises. Being an SOE thus entails additional political risk for investors, as these banks may be forced to follow the CCP’s policies and directions, even if it means sacrificing shareholder returns.

On the other hand, being an SOE has its advantages, as the Chinese government is unlikely to allow them to default. Consider what happened two years ago when Jack Ma spoke out against banks. This demonstrates why you should avoid messing with the CCP and their ‘kids’.

Evergrande Crisis

News of the Evergrande issue has subsided, but it remains a threat to banks and the Chinese economy as a whole. The majority of retail loans are for mortgages, which could spell disaster for the banks in the event of widespread default.

While I am optimistic that CCP will intervene to avert a severe drop, this drama continues to pose a significant danger to investors of Chinese banks.

Slow growth

As a result of the latest Covid outbreak, China, which has insisted on a stringent zero Covid policy, has substantially impacted its economy. Citizens are forced to stay at home during the outbreak, and recent data are now showing a severe slowdown in both manufacturing and service sector activities.

Overall, many are sceptical that China will meet its 5.5% growth objective this year. And, considering bank earnings are closely linked to the health of the economy, banks may feel the brunt of this.

Book value

While the book value of these institutions is remarkably low, it remains a complete mystery. The only figures on which investors can depend are those the companies provide, which must be taken at face value. You just have to trust it is right.

Valuation of China Bank stocks

 ICBCCCBABCBOC
PB ratio0.410.440.350.35
PE ratio4.023.833.683.61
Return on Equity11.18%11.95%10.26%10.06%
Dividend Yield7.86%8.12%8.67%8.92%
Revenue growth (YoY)3.30%3.90%6.00%4.70%
Net Interest Margin2.10%2.15%2.09%1.74%
Non Performing Loan Ratio1.42%1.40%1.41%1.31%
Leverage ratio (%)*8.40%7.94%7.67%7.60%
* The leverage ratio of commercial banks should be no less than 4%.

Due to the dual listing, there are certain differences in metrics, such as the dividend yield. Those trading on HK offer a higher payout since more mainland investors participate in the Shanghai market instead of Hong Kong.

At present, all four banks appear to be cheap, based on their PB ratio. Having said that, it’s worth noting that these companies have typically traded below 1 in recent years. Nonetheless, these banks are still undervalued, with a historical average of roughly 0.6 to 0.8 PB.

Revenue growth is not as terrible as it seems, as the above figures were obtained at the peak of the pandemic last year. Still, investors should not anticipate much growth from banks.

What makes these stocks appealing is their yield, which ranges from 7% to 8%. All things considered, this is undoubtedly attractive as investors wait for the banks to recover.

Concluding thoughts

So are China banks a buy? Which one should you pick?

First and foremost, regardless of how horrible the media portrays the current crackdown, you must continue to believe the China growth story that the country’s economy will do well in the long run. After that, you can start considering which bank is the best.

To me, all four banks seem reasonable, so it truly depends on your risk appetite. I would say that BOC is the most undervalued, as it has the lowest PB. ICBC and CCB are my favourites because they are the largest and have the best return on equity, despite their slightly lower dividend.

Every investor has their own risk appetite. If China bank stocks are not for you, read our Singapore Banks comparison. And if you want consistent dividend payout without the regulatory risks, join Chris as he shares how he picks safe and consistent dividend paying stocks.

Disclosure: At the point of writing, the author does not hold positions in any of the stocks mentioned above.

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