Chinese banks have been trading at depressed valuations and are probably one of the more disappointing stocks so far this year.
With reference to an article written earlier, the debate continues whether these banks’ profitability and creditworthiness are sustainable given the pessimism toward China’s shadow banking market, the ever growing property market (roughly one-third of the top four banks in China have exposure to property-related loans) and regulation changes to financial policies. These issues surrounding state-owned banks could potentially put pressure on the banks’ net interest margins, asset quality (such as NPL ratio) and liquidity adequacy. That said, the depressed valuations have give rise to attractive dividend yields as shown below:
Industrial & Commercial Bank of China – ICBC (HKSE: 1398)
China Construction Bank – CCB (HKSE: 0939)
Bank of China – BOC (HKSE: 3988)
Agricultural Bank of China – ABC (HKSE: 1288)
Are such dividend yields sustainable for the long-run?
Currently, the big four banks in China have a conservative dividend policy with average dividend pay-out ratios at approximately 35%.
Despite China’s economic growth slowing to between 7% to 7.5% and a curb to banks’ credit growth, ROE for these banks have averaged approximately 20% with ROA at roughly 1.3%. Singapore’s top three local banks: UOB Bank (SGX: U11), OCBC Bank (SGX: O39) and DBS Bank (SGX: D05) have ROE and ROA at about 11.89% and 1% respectively.
Moreover, the top 4 banks in China have a loan-to-deposit ratio (LTD) of less than 75%, which could potentially give them additional firepower to boost their earnings.
Chinese banks are well-supported by the state where the central government has established China asset management companies (AMC) are to buy out bad debt from the big four banks. NPL ratio for the big four banks in China are surprisingly low at 1% to 1.5%. Each of these AMCs are tagged to the big four banks:
Huarong AMC – for ICBC
Cinda AMC (HKSE: 1359) – for CCB
Orient AMC – for BOC
Great Wall AMC – for ABC
Value in Action
Dividend yield sustainability might be questionable given fundamental issues arising from the banking sector. However, these major banks in China continue to receive support by the PBOC and still have lending potential when the economy’s growth rate picks up.
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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above
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