China Bank Rally Takes A Breather

After a series of moves and reviews, the big 5 Chinese banks blasted upwards in February, outpacing the rocketing Hang Seng.  Over the past couple of days, however, they’ve retrenched.   If Morgan Stanley and Short trading interest are to be believed, this is a temporary reversal.

The banks include:

Name	Acronym	HK symbol
Industrial & Commercial Bank of China	ICBC	1398
China Construction Bank	CCB	939
Agricultural Bank of China	ABC	1288
Bank of China	BOC	3988
Bank of Communications	BOCOM	3328

Despite rising Non performing loans, shrinking net interest margins and capital requirements, these banks have surpassed the rising Hang Seng thanks to interest rate rises, increased lending, China stimulus and PPI rises.

Timeline of positive factors:

1/24/2017 – Interest rates raised on medium term rates on loans.

2/03/2017 – Interest rates raised on short-term debt, reportedly in the interests of liquidity due to perceived resulting from the Chinese New Year.

2/14/2017 – Morgan Stanley published a bullish report on China Banks. Banks.

2/15/2017 – Bloomberg reported that options trading reacted positively to the bullish stance of Morgan Stanley on the big 4 banks, (all of banks listed above excluding BOCOM, which isn’t included in the  big 4).

None of these banks have reported annual earnings.  While earnings seasons has just about ended in the US, annual earnings reports for Hong Kong listed stocks are trickling in.  Regardless of the annual earnings, they won’t reflect the February 2017 change in interest rates and producer price inflation which Morgan Stanley reports.

Given the significant decline in short-term selling ratios for all but BOC, 3988 HK, the recent drop could signify a temporary drop versus a long-term decline.  At least for the short-term.

 

 

 

 

ICBC of China Issues 117 Million Credit Cards in 1st Half, Why It Matters

As a tantalizing pre-cursor to 1st half earnings, ICBC HK 1398, stated that it issued over 117 million credit cards with 1st half consumption of 1.4 trillion yuan, ($211.25 Billion). However you look at it, that’s a lot of plastic.  However, in relative terms, it’s not quite as stunning.  Particularly for consumption dollars, the increase is substantial, compared to the 1st half 2015 filing:

Why it matters. In terms of market cap, ICBC is the second largest bank in the world after Wells Fargo Bank.  In China, it’s the largest.  Its credit card issuance and consumption therefore give a view of credit card growth in China, which has historically had a higher dependence on debit cards. It’s also a window to consumer credit use in China and the growth of an important revenue source for ICBC.

For ICBC, and the majority of banks in China, debit card issuance has far exceeded credit card issuance.  Based on the last 2 annual reports, ICBC’s credit cards as a % of total cards has inched up , although growing more than debit card issuance.

Based on the annual report, confirmed by the 1st half 2016 results, Chinese consumers who do have credit cards are getting more comfortable buying on credit.  This should be good news for Chinese banks, since they’ve been squeezed by lower net interest income after multiple interest reductions by the Central bank.

Source: Reuters

Add to that a market slowdown and increasing, NPL’S, and banks are grasping for sources of income other than net interest.  ICBC , despite its size and  international holdings, needs that extra income.  The last quarter showed minimal growth in net profit, with commission and fee income representing a consecutively larger part of revenue.

Source: HK filing

While quarterly filings don’t break out bank charges, the last annual showed them to be about 5.6% of gross revenue.

Comparing this to the increase in annual card issuance, the 12.5% increase in annual bank cards issued brought about a 7.3% increase in total revenue.  While the latest statement mentioned only credit cards, the increase bodes well for an increase in a significant portion of income.  With a trailing p/e of 5 and below, it needs all the help it can get.  Judging by historical filing, we should see if this assumption holds around 8/27 of this month.

 

 

 

 

 

Hang Seng and Shanghai Comp Rise in Tandem

Despite disappointing retail sales numbers released over the weekend, the Hang Seng and China Comp managed to rise, following a weekly decline for both.

This could be blamed either on a short-term correction after falls over 10% from recent highs, or the usual stimulus hopes after weakening retail and credit numbers.

The HSI had positive moves in the majority of sectors.  For the HSCEI, however, the 10 decliners were dominated by banks.

Source: AA stocks

 

While China banks are under pressure with net interest income declining and, npl’s growing, the latest move could be due to rumors that Chinese regulators will be examining non-performing loan data.  Despite economic weakness in China, NPL’S have stayed relatively low.  While NPL’S have grown, criticism has come from outside regarding the drop in allowances to NPLS, now below the 150% guideline for 2 of the major 4 banks. From the last quarterly reports for China’s big-4 SOE banks:

Whatever the reason for the rise in stock values, the quick rise in one company, based on recent and historical performance, is unwarranted.  Belle International, hk 1880, has risen over 14% since May 11.

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Belle is a footwear and sportswear apparel retailer with 20,375 stores in Mainland China, Hong Kong and Macao.  Belle has felt the brunt of the Chinese economy slowdown with same store sales declining, particularly in their bigger footwear segment, where they have the most outlets and get the biggest net profit.

Source Data: HKEX filings

While they have yet to issue their annual report, the decline in same store sales has seriously hit the bottom line as a profit warning was issued on 3/29/2016,  stating the company expected a decline in annual net profit of 35% to 45%.  Without giving specific details, the company claimed it was due to declining same store sales, declining gross profit margins and goodwill impairment. This would represent a major decline in performance based on both the last semi-annual report and the last annual.

Source Data: HKEX filings

As shown above, the company is confronting 2 problems.  Thanks to declining sales in its original footwear core, it has been shifting more into sportswear apparel, which has continued to see same store increases although these are shrinking.  Unfortunately, the margins in sportswear apparel, where they sell mostly licensed goods versus proprietary goods as in footwear, are much lower than footwear.

Based on these trends and the recent profit warning, it is doubtful the company will meet the current projections for about a 20% decline in eps. The company is expecting to publish its annual report by the end of this month.

 

 

Shanghai Composite and Hang Seng Falter

Major Chinese indexes faltered pending 1st quarter earnings reports, Wednesday’s data on March industrial profits and  April consumer sentiment and mixed signals from regulators.

Commodity Bubble:

Commodity trading raised alarm bells with both Deutshe Bank and Morgan Stanley noting the spike in volume.  Per Bloomberg:

The recent spike in speculative trading in commodities in China has stunned global markets, according to Morgan Stanley, which cited a jump in local activity for steel, iron ore and cotton as well as eggs and garlic.

“Now China’s speculators engage commodities,” analysts including Tom Price and Joel Crane said in an e-mailed note on Monday. “China’s latest speculative spike has stunned global markets.”

To put it in perspective, also per Bloomberg:

“The fact that trading volume for steel rebar contracts was at 223 million tons of rebar last Thursday, more than China’s full-year production of steel rebar, raised concerns about the repeat of boom-bust scenario seen last year in China’s equity market,” analysts at Oversea-Chinese Banking Corp. wrote in a note on Monday.”

Finally, a picture courtesy Zerohedge:

Banks and Property Agencies Under Pressure to Slow Shanghai Skyrocketing Prices

Per Bloomberg,

China’s banking regulator in Shanghai is halting business between commercial banks and six real estate agencies for a month, the latest in a string of measures to contain risks in the housing market.

The suspension, which takes effect Monday, covers agencies including the local arms of Beijing Homelink Real Estate Brokerage Co., Pacific Rehouse Co. and Shanghai Hanyu Property Brokerage Co., according to a statement by the China Banking Regulatory Commission’s Shanghai office on the city’s official Weibo microblog account.

In the same account, branches for two of China’s largest lenders, Industrial and Commercial Bank of China,  1398 hk, and Bank of China, 3988  hk, along with HSBC are suspended from issuing mortgages for the next two months.  The reasoning given eerily echoes the subprime meltdown as:

China’s central bank Governor Zhou Xiaochuan last month told banks to better assess customer creditworthiness in mortgage lending to reduce risks, adding that unauthorized loans by real estate agents increased the chances of bad debts.

While the overall management on residential mortgage loans is “relatively prudent,” some real estate agents advanced the transactions by providing down-payment loans and bridge loans, the statement said. Some commercial banks also violated rules with their practices on mortgage loans, according to the statement.

China Eastern Stalls Again

Despite the news that CTRIP, CTRP NYEX, is stepping up to invest about 3Billion rmb’s into China Eastern, 670 hk, the stock swooned ovef 5% today while China Southern, 1055 HK, dropped 1.2%, and Air China, 753, hk  dropped 2.5%.  The air pocket could be due partly to the following:

• The 3Billion rmb is just a small portion of the 15 Billion China Eastern announced it would raise with a new, private A-share offering.   Approved by the CSRC in January of 2016 with this investment being the first actual investment since then. The bulk of the money is needed to buy 23 new planes.
• China Eastern faced headwinds when it tried to buyback  3.3 Billion yuan notes due March 2017, 4.8%, guaranteed.  After offering to buy via a dutch Auction with a minimum price under par, the company got no quorum and amended the offer to par + accrued interest and extended the offer to 4/27/2016.  (The bonds were issued in March, 2014, to professional investors).
• The company has been issuing super-short term notes to finance working capital while it waits for  the proposed shares to be bought to finance its expansion. In April alone it issues 4 separate tranches totalling 12 billion rmb.  Since the beginning of 2016, it has issued 19.5 Billion in super short term notes, generally refinancing existing debt.

 

Shanghai/Hong Kong Bank Shares Diverge Again

As the PRC lowered down-payments for 1st and 2nd homes in China, the big 4 banks got different investor reactions based on their exchange.  Agricultural Bank of China, ABC, Bank of China, BOC, China Construction Bank, CCB and Industrial and Commercial Bank, ICBC, all rose moderately in Shanghai on Tuesday, maintaining their over 20% premiums to their Hong Kong listings.  Hong Kong declines in all four reflected a disbelief in the positive impact of this change, with drops from 1% fo 2.25%. Despite the Shanghai rise, the volumes were generally half the recent average. Hong Kong volume was just as thin with the exception of world banking behemoth, ICBC, with volume higher than the average.  Volume for all four on both exchanges has trickled compared to the peak in 2015 when volumes were in the billions.

 

There have been no earnings updates for these four state-owned enterprises, with annual results generally coming around mid-April.  Last quarter reports, albeit with limited disclosure, were lackluster.  Increases in revenues were wiped out by increasing reported non-performing loans, npls, which were still reported at less than 2% with the exception of ABC which showed about 2.02%. Skeptics abound as to the truth in these percentages.

Trailing p/e’s in Hong Kong, significantly below Shanghai, would point to bargains if it weren’t for:

1. flat to slightly negative earnings after profit in the 9 months ending in September
2. Reported NPLs continuing to shoot upwards
3. Domestic economic contraction as shown by the sequential PMI data.

To name just a few reasons, assuming you accept the bank npl’s and the government data.

Currently, in terms of asset size, ICBC, CCB and ABC are the largest banks in the world, in descending order.  Including BOC, these four banks combined employ 1.6 billion, about equal to the 2013 population of Idaho. While US banks are infamous for layoffs in lean times, these SOE’s have made no layoff announcements in their filings or to the public.