china banks results similar

8/12/2019 China Banks Results Similar

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Why are China bank results eerilysimilar?By Jamil Anderlini,FT.comAugust 31, 2010 -- Updated 0421 GMT (1221 HKT)

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Why are China bank results eerily similar? - CNN.com

http://edition.cnn.com/2010/BUSINESS/08/30/china.banks.results.ft/index.html (1 of 5) [01/09/2010 05:48:41 p.m.]
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Pedestrians walk past a branch of the Agricultural Bank of China in Beij ing on July 6.STORY HIGHLIGHTS

Top Chinese banks all

reported net profit

increases of 27 per cent

in the first half

Similarity in their

business models explains

the banks' uniform

profitability

China's big banks are allmajority owned by the

state, their CEOs former

central bankers

RELATED TOPICS

China

Financial Markets

Bank of China

China Construction Bank

Corporation

Agricultural Bank of China

Industrial &

Commercial Bank of China

Ltd.

(FT)-- China's big banks are all majority

owned by the state, their top executives are

mostly former central bankers appointed by

the Communist party and their profits are all

generated using the same business model.

But even for such a homogenous industry their first-half profit results

looked eerily similar.

Industrial and Commercial Bank of China, China Construction Bank (the

world's largest and second largest banks by market value) and Bank of

China (China's fourth-largest lender by assets) all reported net profitincreases of 27 per cent in the first half of the year from the same period

last year.

http://topics.edition.cnn.com/topics/Chinahttp://topics.edition.cnn.com/topics/Financial_Marketshttp://topics.edition.cnn.com/topics/Bank_of_Chinahttp://topics.edition.cnn.com/topics/China_Construction_Bank_Corporationhttp://topics.edition.cnn.com/topics/China_Construction_Bank_Corporationhttp://topics.edition.cnn.com/topics/Agricultural_Bank_of_Chinahttp://topics.edition.cnn.com/topics/Industrial_Commercial_Bank_of_China_Ltdhttp://topics.edition.cnn.com/topics/Industrial_Commercial_Bank_of_China_Ltdhttp://topics.edition.cnn.com/topics/Industrial_Commercial_Bank_of_China_Ltdhttp://topics.edition.cnn.com/topics/Industrial_Commercial_Bank_of_China_Ltdhttp://topics.edition.cnn.com/topics/Industrial_Commercial_Bank_of_China_Ltdhttp://topics.edition.cnn.com/topics/Industrial_Commercial_Bank_of_China_Ltdhttp://topics.edition.cnn.com/topics/Agricultural_Bank_of_Chinahttp://topics.edition.cnn.com/topics/China_Construction_Bank_Corporationhttp://topics.edition.cnn.com/topics/China_Construction_Bank_Corporationhttp://topics.edition.cnn.com/topics/Bank_of_Chinahttp://topics.edition.cnn.com/topics/Financial_Marketshttp://topics.edition.cnn.com/topics/China


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Bank of Communications, the country's fifth-largest lender, saw its net

profit rise slightly faster -- by 30 per cent.

The similarity in their business models explains the banks' uniform

profitability but also highlights the risks that are building up across the

sector.

Chinese banks take in deposits from companies and citizens with very

few investment alternatives but some of the highest savings rates in the

world and then lend the money mostly to large state-backed borrowers

to build factories, steel mills and real estate.

The vast majority of bank profits come from the difference between the

interest rate they have to pay depositors and the rate they charge

borrowers -- a generous spread that is set by the central bank in order to

protect the banks from cut-throat competition.

This business model is often referred to in China as "eating capital"

because it encourages banks to lend as much as they can until their

balance sheets are eroded and they have to return to the capital

markets for funds in order to meet regulatory requirements.

"This is not a sustainable business model over the long term," says Tom

Orlik, an economist at Stone & McCarthy in Beijing. "But as long as you

believe in the China growth story and as long as the government doesn't

liberalise interest rates or allow foreign competitors to take a large share

of the market then the banks will continue to be the geese that lay the

golden eggs."

China's "big five" state-controlled banks -- including ICBC, CCB, BOC,

BoCom and newly listed Agricultural Bank of China -- earned almost

Rmb274bn ($40bn) between them in the first half of the year.

Analysts expect earnings to moderate in the second half of the year but

still expect combined net profit growth for the whole year above 20 per

cent.



4/5


However, over the longer term the same uniformity that allows China's

large banks to reap similar profits in good times will mean exposure to

the same dangers and risks if things start to turn ugly.

This is not asustainable

businessmodel overthe long term--Tom Orlick, Beijing economist

An unprecedented doubling in new loans last year from 2008 has

been described by some economists as the greatest financial easing

in history.

Credit conditions remain far looser than in earlier years although the

government has tried to slow lending growth since the start of the year.

Even top Chinese bankers are quick to admit that not all of the lending in

the past two years was to viable, creditworthy projects and that a

significant portion may never be repaid.

Stone & McCarthy estimates that nascent bad loans to local

governments, real estate projects and redundant sectors of the economy

could raise the banking industry's overall non-performing loan ratio from

the current 1.3 per cent to about 7.9 per cent in the next two or three

years.

In a more extreme scenario, in which housing prices fall further than

expected and local government defaults rise, the NPL ratio could rise by

about Rmb5,400bn, to 13.4 per cent of total loans.

A decade ago, following an earlier credit-fuelled stimulus package,

China's financial system was largely insolvent, with an official NPL ratio

above 30 per cent prompting a banking crisis that Beijing has still not

properly cleaned up.

Since the end of last year, the Ministry of Finance has rolled over



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Rmb720bn worth of 10-year, non-transferable bonds that were given to

ICBC, BOC and CCB in exchange for a chunk of their bad loans 10

years ago.

With a few pen strokes Beijing has delayed the reckoning for its previous

bank bail-out by another decade but in 10 years the banking sector is

likely to be burdened with at least one more pile of bad loans.

In the meantime, Chinese lenders will continue to turn to the government

and to capital markets to satisfy their ravenous appetite for fresh capital.

The Financial Times Limited 2010

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