China banks: China's five biggest banks grew combined earnings by 37 per cent during the first half of 2011. Lending margins and fees rose, while bad debts fell. In a sign of high times, some big banks are now even offering their best customers private jet services. Yet, there is still plenty to worry about and that explains why their shares have fallen roughly a quarter from this year's peak.
There are three concerns. The first is that after two years of rapid lending, bad debts are a problem. There are already early signs of a slowing economy taking its toll. Despite falling bad debts overall, loans overdue by less than three months spiked 36 per cent at Bank of China. At ICBC, loans three to six months overdue grew by 35 percent. At Minsheng, they more than doubled.
The second concern lurks off the balance sheet. Banks have stuffed loans and securities into wealth management products that are sold to clients desperate to beat the 3.5 per cent one-year deposit rate. If the underlying assets go bad and the products can't be repaid, the banks are usually not technically liable, but the risk is that they will be forced to take the losses, nonetheless.
Agricultural Bank of China, Bank of Communications, CCB and Minsheng sold an astonishing seven trillion yuan of wealth management products in the first half. AgBank revealed, in a footnote, that products guaranteeing investors their money back are four per cent in the red. Meanwhile, the off-balance-sheet commitments disclosed, like undrawn loans and letters of credit, shot up. Minsheng's grew 42 per cent over the period ICBC and AgBank by half as much.
For all that, the big banks are liquid and soundly capitalised. Smaller banks are a different story. The minnows can't win customers on price because their deposit rates are fixed. This has pushed up rates in the interbank market as they clamour for funding from their rivals. AgBank is one that took advantage, doubling its "placements to other banks" during the period. Yet, if small banks really get into trouble, some big state-owned banks may be forced to take them over, rather than profit from their difficulties.
Bad debts, risks lurking off the balance sheet and a wave of potential takeovers of weak banks all sound distant. It isn't hard to see why investors aren't taking China's super-strong financials at face value.
