So yet another big western bank is moving to sell down some of its Chinese bank investments, according to the FT’s report on Wednesday that Bank of America is considering the sale of an $8bn stake in China Construction Bank.
If BofA’s sale proceeds – as is likely – it would be merely the latest in what is beginning to look like a modest stampede by western institutions to offload lucrative stakes in China’s largest banks – most recently, in sales by Allianz and American Express of half their shares in Industrial and Commercial Bank of China.
It was always a risk, particularly as nearly all big Chinese banks saw their shares rise spectacularly after listings in the past few years. And the risk became a virtual inevitability as the big US and European banks began running into trouble last year, ahead of expiries on their lock-in periods for some of their Chinese bank holdings.
While the gloss has come off the big Chinese banks from earlier days – when valuations soared through the stratosphere amid predictions for seemingly limitless profits – the stake sales are probably more due to problems for investors back home than to faltering confidence in China’s banking industry.
That doesn’t makes the slow-motion exodus any less palatable – one might think. But do the behemoths of China’s banking industry care? At one point, earlier on, Chinese banks were anxious to attract foreign capital – not least to show the world that they were desirable investments.
Interestingly, Chinese state entities – including the sovereign wealth fund CIC, the country’s social security fund and others – have been buying up shares to prop up the market, and as far as the big banks are concerned, appear to have started what could be seen as a modest “re-nationalisation” of the banking system.
The faster the foreigners sell out, the more the state buys back. Of course it’s nothing like what we’re seeing in the UK and US – not least because China has taken firm measures to limit foreign ownership of banks to 25 per cent of the total – capped at 20 per cent for a single foreign investor.
When Shanghai Pudong Bank – part owned by Citigroup – announced a $4.4bn equity call back in April, Lex (presciently) remarked:
Shanghai Pudong is raising half its $4.4bn through a private share placement. It is unclear which shareholders will stump up rather than be diluted but it seems a fair bet that Citigroup will opt out. Shanghai Pudong’s biggest shareholder, an arm of the Shanghai municipal government, may well end up with a swollen stake. That would be consistent with the bigger trend of renationalisation by stealth, whereby state funds’ buying of shares to help prop up the market brings more equity back into state hands.
That said, the Chinese still clearly care – to some degree – about their big foreign investors. And not just for image reasons.
Earlier this year, ICBC, fretting about the indications that its western investors were preparing to sell as soon as their lock-in periods expired, cared enough to extract a promise from Goldman Sachs in late March to hold the majority of its 4.9 per cent stake in the lender for at least another year. It clearly has no hope of securing the same commitment from BofA.
ICBC is the world’s biggest bank by almost every measure, far exceeding any other lender with a net income of $5.2bn in the first quarter, while deposits of about $1,400bn have now surpassed Japan’s MUFG and JPMorgan. Its market cap is just under $200bn – 60 per cent bigger than the nearest US bank, JPMorgan, and a striking 11 times bigger than Citi, according to Lex.
So why is it so concerned? As Lex notes:
While things seem tickety-boo on the surface — non-performing loans actually fell 2 per cent from the fourth quarter — trouble surely awaits. ICBC almost quadrupled loan volumes in the first quarter, year on year; number two, China Construction Bank, merely tripled them; while at Bank of China they doubled. Similar state-directed lending splurges in the 1990s left companies laden with capital equipment they barely needed, and too much debt. On Deutsche Bank estimates, China’s stimulus needs less than $150bn of annual lending. ICBC supplied two-thirds of that in the first quarter alone. Loan growth is outpacing deposit growth by about 2.5 to 1.
Still, Lex adds:
China’s loan-classification system gives lenders an unusually long period of grace before recognising losses. And the equity valuation is “no great stretch”: on just over 10 times next year’s earnings, it is inexpensive both against Asian peers and its historical levels. While faith in China’s ability to spend its way out of a slump endures, so should ICBC’s grip on the top spot – however many bogeymen are lurking.
The bottom line, of course, is that no matter what concerns lie ahead for ICBC, CCB and their peers, the position of their US investors such as BofA is far worse. The only question is whether, if you’re among the believers in China’s banking future, BofA and other stakeholders may be moving too rashly.
As Lex said in a separate note last November, when BofA stumped up $7bn to raise its CCB stake from 9 per cent to 19 per cent:
[BofA] is exercising an option to buy the new slug of shares at 1.2 times net asset value, or HK$2.79 apiece. Meanwhile, CCB shares closed yesterday [November 17] at HK$3.88. Fortuitously, the lock-up period on BofA’s initial holding expired last month. If BofA were to sell the same number of CCB shares as it is now buying, that would yield a gain of more than $2.5bn. Sure, BofA is committed to hold the new stake for another three years. But by then the outlook for banks, and China, may be a whole lot rosier.
Related links:
BofA weighs CCB stake sale – FT
Allianz and Amex may cash in ICBC stakes - FT
Goldman’s required (Chinese) reading - FT Alphaville