Author: Tung-fong Chu-chu
Translation: Chapman Chen
2014 is already gone and we have to look forward to investment opportunities for this year. But I think that one plate may be ignored and it is Mainland bank stocks, for which only swing but no actual upswing is expected.
Rebound of Hong Kong shares is sometimes led by Mainland bank shares but they usually only manifest swing rather than actual upswing and soon enough they will return to their former status.
Judging from the annual net profit of a lot of Mainland shares in the third season of last year, something was obviously wrong. The upswing was dubious and the net profit rises were between 3.4% and 33.3%. Only one stock rose 33% and four rose 12 to 15%. Another four only rose 3 to 10%; and those with low growth rate were mostly important Mainland stocks.
Despite the fact that one or two Mainland bank stocks once became the biggest bank in the world, in recent years, there has only been swing but no actual upswing for Mainland bank stocks. In terms of quality of management, American and European banks certainly do better than mainland banks. The reason why in 2008 American and European banks were affected by the financial tsunami is because they took part in the high-risk subprime mortgage bond and suffered huge deficits.
The reason why mainland banks managed to shun this disaster is not because their management was good, but because they did not engage themselves in these new investment tools out of unfamiliarity with them. I believe that now that these high-risk investment tools are coming back to life, there will be mainland banks which take part in them much more significantly than before in order to boost their track records. Should there be any mishap, it will not be easy for mainland banks to keep out of the affair. The increase in growth of non-interest income on the part of mainland banks may be connected with this.
Moreover, more and more real estates developers have got into trouble recently. The loss suffered by mainland banks is probably not slight. As China developers have gone bankrupt one after the other, and there are ghostly cities everywhere in China, it will certainly be hard for banks to pursue the loans they have made. Write-off seems inevitable.
Also, as the government and the business sector are undifferentiated from each other in China, certain powerful people often demand loans from the banks, and if mainland banks turn them down, they will have to face a lot of challenges in their business.
With the China real estates market bubble bursting, China economy has in general slowed down. It is doubtful whether the economical growth of 7.3% could be maintained last year. Besides discontinuation of liquidity on the part of developers, shortage of liquidity on the part of China civil enterprises is also common. When civil enterprises go out of business, mainland banks will also suffer.
Although China has a vast territory and plenty of enterprises, the number of good-quality enterprises is falling due to slackening of the property market and economy. In order to compete for good customers, banks have to lower prices, and drop in interest margin is inevitable. The NIM of mainland banks has on average contracted by more than 10 basic points and ended at 2.65%. The contraction of small-scale banks is even more serious. A contraction of 20 to 30% is not uncommon.
In order to rescue its economy, China has turned on the tap in various ways in recent months. As many as forty cities have relaxed the real estates restriction in China. But each time the momentum put into the market vanished like smoke and very soon the Central Government had to turn on the tap again. The frequency of the Central Government turning on the tap is unprecedentedly high, but still China economy has shown no signs of recovery. In addition, the rapid development of internet finance in China constitutes another threat to profit-making on the part of mainland banks.
In the outer ring, the United States and Europe continue to be fatigued in their economy. US increase in interest rates probably has to be postponed, and Europe has to maintain quantitative easing. As export to the West is in low tide, it will be difficult for China economy to perform well this year. If even export as an important domain of China fails to show improvements, it will be even harder for mainland bank stocks to turn for the better, and fall of net profit growth seems inevitable. In case of rebound of mainland bank stocks, refrain from pursuing it, lest that you will be tied up with high share prices even in the Chinese New Year!
