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SI Research: 3 Reasons to Drop China-Exposed Banks
Aspire, Thought Leaders | 07 December 2015
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By: Lim Si Jie
Articles (169) Profile

In October, China’s broadest measure of new credit slumped to the lowest in 15 months. The readings underscore the government’s challenge to kick start growth in an economy weighed by overcapacity and debt. This further adds to speculation that six central bank interest-rate cuts in a year from People’s Bank of China (PBOC) have yet to spur a sustained pick up in borrowing.

1) Statistics Show Unfavourable Lending Data

According to a report from the PBOC, aggregate financing fell to 476.7 billion yuan. This was lower than ALL 25 economists’ projections and less than half the median forecast of 1.05 trillion yuan. The data rounds out a week of unfavourable readings that have shown falling exports, tame inflation, and slowing industrial output. The only silver lining was a rare bright spot in the form of increased retail spending.

China’s outstanding corporate and household borrowing has surged by two-thirds since 2008 to 208 percent of its GDP, while producer prices have slumped for 44 consecutive months and the consumer price index began a downward trajectory in the middle of last year. These are impending signs of a debt-deflation trap if growth and productivity do not rev up enough.

2) Experts: Credit Growth Problem Both Demand And Supply Led

Experts believe that the problem is both supply and demand-led. “Banks are still unwilling to lend,” said Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG. Even after accounting for the seasonality, supply has been weak. The rebound in bank lending boosted by the PBOC’s injection to the policy banks has been rather short lived.

Tao believes that the central bank may need to inject another round of liquidity to its policy banks, which lend according to government direction, before the end of this year.

Xu Gao, chief economist at Everbright Securities Co. in Beijing, cited problems on the demand side. Gao noted that companies are unwilling to borrow to invest and monetary easing isn’t enough right now. “The government needs to use fiscal and other policies to stimulate demand, or it will struggle to stabilize the economy,” he said.

3) Kyle Bass: Chinese Banks In For Tough Times

The slowing economy and interest rate cuts are hurting bank profits and margins while lending books are starting to show some strain. According to Kyle Bass, founder and principal of Hayman Capital Management, Chinese banks have gotten too big and a natural result of this would be a loan-loss cycle.

And if that’s the fact, then credit fuelled growth in Asia is going to take a breather and have a little bit of a decline. This would mean an end to double-digit credit growth in China.

Bearish On Chinese Exposed Banks

Kyle is currently bearish on the “rest of the financial institutions in Asia,” especially those that are not in China and Japan but exposed to the Chinese credit market.

There are a lot of institutions in Asia that lend aggressively to China,” he said. Though Kyle affirmed that it is not the end of the world, he believes Asian banks are going to see severe trouble over the next two years.

Investors Takeaway: Replace OCBC, DBS with UOB for Diversification

OCBC, which acquired Wing Hang Bank, currently derives 16 percent of its revenue from the Greater China region. DBS, the fifth largest bank in China, has a third of its revenue coming from the Greater China region.

In comparison, UOB has a proportionately larger exposure to Singapore and lower share of loans in banking markets such as China (10 percent). In order to achieve diversification in investors’ portfolio, investors can consider replacing shares of OCBC and DBS with UOB shares in their portfolio as a proxy for financial sector holdings.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

DBS Group Hldgs  24.390 +0.53 +2.22%   
Business: [FY16 Turnover] Institutional banking (45.4%), consumer banking/wealth management (37.2%), treasury (9.9%), others (7.5%).

Insight: Nov-17, 9M17 net profit decreased by 4.5% as reven... Read More
Oversea-Chinese Banking Corp  11.920 +0.21 +1.79%   
Business: [FY16 Turnover] Global corporate/investment banking (36.1%), global consumer/private banking (33.4%), insurance (11.1%), OCBC Wing Hang (10.8%), global treasury & mkts (8.3%), others (0.3%).

Insight: Oct-17, 9M17 net interest income rose 5.2% led by ... Read More
United Overseas Bank  25.790 +0.53 +2.10%   
Business: [FY16 Turnover] Group retail (45.2%), group wholesale (44%), global markets & investment management (6.4%), others (4.4%).

Insight: Nov-17, 9M17 net profit increased 7.6% to $2.5b as... Read More


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