Text | Caihua News Agency, Author | Mao Ting
Currently, the four state-owned banks and Postal Savings Bank of China (01658.HK) andChina Merchants Bank (03968.HK)The dividend yield has exceeded 6%, which is much higher than the interest on fixed deposits.
At the same time, their price-to-book ratio (i.e. price-to-book ratio, the same below) is still less than 1 times, much lower than other large multinational banks, including Bank of America (BAC.US), which was significantly reduced by Buffett, and JPMorgan Chase (JPM.US), the commercial bank with the highest current market value.
Stock price trends of the six major banks this year
Compared with the overall market index, the four state-owned banks and Postal Savings Bank of China (01658.HK) andChina Merchants Bank (600036.SH)The stock price performance this year has actually been quite good.
From the market point of view, the Shanghai Composite Index has fallen 5.78% so far this year, butIndustrial and Commercial Bank of China (601398.SH)China Construction Bank (601939.SH), Agricultural Bank of China (601288.SH), Bank of China (601988.SH), Postal Savings Bank of China (601658.SH) andChina Merchants BankThe cumulative increases of A-shares since the beginning of this year have reached 28.86%, 19.80%, 31.38%, 26.93%, 13.20% and 22.32% respectively.
In terms of Hong Kong stocks, the Hang Seng Index has risen 3.54% so far this year, while the H shares of Industrial and Commercial Bank of China (01398.HK), China Construction Bank (00939.HK), Agricultural Bank of China (01288.HK), Bank of China (03988.HK), Postal Savings Bank of China and China Merchants Bank have increased by 22.85%, 27.73%, 25.14%, 26.06%, 18.18% and 24.61% respectively, far outperforming the broader market.
The six major banks have all announced their performance results up to the first half of 2024. What is rare is that the four state-owned banks and Postal Savings Bank of China have all announced the distribution of interim dividends. If the final dividend is included, the annual dividend yield may exceed 6%, which is much higher than the fixed deposit rate.
From the perspective of valuation, whether A shares or H shares, the share prices of the six major banks are far below their net asset values, and are also much lower than other multinational banks. For example, Bank of America (BAC.US), which was significantly reduced by Buffett, currently has a price-to-book ratio of 1.18 times (based on the current price of US$40.75), while JPMorgan Chase (JPM.US), the commercial bank with the highest current market value, has a price-to-book ratio of 2.02 times (based on the current price of US$224.80).
Interest business still dominates
In the first half of 2024, net interest business still accounted for most of the income of the six major banks. Among them, the net interest income of the four state-owned banks and Postal Savings Bank accounted for more than 70%, among which Postal Savings Bank had a higher proportion, reaching 80.82%, while the retail bank China Merchants Bank was better diversified, with a net interest income share of 60.39%.
It should be noted that since interest-bearing business accounts for such a high proportion, the Big Six banks are vulnerable to changes in interest rate spreads.
In the first half of this year, my country insisted on expanding domestic demand and promoting economic development, creating a good monetary and financial environment for social development, and guided the overall financing cost of society to steadily decline by moderately lowering the deposit reserve ratio of financial institutions, re-loans for agriculture and small businesses, and re-discount rates, while the interest rates of new loans issued by banks continued to decline. On the other hand, commercial banks were also allowed to moderately buffer cost pressures by lowering deposit rates.
Caihua News Agency noted that in the first half of 2024, the total interest-earning assets of the six major banks all expanded year-on-year, among which ICBC, ABC, BOC and Postal Savings Bank all increased by double digits, with the expansion of customer loans and advances being the main growth driver, as shown in the table below. However, due to the decline in comprehensive loan interest rates, the total interest-earning asset yields of the six major banks all declined without exception.
Looking at the cost side, the total interest-bearing liabilities of the six major banks have all expanded. Among them, the growth rate of interest-bearing liabilities of ICBC, ABC, BOC and Postal Savings Bank of China are all greater than the expansion of interest-bearing assets. However, except for CMB, the deposit growth of the other five banks has not kept up with the overall interest-bearing liabilities.
In terms of deposit cost rate, the largest decline was seen in Agricultural Bank of China and Postal Savings Bank of China, while at the same time, deposits of these two banks maintained double-digit growth, which may reflect the advantages of these two banks, which mainly serve farmers and small and medium-sized enterprises, in attracting deposits.
The pressure on the cost side has not been completely released, and the downward trend on the income side cannot be curbed. The net interest margin (the difference between the yield on interest-earning assets and the cost of liabilities) and net interest margin (NIM, the net interest margin and the average of interest-earning assets during the period) of the six major banks have both declined, as shown in the table below.
This is the main reason for the decline in interest business income and overall revenue.
On the other hand, the decline in comprehensive financing costs may help mitigate risks, which may alleviate the risk pressure of the six major banks to a certain extent, which is the main reason for the increase in their stock prices.
Risk tolerance of the six major banks
The biggest risk currently facing the six major banks is the real estate market risk.
We noticed that the non-performing rates of the six major banks’ real estate corporate loans were all at a high level, but had improved compared to the end of last year.
In terms of the relative scale of corporate loans to real estate, China Merchants Bank has the largest business volume. At the end of June 2024, the balance of corporate loans in China Merchants Bank’s real estate business was 339.938 billion yuan (RMB, the same below), an increase of 4.06% from the end of last year, and the non-performing rate was as high as 5.12%, but it was 0.14 percentage points lower than the beginning of the period, accounting for 5.04% of China Merchants Bank’s total loans.
In terms of non-performing loan ratio, ABC’s real estate corporate business non-performing loan ratio was the highest, reaching 5.42% in the first half of 2024, the same as at the end of last year.
In addition to corporate real estate loans, the six major banks also have many personal residential loans, but the non-performing rate is much lower.
The recent reduction in the interest rate of existing mortgage loans should help stabilize the property market and ease the pressure of individual mortgage loans. Although it may put downward pressure on the yields of the six major banks in the short term, which is also the reason for the recent decline in the share prices of the six major banks, in the long run, the stable property market will buffer the risks of the six major banks and will be more conducive to the sustainable development of the six major banks, which is a good thing.
Overall, the overall NPL ratios of the six major banks at the end of June 2024 remain stable and tend to decline, among which only the NPL ratio of Postal Savings Bank of China rises slightly by 0.01 percentage point compared with the end of 2023. The NPL ratios of Postal Savings Bank of China and China Merchants Bank are lower than those of the four major banks.
In terms of coverage ratio, although the provision coverage ratio of China Merchants Bank and Postal Savings Bank at the end of June 2024 has decreased compared with the end of 2023, it is still much higher than that of the four state-owned banks, as shown in the figure below. Among them, China Merchants Bank reached 434.42%, and Postal Savings Bank was 325.61%.
Caihua News Agency noticed that the scale of the six major banks’ special mention loans basically far exceeds their non-performing loans. For the sake of prudence, Caihua News Agency divided their provisions by the total of special mention loans and non-performing loans, and found that the current provisions of Agricultural Bank of China, Postal Savings Bank of China and China Merchants Bank are very sufficient, exceeding their special mention loans and non-performing loans, with coverage ratios of 146%, 165% and 188% respectively. In terms of the announced special mention loans and non-performing loan scales, their current provisions should be sufficient.
Summarize
At present, large state-owned banks are still mainly engaged in interest-bearing business, so the downward trend in loan interest rates will greatly affect their yields. However, at the same time, these large banks are allowed to lower deposit rates, which will help ease their liability costs and cushion the impact of narrowing interest rate spreads. In addition, given that the current domestic deposit scale continues to rise, lowering deposit rates to release funds should be more conducive to their loan business and reduce their liability side, which is beneficial to the healthy development of commercial banks in the long run.
On the other hand, a number of incentives for the property market should help stabilize risks. Although they may not be conducive to profit growth in the short term, in the long run they should be very beneficial to the sustainable growth of commercial banks.
In the first half of 2024, China Merchants Bank, which has always had strong growth, lagged behind its peers in the growth of its interest business. However, given that its corporate real estate loans are relatively large in scale, if the property market improves, it should also be a significant boost to it. In addition, China Merchants Bank’s provision adequacy ratio is also higher, so there should be something to watch in the future.
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