Comparing the 3 Chinese Banks

JC Project Freedom

The 3 Chinese Banks are the Bank of China, China Construction, and the Industrial and Commercial Bank of China. The role of banks is to provide credit to businesses to assist them in their business plans or short-term crunch. Banks provide credit to individuals to promote spending, leading to greater economic growth. Banks turn the wheel of financial systems and allocate capital by putting savings to work.

The revenue sources for banks come from interest income, fee income, and trading income. Interest expenses are the cost of banks. Assets consist of loans, investments, and cash. The liability consists of deposits and borrowings. The business model of banks is highly leveraged.

Look at the Balance Sheet Strength of banks
1. Non-Performing Loan/ Total Assets %
2. Capital Adequacy Ratio %
3. Loan to Deposit Ratio %

Non-performing Loan Ratio % = Total Non-Performing Loans/ Total Loans x 100

Total Non-Performing Loans refer to the value of loans that are in default or are not being repaid on time, while total loan refers to the total value of loans that the bank has outstanding.

The NPL Ratio of CCB for FY2022 is 1.4%, ICBC for FY2022 is 1.41% and BOC for FY2022 is 1.46%. A higher NPL ratio indicates that a greater portion of the bank’s loans are in default, which can be a sign of increased credit risk and potential financial difficulties for the bank. The NPL Ratio should not exceed 2%. All banks passed.

Capital Adequacy ratio is a way for the bank to show that it has enough money to cover any losses it may have. It looks at how much money a bank has compared to how much risk has taken on. Risk is when the bank lends money to someone or invests in something that might not work out. The bank needs to make sure that it has enough money to cover any losses from risky lending.

Capital Adequacy Ratio Formula = (Tier 1 Capital + Tier 2 Capital)/Risk Weighted Assets

ICBC has a Capital Adequacy Ratio of 18.3%, BOC has a Capital Adequacy Ratio of 17.53% and CCB has a Capital Adequacy Ratio of 18.42%. The Capital Adequacy Ratio should be >10%. All banks passed.

A loan-to-deposit ratio is a way to measure how much money a bank has lent out compared to how much money it has in deposits from its customers. Loan-to-deposit Ratio = Gross Loans/ Total Deposits. A higher ratio can bring more profits for the bank but it is risky if the loans go bad. A higher ratio means less liquidity to cover any losses or huge deposit withdrawals. It is dependent on interest rates, competition, and economic activities. Money is stuck in banks, the deposits outpaced loans by 44.51 trillion yuan.

The ROA of CCB is 0.94%, ICBC is 0.91% and BOC is 0.79%. ROE of CCB is 11.79%, ICBC is 10.63%, and BOC is 10.1%. ROA should be >1% and ROE should be >15%. This is not ideal for the Chinese banks.

The Net Interest Margin of CCB is 2.02%. ICBC’s NIM fell to 1.98% at the end of September 2022 compared with 2.03% at the end of the prior quarter. BoC has a slight uptick from 1.76% at the end of June 2022 to 1.77% at the end of September 2022. Overall the NIM for the Chinese banks is squeezed due to the property woes in China. The Net Interest Margin should be >2%. Only CCB makes the cut for this.

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