Thursday, August 25, 2011

Industrial and Commercial Bank of China (ICBC), the World's Largest Bank Is Bigger Than You Think

      Since July 24, 2007 when it overtook CitiBank in market capitalization (US$ 254 billion versus US$ 251 billion) ICBC has been the largest bank in the world by market value (4th overall. It is 22.7% bigger than domestic competitor China Construction Bank, in contrast, construction bank's (2nd largest bank by market cap) overall rank fell 5 spots to 12 down from 7 in March). (FT Global 500 List June 2011) ICBC's impressive performance during the economic crisis has lifted it higher in The Global 2000, a ranking system compiled by Forbes; in it ICBC was ranked 12 overall in 2009, 5 in 2010 and 7 in 2011 (2011 slight drop was because higher oil prices pushed 3 oil companies into the top 6, by comparison none were top 6 in 2010), in 2011 ICBC overtook Bank of America but was overtaken by JP Morgan (rank 1st overall on highest sales of any bank and strong earnings) and HSBC (rank 2nd on high sales and assets (4)); HSBC was ranked lower than ICBC in 2010 (8 versus 5) but in 2011 it shot up to 2 (ICBC 7), JP Morgan was ranked higher than ICBC both years even though its market value was much lower and ICBC had 41% more profit (US$24B vs US$17B). In March of 2009 ICBC became the world's biggest bank in terms of deposits after its clients added US$140 billion to accounts bringing the total to US$1.31 trillion, higher than JP Morgan and Mitsubishi UFJ Financial Group.

Although many key indicators for ICBC improved in 2010 [(cost/income ratio down to near record low levels (30.99%) at a time when wealth managers worldwide are facing higher cost/income ratio's ( Net fee, commission/operating income ratio 19.13 a 4 year high, 4 year high also in ROA assets (1.32% up 86% since 2006), ROA equity (22.79% up 336 basis points in 2 years), non-performing loans ratio down to 1.08 (down 49% since 2008)], the bank's market value has been slow to respond (growth) because of concerns among investors regarding banking risks faced industry-wide (brought on by banks abroad in countries where unemployment is high and consumer debt, national exceeds annual income, gdp) and a possible housing bubble in mainland China (loans secured by mortgages amounted to US$ 421.117 billion on December 31, 2010 up 31.2% since December 31, 2009 (US$ 321.063)); Market Values in the graph for the 3 big banks are from December 31 for each year, the end of the fiscal period.

In terms of revenue, JP Morgan still leads all banks however the major Chinese banks including ICBC significantly closed the gap between themselves and Bank of America/Citigroup. In the first half of 2011 HSBC leaprogged all banks except JPM even though its revenue grew by only 5%. Chinese institutions closed the revenue gap with their Western counterparts, ICBC only 45% the revenue of Bank of America (56% of Citigroup) in 2010 1st half but that increased to 88% in 2011. More info on 2011 revenue, assets at top 20 banks as of September 2011 ranked by 2011 2nd half metrics

Mortgage loans make up 41% of all loans at ICBC (2011 January 1) up from 38.3% a year earlier even though the government instituted new laws aimed at limiting lending to local governments (financing vehicles) and to the real estate sector. In May of 2011 in an attempt to reduce mortgage risks, ICBC told separate branches to raise certain minimum downpayments (up to 40% from 30% in places where prices are unusually high) and lending rates when the branch sees fit (110% higher than the benchmark best), in 2010 home prices were up 47% in Hangzhou (Zhejian ranks 5 in gdp per capita (US$7.4th), 10 in population), 37.9% in Chongqing (14 gdp pc (US$4th)/20 in pop.) and 37.1% in Beijing (3 in gdp pc (10.4th/26 in pop.). Prior to the increase, buyers of a second home were required to give a 60% down payment. (BBC: ICBC bank's profits surge as China economy grows, China Economic Review)

Also, the bank's less than perfect credit rating (A1+) due to the bank being highly exposed to a softening Chinese real estate market and having increased international exposure (Chinese government has shown interest in helping the bank gain a foothold outside the mainland since Chinese banks don't have as much global exposure as their western counterparts and China has the capability to do that; China has shown interest in establishing new international finance; In 2009 it gave China Investment Corp $200 billion to do that), may have scared away some investors who aren't aware of the bank's solid fundamentals (arrears/risks are as low as any other bank even those with better Moody's ratings).

At a time when the largest bank based outside of China (HSBC, US$ 176.9 billion in market cap) announced a 3 year plan to cut 30,000 jobs worldwide (10% of its workforce, 20-25% of its employees in Europe and North America), China's ICBC is hiring (workforce is over 397,000 up 1.8% on the year with over half of those new jobs stemming from increased business overseas (jobs associated with that increased by almost 1/4 to over 16,000). Also, even though HSBC net income doubled in 2010 (up 126.4%), it still has yet to reach its 2007 high of about US$ 19 billion (HSBC market value position fell from 11 in to 2007 to 22 in 2008 before rising to 8 in 2009; ICBC went from 7 to 6 in 2008 then to 4 in 2009 year end). While JP Morgan (largest USA bank) is suffering from weak operating revenue (US$25.8 billion in first quarter 2011 compared to US$ 17.2 billion at ICBC) ICBC is nearing record highs with each financial reporting period (as recently as 2009 JP Morgan made 121% more revenue than ICBC however in 2010 that ratio was down to 82% and in the first quarter of 2011 it fell even further to 50%). ICBC's balance sheet has another factor coming into play that's providing even more positive pressure: the strong Chinese Yuan/Renminbi; For example net operating income in the first quarter of 2011 was 659.27% higher qoq an increase the bank credited to exchange rate/foreign exchange products effects. Considering also ICBC's increasing asset value (up US$247.167 billion in 2010; up US$150 billion in the first quarter of 2011 to just over US$ 2 trillion), improving fundamental ratios (financial assets designated at fair value through profit or loss was up 3,598% in the first quarter of 2011 to close to US$ 15 billion), significant position in tier 1 capital markets (top 7-8) and increasing international market access (one of only a handful of Chinese banks given federal approval to open branches in the USA, May 23, 2011: received license for Mumbai branch from Indian reserve bank Bank of India, Janaury 2010: acquired 70% of Bank of East Asia Canada followed by July 7, 2010 launch of direct operations in Canada (where it has 10,000 clients), takeover of South Africa's Standard Bank operations in Argentina for US$ 600 million (103 branches there represents 50% increase in ICBC's branches outside the mainland; ICBC has held a stake in Standard Bank since October 2007 when it paid $5.5B for 20% of shares). The bank also benefits from low exposure to derivatives which represent only about 1.9% of its asset portfolio (derivatives have become problematic in the USA and Europe). For the 2010 fiscal year ICBC profits surged 28% (compared to 46% for the Agricultural Bank of China).
Graph shows employees, assets, revenue income before tax, interest income and loans by region (regional; Yangtze River Delta, Pearl River Delta, Bohai Rim, central western and northest China, overseas).
ICBC has over 260 million customers (7X more than Societe Generale, 1.7X more than HSBC). Customers went from 219 million to 260 million in just the last couple years mostly because of a growing middle class in China and China's expanding corporate/trading market (China has become the world's biggest market for commodities futures, China launched its own gold exchange in 2008 and has its own gold tracking ETF). Just about the only statistics that ICBC lags JP Morgan and HSBC in are sales (JP Morgan) and total assets (JP Morgan and HSBC) however the gap separating them is closing.

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