China’s Bank Loans Coming Back to Bite Them

The Wall Street Journal reports today that profit growth slowed at China’s big banks in 2013. Industrial and Commercial Bank of China grew profits by 10%, the slowest pace since listing in 2006. Bank of China’s profits grew 12%, the second slowest pace of growth since listing in 2006. And Agricultural Bank of China posted a robust 15% profit rise, but was still the slowest pace of growth since listing in 2010.

China’s big banks make state sanctioned profits. Although the rules have loosened a little recently, for years financial repression saw the big banks make a chunky 3% spread on lending. That is, depositors received 3% interest while borrowing costs were 6%. The difference was the banks’ to keep.

As the chart below shows, since 2009 bank loan growth in China has been huge. Although it’s slowing marginally, it’s still running at a healthy clip of just under 15%. Most of the recent slowdown has come from the ‘shadow banking’ sector, which is included in the ‘total credit’ growth rate in the chart.

click to enlarge
Source: Society Generale

But the problem for China’s banks is that some of the loans they made during the boom are coming back to bite them. Bad loans are on the rise and as the credit bubble deflates, banks will have to write off past profits. Expect more of that in the next few years. The market certainly does, which is why China’s banks look ‘cheap’.

Phil Anderson, who will also be speaking at the conference, reckons China isn’t in trouble yet. But in a just released video series with Dan Denning, he explains what to look for as this credit bust unfolds. It’s what will turn things from a run-of-the-mill slowdown to something far more serious.

To find out what Phil’s keeping a very close eye on in China right now, sign up here for free access to the three part interview series.


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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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