Chinese Banks: Still Weak

Industrial and Commercial Bank of China, or ICBC, has a market

capitalization of $334 billion, making it by far the most valuable bank

in the world. Citigroup, HSBC, and Bank of America are next on the list, worth

about $235 billion each, but the next two biggest banks are Chinese: China Construction

Bank, worth $225 billion, and Bank of China, worth $200 billion. Chinese banks,

it would seem, are pretty healthy, no? Not according

to Moody’s:

During the past two years, improving financial fundamentals due to recapitalizations

and problem loan reductions have contributed to upgrades in the financial

strength ratings of the Chinese banks, from an average of E+ to D-, Moody’s

says in a new Outlook for China’s banking system.

In other words, the Chinese banking system might be a little bit better than

it was, but it’s still really bad. The reasons are familiar:

The relatively low D- average BFSR for the Chinese banking system—Moody’s

measure of intrinsic creditworthiness and the potential need for external

support—points to the continued high levels of problem and special mention

loans of the largest banks, their developing capital adequacy, and below average

profitability metrics.

It does seem weird that the stocks of China’s banks should be skyrocketing

even as enormous amounts of uncertainty remain over the amount of non-performing

loans on those banks’ balance sheets. But then again, all Chinese stocks

are skyrocketing, so maybe the banks are just rising as some kind of relative-value

play. Tides and boats, and all that. But a valuation of more than $2,000 per

customer does seem rather excessive, by any measure, especially given how little

money most of those customers have.

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