Print this article
If you want to see the difference between Asia and the West summed up in two firms, compare Lloyds Banking Group and Minsheng Bank. Both have had to raise fresh capital in the stock market. But while the troubled British group needed to offer a 60% discount on its record £13.5bn ($22bn) rights issue, China’s first privately-owned lender was able to price its HK$30bn ($3.9bn) Hong Kong IPO at a discount of just 5% to its existing listing on the Chinese A-share market.
The enthusiasm for Minsheng’s placing is understandable: it’s seen as one of China’s best-run banks, with a non-performing loan (NPL) ratio of around half the sector average. So the fact that it’s trading on a price/book ratio of 2.6 times, in the middle of the 2-3 times range spanned by the big four - Bank of China, Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China - may look odd. Surely it should trade at a premium?
But investors fear that the big four and the unlisted Agricultural Bank of China will always be favoured by government policy. That will leave Minsheng fighting over lesser pickings with 11 other national second-tier banks. Also, the big banks are expected to evolve quickly into global giants, as shown by their big push into foreign lending, unlike smaller rivals.
Both advantages may be real. Yet the bigger banks look risky. A few years ago, their balance sheets were drowning in bad loans from the late nineties; it’s questionable how fully these were tidied up. This year’s rapid rise in loans will certainly create more.
Many investors ignore this, assuming that the government will take on the loans like last time. I’ve long suspected that shareholders may ultimately take much of the hit and reports that the banks are planning to raise more capital supports that.
If I had to hold a mainland bank, I'd prefer Minsheng to the big four, although given that its lending is up 40% this year in line with peers, there’s definitely scope for rising NPLs. But given the uncertainties involved in this very politicised sector, I’d rather look for banking ideas elsewhere, such as the likelihood of takeovers among small independent Hong Kong banks such as Bank of East Asia (HK: 0023), Chong Hing (HK: 1111), Dah Sing (HK: 2356) and Wing Hang (HK: 0302)in the next few years.
Published in
Tips & advice
| More
articles
by
Cris Sholto Heaton
Related articles
-
By Cris Sholto Heaton, Feb 07, 2012
-
By Cris Sholto Heaton, Jan 13, 2012
-
By Cris Sholto Heaton, Jan 06, 2012
-
By Cris Sholto Heaton, Sep 23, 2011
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.