24 March 2019
Despite several risks
Despite several risks

The banking allure: Is it really so strange?

In China, there is no industry that is more perplexing than the banking sector.

On one hand, commentators and analysts are sounding alarm bells over the business, pointing to several dangers such as the possibility of more corporate bond defaults, poor repayment capability of industries hit by overcapacity, overstretched local government borrowers, risks related to interest-rate liberalization and a general slowdown of the economy.

Stock investors are certainly buying this end-of-the world scenario and dumping bank shares at distress valuations, as can be seen from the low single-digit price-earnings multiples and below book prices of some counters now.

But strangely, entrepreneurs from other sectors are pushing their way into the banking field. Baidu, Tencent (00700.HK), Alibaba, Suning (002024.CN) and Midea are all reportedly applying for new banking licenses either on their own or as part of some consortia.

Property developers also appear to be big fans of the banking industry. Real-estate titan China Vanke (000002.CN) was a cornerstone investor in Huishang Bank (03698.HK) in the latter’s initial public offering last year, splurging 3 billion yuan for an 8 percent stake.

In January this year, Evergrande Real Estate (03333.HK) spent 3.3 billion yuan for a 4.5 percent stake in Beijing-based Huaxia Bank.

Developers are not alone. Conglomerate China Resources group went so far as to develop its own banking arm to add to its empire that covers gas, property, cement, supermarkets and electricity.

In the latest earnings report from Jiangsu Expressway Co. (00177.HK), what catches investors’ attention, among other things, is the firm’s 1 billion yuan investment in Bank of Jiangsu. The deal marked the biggest capital expenditure item for the company last year, far more that what it spent on expanding its toll roads or renovation of collection points and traffic systems.

So, what exactly is going on?

Despite all the negative news flow and analyst comment, many banks are still reaping about 20 percent return on equity, which is a lot better than many other industries generate. Running a banking business in China is still a lucrative opportunity. That could be a reason why many firms are interested in investing in the sector, seizing a chance as the government aims to channel more private capital into the banking industry. 

That said, questions abound on the way the big lenders are operating, with observers doubting the effectiveness of the banks’ credit controls and their over-dependence on sales of dubious wealth management products to prop up fee income. Some also challenge the high costs of their extensive bricks and mortar branches.

Thus, a popular theory is that banking business can be more efficient if it is run differently, such as using the internet platform more extensively. This is where the internet giants come in.

Another thing is about knowing the borrowers.

Banks may find it difficult to truly understand the businesses of their hugely diverse clientele. But if an appliance lender sets up a bank to lend primarily to the suppliers it knows well, or if an e-commerce platform offers loans to small businesses running cyber stores on its site, where it has accesses to all the transaction records, the chance of lending to the wrong person may be slimmer. This can explain why companies like Midea and Alibaba want to have their own banks.

– Contact the writer at [email protected]



EJ Insight writer

EJI Weekly Newsletter

Please click here to unsubscribe