Date
20 January 2017
Shares of Bank of Communications jumped after it  gained State Council approval for its stock ownership plan. Photo: Bloomberg
Shares of Bank of Communications jumped after it gained State Council approval for its stock ownership plan. Photo: Bloomberg

Will share reform, incentive schemes boost China banks’ returns?

The People’s Bank of China wants lenders to optimize their shareholding structures, seek private capital and increase employee equity ownership to make them more efficient.

Yet, the initiatives probably won’t be enough to offset deteriorating credit growth, margins and asset quality.

Banks’ average return on equity fell to 17.6 percent last year from 20.4 percent in 2011. Average ROE for state banks will drop to 16 percent this year, based on analysts’ consensus.

China’s plans to help employees and outside investors buy state-bank shares may prompt the sale of some of the US$690 billion in government assets, adding to the supply of bank shares in the market.

Government stakes range from 31 percent to 83 percent at different state banks. Their total value of about US$690 billion equates to 65 percent of the market cap. Its 83 percent stake in Agricultural Bank of China (01288.HK, 601288.CN) is the largest, followed by 69 percent at ICBC (01398.HK, 601398.CN).

Minsheng Bank (01988.HK, 600016.CN) and China Merchants Bank (03968.HK, 600036.CN) have recently introduced employee incentive programs. These include stock-ownership plans that offer discounts of more than 10 percent to the latest close.

While these still need regulatory approval, Bank of Communications (BoCom, 03328.HK, 601328.CN), Bank of China (01988.HK, 603988.CN) and Ping An Bank (000001.CN) have indicated interest in similar programs. BoCom recently gained State Council approval for its stock-ownership plan.

Over the past month, BoCom led peers with a 7.3 percent increase in share price, followed by 3 percent at Bank of China.

Most other Chinese banks retreated in share prices along with the broader market. BoCom’s shares may have jumped on optimism about a positive impact from its approved share reform.

The views expressed in this article are those of Francis Chan, a senior banking analyst at Bloomberg Intelligence.

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CG



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