In the first quarter of 2024, the financial reports of the six state-owned banks in China, including Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications, and Postal Savings Bank of China, showed negative growth in both operating income and profits, except for individual cases. This is highly unusual.
If compared to the data from 2023, the operational performance of the six banks has deteriorated rapidly. In 2023, the total operating income of the six major banks amounted to 3.53 trillion yuan, a decrease of 4.53% from 3.69 trillion yuan in 2022. However, the total net profit of nearly 1.38 trillion yuan in 2023 slightly increased from 1.36 trillion yuan in 2022. This phenomenon was described by the media as a dilemma of “increasing profits without increasing revenue”.
As we move into 2024, the revenue of the six major banks shifted from mixed performance (two declining, two remaining stable, and two growing) to an overall decline, while their profits shifted from slight growth to overall negative growth, indicating a visible deterioration in their operations.
Looking at the overall operating data of the six major banks since 2019, even though they faced a severe blow from the sudden outbreak of the pandemic in 2020, their total operating income still grew by 4.31%. However, the growth rate dropped to 0.27% in 2022 and directly declined in 2023, continuing the downward trend in 2024.
The year 2022 marked a significant turning point for the Chinese economy. With the massive outbreak of the pandemic, extreme measures such as “dynamic clearance” and the lockdown of Shanghai, the economic landscape was shaken, and the official GDP growth rate plummeted to as low as 3%. Following the economic turmoil in 2022, the economy could not stabilize, leading to deepening economic difficulties with the Chinese Communist Party appearing helpless.
The deterioration in the operations of the six major banks can be attributed to factors beyond the pandemic, primarily concerning systemic, policy-related, and operational issues.
In the late 1990s, China experienced technical bankruptcy in the banking sector, prompting the government to implement significant reforms (establishing four asset management companies to tackle non-performing loans in the Big Four banks; introducing strategic investors to drive the listing of the Big Four banks), which led to rapid development in the banking sector, including state-owned banks. The period from 2003 to 2013 was hailed as the “Golden Decade” for the Chinese banking industry. However, starting from 2014, regulatory authorities began advocating for “guiding banks to offer benefits to the real economy”. By the end of 2023, the net interest margin of commercial banks had fallen to 1.69%, breaking below the crucial threshold of 1.7% for the first time, signaling a significant decline in the profitability of large commercial banks. Additionally, the bursting of the real estate bubble after 2021 dealt a severe blow to the banking sector, impacting the quality of assets due to rising non-performing loan ratios within housing loans.
This downward trend is reflected in the operational data. From the first quarter of 2011 to 2023, the year-on-year growth rate of net profits of commercial banks dropped from 36.3% to 1.3%, and the Return on Equity (ROE) declined from over 20% to around 10%.
Correspondingly, bank stocks, including those of the six major banks, have long been mired in the “mystery of undervaluation”. While the capital return levels of listed banks seemed adequate based on the profits of 2022 – with a total profit of 2.06 trillion yuan and net assets of 20.38 trillion yuan for all A-share listed banks, corresponding to a total market capitalization of 9 trillion yuan, resulting in a price-to-earning ratio of only 5.2 times and a price-to-book ratio of less than 0.6 times – their market performance fell below expectations. Comparing these figures to the average ROE of approximately 12% for A-share listed companies by the end of 2022, it was evident that the ROE of bank stocks at around 11% was inadequately valued. In addition, while the Price-to-Book ratio of A-share listed companies stood at 1.5 times, significantly higher than the bank stocks’ level of approximately 0.5 times, implying substantial undervaluation.
Entering 2024, bank stocks had been hyped up but remained undervalued. Wind data revealed that by April 1, 2024, all 42 listed A-share banks had a price-to-book ratio below 1, indicating that their market price per share was significantly lower than the latest net asset value per share. Based on the net asset value per share in 2023, the overall price-to-book ratio for the banking sector was approximately 0.5 times, ranking at the bottom among various major industries in A-share listing.
While undervaluation typically triggers automatic market corrections, the fact that Chinese bank stocks have persistently traded below their net asset values for an extended period suggests that the issue goes beyond being undervalued.
The market is not naive. With over 30 years of experience in the Chinese stock market, it has gradually awakened to the fact that the quality of bank assets is too low and full of hidden risks. Few are willing to blindly walk into that pit.
Indeed, the quality of assets, long-term profitability, growth prospects, and disclosure practices of bank stocks, including the six major banks, raise concerns. For instance, according to the central bank’s statistics, by the end of 2023, the balance of homeowner operational loans stood at 22.15 trillion yuan, marking a 17.2% year-on-year increase and a yearly addition of 3.23 trillion yuan. The question arises: where do these “operational loans” flow? When the interest rates on operational loans fall below those on housing loans, it creates arbitrage opportunities that redirect these funds into the real estate market through dubious means, structured as a covert industry chain involving loan intermediaries setting up fictitious companies and fabricating bank records to present individuals as business owners in need of operational loans. A significant portion of these funds inevitably inflates the real estate market. With the bursting of the real estate bubble, operational loans flowing towards real estate are prone to defaults, likely causing severe damage to relevant banks. Yet, which bank’s financial report can reveal this impending risk?
This is not the only risk; there are far too many concealed risks. The data from the China Banking and Insurance Regulatory Commission for the fourth quarter of 2023 indicated that the balance of non-performing loans in commercial banks was 3.2 trillion yuan, almost unchanged from the previous quarter, with a non-performing loan ratio of 1.59%, dropping by 0.02 percentage points from the previous quarter. It’s hard to believe!
The persistent undervaluation of the bank stocks, including those of the six major banks, illustrates that the concealed risks in the Chinese banking system have been accumulating for too long and too deep. With the overall decline in the operating income and profits of the six major banks in the current scenario, the storm seems imminent.