Which China bank to invest, ABC, BOC, CCB or ICBC?

According to Business Insider Singapore in May 2018, there are 28 banks in the world with $1 trillion of asset each. Of that, China is home to the four largest in the world by asset ranked in the following order:

1.       Industrial & Commercial Bank of China (ICBC)- $4.0 trillion (SHA: 601398, HKG: 1398, US: IDCBY)

2.       China Construction Bank (CCB) - $3.4 trillion (SHA: 601939, HKG: 0939, US: CICHY)

3.       Agricultural bank of China (ABC) - $3.24 trillion (SHA: 601288, HKG: 1288, US: ACGBY)

4.       Bank of China (BOC) - $2.99 trillion (SHA: 601988, HKG: 3988, US: BACHY)

Collectively known as Big Four banks in China, their A-shares and H-shares dual-listed in China and Hong Kong stock markets and ADR shares are available for trading in US market too. These bank stocks had a good run since bottoming in early 2016, clocking gains of between 80% to 120% from their lows. After peaking in Jan 2018, their share prices have correct almost 20%. With low Price-earnings ratios and high dividend yields currently, are they good bargains to buy now?

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Based on the price as of 22 Aug 2018, the valuation matrices based on Price-earnings ratios (P/E), Price-book ratios (P/B) and dividend yields are as follow:

(Based on H-share prices)

Comparing Valuations based on P/E against dividend yield:

At a glance, it appears that BOC is the cheapest (lowest PE, highest dividend yield) among the four followed by ABC while ICBC and CCB are trading at very close valuations.

Before deciding on which bank is the best bargain right away, the analysis might be useful to compare the banks in terms of profitability, asset quality and capital adequacy based on their 2017 annual results.

Comparison of Profitability

Based on the above profit indicators, ICBC and CCB scored the best. Although ABC was the best in terms of NIM (i.e. difference between Interest Income and Interest Expense over Total value of Loans and Securities), it also had the highest cost-to-income ratio (expenses incurred to earn that income) and lowest return on total assets. However, ABC managed to earn relatively higher Return on Equity (ROE), probably due to the lower common equity employed which could be seen from the section on Capital Adequacy. Of the four, BOC had the lowest ROE.

Comparison of Asset Quality

A non-performing loan (NPL) is defined as a loan that is in default or close to being in default. High NPL ratio may indicate that greater portion of loans were made to poor credit quality borrowers. Allowance to NPL is the amount provision made divided by the amount of NPL. A higher Allowance to NPL indicates a bigger buffer and hence ability to absorb any sudden increase in the NPL without immediate impact on the future profits.

From the table above, it can be seen that ABC had the highest NPL ratio and was the most aggressive in terms of making provision for the potential impairment losses on loans and CCB seems to be in the middle of the extremes.

 Comparison of Capital Adequacy

According to Investopedia, the Capital Adequacy Ratio (CAR) is a measure of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. Tier one capital is the capital that is permanently and easily available to cushion losses suffered by a bank without it being required to stop operating.

As tabulated, CCB and ICBC had the highest capital adequacy ratios. While ABC had the lowest ratios, it may be useful to note that BASEL III international regulatory framework only requires 8.5, 9.5 and 11.5 for the above ratios (source DBS Research) and all the four banks were well in excess of the minimum requirements.

 What does the market think of the valuations?

From the P/B and ROE chart above, it can be deduced that the market is currently pricing the four PRC banks based on profitability, quality of assets and adequacy of capital with CCB having the highest valuation awarded, followed by ICBC, ABC and BOC in that order.

Would you pick the cheapest bank to invest or pay a higher price for better quality?

Due to lingering fears of hidden bad loans, China banks have persistently traded at low PEs and below its book values over the past few years despite providing relatively high dividend yield.

Other articles on Banks:

Who Had Been Buying and Selling the Shares of Singapore Banks?

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This is not a buy or sell recommendation. Please do your own due diligence before making any investment decision. Read Disclaimer