The Chinese banking sector has suffered through a long, dark bear market. Correspondingly, shares of the Industrial and Commercial Bank of China Ltd. (601398.SS) have lost about 15% of their value since January. So maybe it’s time to look at the world’s largest bank from another angle.
As the chart below shows – there is a huge feast or famine divergence in Asia-Pacific financial services valuations – with China and Hong Kong at the low extreme and Australia at the high end. The average P/E ratio for the next 12 months for the mid- and large-cap Chinese banking sector is now 4.7. Concerns abound: 1) the quality of the sector’s balance sheet with over-lending to local governments, 2) the economy’s managed slowdown as China targets a new, lower level of growth and 3) the rebalance away from exports.
Source: Thomson Reuters Eikon
World’s largest unknown bank?
ICBC may not be a household name in the West, but it’s the world’s largest bank in terms of assets – 18.7 trillion Chinese yuan renminbi (US$3.1 trillion) as of June 30, 2013. It’s number-two in market cap (US$223 billion) after Wells Fargo. (See chart below.) ICBC is a traditional lender, focused on commercial and retail — not the type of capital markets-focused investment bank that dominated the list of the top 20 banks in the lead-up to the 2008 crisis. That helps explains its relatively unknown international brand.
Source: StarMine Professional
Domestically, ICBC has a network of more than 17,000 branches, and is also the world’s largest bank in loans and deposits. With its scale, the company is therefore a barometer for broader concerns about the Chinese market, concerns that are well represented in the current share price. The great buying opportunities always occur in the depths of despair and it’s hard not to see signs of despair in the current valuation.
Source: Thomson Reuters Eikon
Questions to ask
The key questions for ICBC investors have many local components but also global themes that will sound familiar to many investors –
1. What is the appropriate valuation level for banks post the end of the credit supercycle?
2. How risky is the balance sheet?
3. To what level will the Chinese government prevent losses through macroprudential policy?
4. How much of the worst case is built into current valuations?
With the entire banking sector now having de-rated and with ICBC now trading at a significant discount to an already inexpensive sector – this seems an interesting play. The risks are well known, if difficult to quantify, while almost no allowance is made for a happier ending. There are many euphemisms for this type of bold play – catching a falling knife being one – but at a F12M PE of 5.5, F12M book value of 1 (historical median of 2) and with the government having a strong vested interest in maintaining the stability of their financial services sector – it may be time to employ a deeply contrarian view of ICBC.
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