Ping An Bank reports decling profits amid bad debts while Huaxia Bank faces highest bad debt ratio in banking sector.
$Ping An Bank Co.,Ltd.(000001)$
$PING AN(02318)$
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In China’s economic landscape, the central bank is currently the only entity taking decisive action. Last Friday, the People's Bank of China (PBOC) initiated a swap facility in collaboration with major brokerages and fund companies, effectively delivering a much-needed boost to the market. Today, just ahead of Monday’s trading session, the central bank continued its supportive measures by announcing a reduction of 25 basis points for both the one-year and five-year Loan Prime Rates (LPR). This marks the most significant rate cut in history.
When PBOC Governor Pan Gongsheng hinted at the rate reduction a few days ago, he projected a decrease of 20 to 25 basis points. Ultimately, the full 25 basis points were implemented, indicating a commitment to maximum monetary easing. As of today, all three major initiatives announced by the PBOC in September have been rolled out: the swap facility with 200 billion yuan in stock repurchase loans launched last week, and today, 23 listed companies have already announced loan amounts totaling 11 billion yuan. Furthermore, the rate cuts and reserve requirement ratio reductions have all been officially confirmed. The central bank has done all it can; now, it’s up to the market to respond.
Looking ahead, the only confirmed fiscal measure for the fourth quarter is the issuance of bonds to recapitalize state-owned banks, estimated at around one trillion yuan. This indicates the significant pressure on banks, prompting the need for capital injections.
Recently, state-owned banks have also lowered deposit rates to protect their interest margins.
But how will this round of rate cuts affect banks’ interest margins and the RMB’s exchange rate?
Typically, the immediate reaction to rate cuts is bad for banks, as lower loan rates can lead to decreased profits.
Currently, interest margins for major banks are at historic lows. According to recent reports, the highest margin among state-owned banks is with Postal Savings Bank at 1.91%, which has only dropped 17 basis points compared to last year.
However, even this bank has seen its stock sold off by investors like Li Ka-shing, indicating a lack of confidence in its future prospects.
The major state banks have margins hovering between 1.4% and 1.5%, down significantly from last year.
Historically, we see that a 10 basis point reduction in the one-year LPR corresponds to about a 5 basis point decrease in banks' interest margins. With the current 25 basis point cut, we can anticipate a drop of roughly 15 basis points in margins, potentially bringing the big four banks' margins down to around 1.3%.
This is below the official warning threshold of 1.8% set last year, suggesting that these banks are in a precarious position.
The risk levels vary among banks; for instance, China Construction Bank has a troubling bad debt ratio of 1.35% against a margin of 1.54%, which will drop further post-rate cut, leaving it potentially at 1.39%. Given this, I would consider Construction Bank to be the most vulnerable among the big four.
In contrast, Postal Savings Bank appears the safest, with the highest margin and the lowest bad debt ratio. This explains Li Ka-shing’s continued investment in its stocks.
Shifting our focus to joint-stock banks, the only one to report so far is Ping An Bank, which has seen a decline in profits for Q3.
It is rather surpising that many analysts overlook financial reports without context risks for future earnings.
While its margin remains relatively high at 1.93%, its bad debt ratio of 1.06% raises concerns, particularly since it has taken on many real estate projects.
Meanwhile, Huaxia Bank has the highest bad debt ratio at 1.65%, with a margin of only 1.61%, signaling severe operational issues.
Returning to the central bank, we know that rate cuts typically exert downward pressure on exchange rates. If the Federal Reserve continues to surprise with significant cuts, this gives the PBOC less room to maneuver. The risk here is if the dollar remains strong while China cuts rates, it could keep the yuan under pressure, potentially breaking through the 7.3 mark.
Currently, the PBOC seems to be taking a gamble, attempting to spur the stock market with new credit tools. These tools are sensitive to interest rates, with brokers eager to pledge stocks for low-rate loans, which are estimated to be below 2%. This increased leverage could become a liability if rates rise, leading to liquidity issues for companies.
The PBOC’s actions imply it’s unlikely to raise rates in the near future, locking in a trajectory for the yuan to decline.
The only way out is for the dollar index to fall significantly; otherwise, breaking the 7.3 barrier seems inevitable. If the U.S. economy achieves a soft landing and stock markets continue to rise, the Fed may not need to lower interest rate as market expected, complicating the situation for China.
The China central bank is adapting strategies from the Fed, such as trading government bonds to influence medium- and long-term rates, but it must be cautious.
China cannot afford to run low on foreign reserves, and excessive bond issuance could devalue its foreign assets.
Thus, any leverage increase will have limits. The PBOC cannot simultaneously stabilize the yuan above 7.3 while aggressively pursuing monetary easing.
In summary, the new monetary tools aimed at invigorating the market are not without risks; they do not allow for unlimited arbitrage.
The situation hints at a short-term boost for the stock market, but expecting significant long-term gains is unrealistic.
I advise investors to take profits during any market bounce and avoid chasing stock prices out of FOMO. It's important to stay disciplined and make decisions based on strategy rather than emotions.
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