ATEC will admit that we are not the most well versed when it comes to looking at the fundamentals of financial companies. Hence please do your own work.
With our simpleton approach though, we will however make the following observations about Chinese banks (here, we use ICBC’s chart as a poster child):
Most investors do not believe in the true nonperforming loan (NPL) figures of the Chinese banks, especially in a weak macro environment, and that is why the sector continued to de-rate over the last few years (0.4x Price to Book on average now). That’s fine. But we had already seen the fallout of Huarong and Evergrande come undone and if nothing systemic had emerged from these risks by now, we wonder what we are missing.
China’s proactive tackling of its ‘problematic children’ could also be seen as a longer-term positive for its banking system in terms of diffusing such time-bombs which might otherwise return to kick them in the behind when the next downturn arrives. ATEC also does not recall any other government that had so successfully managed to orchestrate such a feat without having to deal with worse stresses on the banking system. Hence, could we already be looking at this sector at the worst (or close to worst) of their credit cycle?
Please correct ATEC if we are wrong, but whilst the shadow banking system used to be a constant risk over-hanging the system, it is pretty much largely cleaned up by now, and many speculative products banned.
It is also likely to us that with the ‘demise’ of Alibaba, Ant Financial can pretty much forget about ever disrupting the Chinese Financial industry. If Ant Financial should return to the market in time, it will be with the heavy influence of state-backed investors, meaning there is now a higher chance Ant will have to collaborate with the banks and even share the treasure trove that is their over 1 billion people’s worth of credit data.
Hence, what Jack Ma might have unknowingly done was to spark a sense of urgency amongst the bank regulators and bank managements to accelerate their pace of digitisation (and product modernisation?), which we know can eventually deliver sizeable cost savings at the bare minimum.
It is probably fair to say that optimism towards the Chinese banks is almost non-existent at this point, although ATEC will admit that we have no idea what can catalyse a move in their share prices. Perhaps it will come in the form of further easing by the People’s Bank of China or just a steady build-up and release of new green infrastructure projects (amidst others) backed by the government as they move the country towards a new era.
ATEC might be wrong, but we think it is worth watching and getting ready.