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March 24, 2014 11:50 am
Investors in China’s state-backed banks have a lot to worry about: the dangers of default in a slowing economy, the threat of bank reforms and market-based competition and the growth of online money market funds to name but a few. This week the big four are likely to report their slowest profits growth in at least five years. So it is hardly surprising that China’s big banks have been caught in a bear hug. All four have underperformed the Hang Seng this year – for the past five years, in fact. There are few signs that bears are considering releasing their grip. But dividends announced this week will be worth watching.
In absolute terms, China’s bank earnings are nothing to sniff at. The four – ICBC, China Construction Bank, Agricultural Bank of China and Bank of China – are expected to raise profits by a tenth to Rmb793bn ($128bn). That is more than the Japanese megabanks plus the biggest four European and US banks by assets have done, combined. Returns on equity are running between 18 and 22 per cent – rates no other big bank even nears. Yet none of that matters when investors doubt loan book quality. All four are trading at or below book value – weaker than Asia’s 1.2 times average – as fretting about bad loans continues.
Dividends matter in this situation. Whatever sour loan levels are actually reported, executives seem unlikely to agree dangerously high payouts. Should the four meet or exceed expectations of about a 35 per cent payout ratio, it would suggest they, and regulators, are comfortable with capital and provisioning. The negative mood is such that it seems unlikely the four would get much of a boost from higher payouts. But any uptick at all in their share prices would be a sign that investors were at least prepared to reconsider their gloomy outlook. That, or a juicy 7 per cent dividend yield finally proved too tempting.
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