Abstract: Explain and compare China Merchants Bank with the other large state banks including Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of China (BOC) based on my practical investing experience.
Basic information about China Merchants Bank
China Merchants Bank was established on April 8, 1987. It was the first national stock-based commercial bank in China completely managed by a corporate bank and was founded by China Merchants Group, a state-owned enterprise in Hong Kong. Currently, its two major shareholders are China Merchants Group (owns 26.32%) and China Ocean Shipping Co Ltd (Owns 6.24%). Next, let us have a look at a few interesting statistical figures, up to end of 2020 CMB has become the third largest bank in China in market capitalization, see the following table in detail.
As of the end of 2020, the top five banks in China are ranked by market capitalization:
- Industrial and Commercial Bank of China (ICBC) – RMB 1712.8B or US$265B
- China Construction Bank (CCB) – RMB 1252.1B or US$193.7B
- China Merchants Bank (CMB) – RMB 1096B or US$169.55B
- Agricultural Bank of China (ABC) – RMB 1075.9B or US$166.44B
- Bank of China (BOC) – RMB 856.7 or US$132.53B
Next, based on the information I found on the internet, CMB has ranked the fifth largest bank in China in brand value in 2020, with brand value of RMB 2611.23 or US$403.97, see the table below in detail.
Top 10 brand value ranking list for banks in China in 2020:
- Industrial and Commercial Bank of China (ICBC) – RMB 456.4B or US$70.6B
- China Construction Bank (CCB) – RMB 388.8B or US$60.1B
- Agricultural Bank of China (ABC) – RMB 377.9B or US$58.5B
- Bank of China (BOC) – RMB 332.6B or US$51.5B
- China Merchants Bank (CMB) – RMB 261.1B or US$40.4B
- Bank of Communications (BOCOM) – RMB 220.7B or US$34.1B
- Shanghai Pudong Development Bank (SPDB) – RMB 192.5B or US$29.8B
- Postal Savings Bank of China (PSBC) – RMB 147.5B or US$22.8B
- Industrial Bank – RMB 143.6B or US$22.2B
- China Minsheng Bank (CMBC) – RMB 128.8B or US$19.9B
(Data source: https://www.10guoying.com/news/7641.html)
Current market conditions of China Merchants Bank
The current stock price of H-share of China Merchants Bank (HK stock code: 3968) is HK$66.55 with price-to-earning ratio (PE) of 14.73 and price-to-book ratio (PB) of 1.95 and the annual yield of 2.24%.
I am holding China Merchants Bank right now, which accounts for about 4.81% of my “Long-term growth stock portfolio”. It is the only bank stock in China in my portfolio.
China Merchants Bank vs Big four state banks
Let’s look at the following table that I found on the internet. It shows the top 20 China companies in market capitalization in 2010 and 2020, respectively. We can see that the resource and finance industries occupied the largest market capitalization ten years ago while the trend has changed to technology sector nowadays. Market capitalization is the value that the market gives. Speaking in the simple perspective of price-to-earning ratio (PE), market capitalization equals to annual earnings times PE. Earnings of a company is an objective number which reflects the real net earnings of its company (Of course here we do not consider those companies which conduct fake accounting practices). However, PE ratio is more of a subjective factor which relates to the market sentiments as well as which industrial sectors the current market like or if the market has faith in the future growth of a certain company.
(Translated from : https://finance.sina.com.cn/stock/hkstock/ggscyd/2021-01-06/doc-iiznctkf0445409.shtml)
Comparisons among the largest banks in China over the last ten years
Since the topic of this article is about banks, we are going to extract the information of the banks from the above table and let us compare their development over the last 10 years.
From the table above, can you see anything interesting? If you have never learnt about anything of these banks, you should still be able to notice something unique of one certain bank against the others. Yes, it is China Merchants Bank and its market capitalization has increased significantly over this 10-year period, the compound annual growth rate (CAGR) is 14.16% while that of the other five banks are ranging between -1.59% and 1.92%, which are even lower than the inflation rate and seems like they haven’t changed.
Next, let us look at the earning development of them over the years, from the table below, we can compare their annual earnings between year ends of 2010 and 2020, China Merchants Bank is again as outstanding as in the previous table and is the only one with two-digit-figure increase of CAGR, i.e., 14.21% while that of the others are from 6.33% to 8.57%.
Here you may doubt though the net earnings of the other banks has risen less than CMB, they have still risen in middle-to-high single digit annual earnings, why haven’t their market capitalization changed accordingly? The market caps of some of them have even fallen while their earnings have risen somehow. Why does that happen? Well, it does relate to the price-to-earning ratio (PE) as mentioned above. Let us look further into the table below.
According to the PE numbers in the above table, you may also figure out the difference between CMB and the others. Ten years ago, the PE values of them were quite close, from 8.8 to 11.3. Although CMB’s PE has the highest valuation, it was actually not far from the others. However, in year end of 2020, the situation has varied quite significantly, while the market is still willing to give CMB high PE ratio as ten years ago, the other banks got significantly lower valuation in PE ranging from 4.4 to 5.4, which are much less than that of CMB. What a great difference in valuation! That is why apart from CMB, the market capitalizations of the other banks haven’t changed much or have dropped a bit even if their earnings have actually risen. Just because the market sentiments towards them have turned pessimistic. Why does it happen? I will try to explain in my point of view next.
China Merchants Bank is just different
The style and corporate culture of a company are directly related to the company’s management, and the company’s shareholding structure is also related to a certain extent. Let’s look at the composition of the major shareholders of the above-mentioned banks.
From the above table, all the banks’major shares except CMB have been directly controlled by the central government of China. Regarding CMB, China Merchants Group which has controlled 26.32% of CMB is also a state-owned corporation; however, even if the total shareholding of the top ten shareholders of CMB accounts for only 48.47%. Here we can see a clear difference. The equity of CMB is much more dispersed while that of the other four banks are relatively centralized and controlled by the central government. But how is this related to the operations of the companies? Firstly, undoubtedly, these four more centralized banks have much less bankruptcy risks than CMB, this is definitely one of the advantages of them. On the other hand, relatively speaking, the equity-dispersed companies are more inclined to take care of the benefits of the other shareholders while implementing corporate policies. However, for the more concentrated companies, they may think since they already possess the final say, even if the other minority shareholders object, it won’t affect their decisions. This situation will undoubtedly make the management relatively less concerned about the interests of minority shareholders when considering what policies to implement. Therefore, companies with more dispersed equity are more likely to incline to boldly innovations than companies with concentrated equity, which is undoubtedly conducive to the long-term development and growth of the company.
Case study-the collective profit transfer of the state banks in 2020
The epidemic of Covid-19 broke out in China at the beginning of last year. Consequently, China’s domestic economy in the first half of last year was suffered an unprecedented and significant impact. Of course, the performance of the banking industry was affected unexceptionally. When the banks’ interim results were released last year, the results of the five major state banks were surprisingly consistent, and their profits fell the same amount at nearly 11% year-on-year. There was an uproar on the Internet. Could it be such a coincidence? Could it be agreed by these companies in advance? There are some thoughts that maybe these banks deliberately created the loss results together. If so, where were the hidden profits? Of course, this was probably related to the substantial increase in the provision for bad debts. From the accounting point of view, the setting of the provision for bad debts naturally becomes a regulator of how much profit or loss a bank generates. Banks can flexibly control the resulting profit or loss in a discretionary way. Look at the following table, you may see that China Merchants Bank performed greatly again in comparison with the others and its resulting loss just slightly dropped by 1.63%.
Last year, for the first time I heard a new term “Rang Li” in Chinese, which means to “surrender the interests to others”. What exactly is it? According to an article published on the financialnews.com.cn website on September 25, 2020, “The collective decline in net profits will benefit the real economy-the six major banks’ 2020 mid-year report ‘Perspective’”, which quoted the response of the president of ICBC Mr. Gu in the interim report meeting, “In the first half of the year, the bank’s net profit declined year-on-year, not because of problems with its own operating capabilities, but because of serious implementation of relevant national policy requirements, and in accordance with the principles of commercial sustainability, to fully support the prevention and control of the epidemic, and to increase the transfer of profits to the real economy and accelerated risk resolution.” Here, I understand that some companies might encounter liquidity problems during the epidemic and were unable to repay the banks’ debt, resulting in bad debts. Under normal circumstances, the banks may sue the company to force it to sell out its assets to repay the debts or even caused it to go bankrupted. However, during this special period, the government introduced special policies to transfer the “profits” of these state banks to the difficult business entities, so as to prevent their imminent problems and bankruptcy. This kind of policy looks good and reasonable. It will allow the entire society to tide over the difficulties and prevent the companies from closing down and a large number of layoffs and other adverse consequences. But of course, the “profits” of this transfer will have to be paid off together with the minority shareholders of these state banks. If I ask you honestly in case you made a profit from an investment last year, would you actively donate a portion of the profit to those companies that are about to fail because of social responsibility? For most investors, the answer is simply no. Therefore, the capital market is a place where profits are pursued. They usually do not talk about social responsibility. This is the fundamental reason why the market has given these state banks such a low price-to-earnings ratio after the epidemic broke out. Of course, this is just my point of view. But it is true that under the current circumstances, these banks have this additional policy risk of “surrendering profits” than other commercial banks such as China Merchants Bank. It turns out that even if a bank makes money, the money may still leave the pockets of the investors because of this additional policy.
What’s more, there is also a conspiracy theory though it is unproven, let us just talk about a possible situation. It is somehow possible that some state-owned enterprises cannot repay the debts borrowed from these state banks due to the epidemic. Then, one may take advantage of this opportunity to “give out” the profits of these banks to fill the debts, and then the money will actually flow from you (small shareholders) to their pockets. That is, your money becomes their money, and their money is still theirs. Of course, this may be just a hypothesis, and everyone should not take it very seriously. If there are similarities, it may be just a coincidence.
Based on the above, I feel that investing in China Merchants Bank gives me more peace of mind. Of course, after a certain period of time, market sentiment may change again, and the state banks will be given new valuations at any time, and then the stock prices of them will take off again. I sincerely wish the shareholders of these banks good luck.
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