Analysis of Chinese Banks Listed in Hong Kong

Banking is an important industry in modern economy. With the fast economic growth in China, the investment value of banks in China has become a major topic for investors who want to share the economic benefits from the growth of Chinese market. According to the policies in China, the largest banks are still state owned enterprise. The largest stake could be taken up by foreign investors should not be more than 20%. This is why HSBC could only take up a 19.99% share in the Bank of Communications. Up to now, the four major state owned banks are Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, China Construction Bank (CCB) and Bank of China (BOC). The fifth one is Bank of Communications but of much smaller size than the big four. For the top five banks, three of them have been listed in Hong Kong Stock Exchange. Below are the comparisons of the three listed banks for their investing values . Major data was taken from their annual reports and prospectus in 2005. In order to give a more comprehensive idea of their performance, I also abstract some important figures from HSBC annual report 2005 which represent an internation performance standard for banks :

1. Major Business Focus

China Construction Bank (stock code : 939)
CCB develop their major business within China and their major loans are for infrastructure contruction and real estates within China. Therefore, their profits are closely related to the economics development of China.

Bank of China (stock code : 3988)
BOC is the best known chinese bank in the world as their major focus is foreign exchange service. Besides china, they also set up branches around the world. About 40% of their profit is from BOC Hong Kong. Therefore, the bank is expected to be more stable in profit but will face higher exchange risk and gets less benefits from the RMB currency rise.

Bank of Communications (stock code : 3328)
Bank of Communictions is operating in a smaller size than the big four and offers more general and customized banking services to the public. With their strategic cooperation with HSBC, the bank is improving their working effeciencies to give a better performance.

2. Size of Business

Loans / Deposits (RMB in Millions)
China Construction Bank : 2,395,313 / 4,006,046
Bank of China : 2,152,112 / 3,699,464
Bank of Communications : 758,773 / 1,220,839

Note : From the above, the China Construction Bank is operating at a higher loans and deposits from which they are more likely to generate more profits and better economy of scale.

3. Key Operating Figures

ROE (Return of Average Equity)
China Construction Bank : 17.99%
Bank of China : 12.14%
Bank of Communications : 13.68%
HSBC : 16.8%

Note : For the ROE, China Construction Bank gives the best performance which is higher than HSBC. Such outcome is reasonable as China is a fast growing economy. The performance of banks in such market should be better than the banks in mature economy. The performances of BOC and Bank of Comunications are quite unacceptable in such case.

Net Interest Spread / Net Interest Margin
China Construction Bank : 2.7% / 2.78%
Bank of China : 2.21% / 2.33%
Bank of Communications : 2.58% / 2.64%
HSBC : 2.84% / 3.14%

Note : The interest rate in China is controlled by the People's Bank of China which is the central bank. However, under such circumstances, China Construction Bank managed to give the best Net Interest performance within the three. In the coming year, the chinese banks are expected to give a higher Net Interest Spread and Net Interest Margin as the central bank has raised the loan rate but maintain the deposit rate unchanged.

Non-performing Loan Ratio
China Construction Bank : 3.84%
Bank of China : 4.9%
Bank of Communications : 2.8%
HSBC : 1.16%

Note : The non-performing loan ratio is one of the major issues concerned by investors as some of the loans have been political loans which may not be executed according to general economic rules. Therefore, the NLR of the three banks are relatively higher than that of HSBC. But Bank of Communications is the best performer among the three.

Cost to Income Ratio
China Construction Bank : 45.13%
Bank of China : 47.95%
Bank of Communications : 51.24%
HSBC : 51.2%

Note : The two large banks has a better percentage than HSBC due to the lower running cost such as lower salaries for staff and lower rent in China. However, Bank of Communication got a higher figure which may be due to their smaller size in operation. In this aspect, China Construction Bank gives the best performance.

From the above analysis, it is obvious that China Construction Bank gives a better performance than the other two and its share performance is more likely to outperform the other two in the long run.