AFTER CREDIT SUISSE, CHINESE BANKS AREN´T A GREAT SAFE HARBOR / THE WALL STREET JOURNAL

After Credit Suisse, Chinese Banks Aren’t a Great Safe Harbor

Chinese banks will likely avoid the troubles of their global peers, but they are cheap for good reason

By Jacky Wong

With the global banking sector in an uproar, it is understandable that shares of Chinese banks have outperformed their peers. / PHOTO: CFOTO/ZUMA PRESS

Chinese banks are unlikely to be dragged into the still-simmering banking crisis in the U.S. and Europe. 

But they may not be the best investments. 

Anemic growth and declining margins—along with persistent concerns about undercounted problem loans—make Chinese bank shares more of a value trap than a safe harbor.

Thanks to its insulated and tightly controlled financial system, China is relatively safe from contagion related to the failure of Silicon Valley Bank and fire sale of Credit Suisse. 

Foreign assets only accounted for around 2% of total banking assets in China last year, and most of those were loans, according to Morgan Stanley.

Additional Tier 1 bonds, or AT1s, which can be used to cover losses when a bank goes bust, account for around 10% of Chinese banks’ capital base. 

But most of those were issued onshore in China, says Morgan Stanley. 

So they are also less vulnerable to the global selloff after $17 billion of AT1 bonds from Credit Suisse were wiped out when the Swiss bank was taken over by its rival UBS.

Beijing maintains tight control over China’s financial system. 

The biggest banks and many of the largest borrowers are state-owned, allowing the government to assign losses in a pinch and prevent crises from metastasizing—although at the cost of widespread moral hazard and often subpar returns for both depositors and investors.

Nonetheless, with the global banking sector in an uproar, it is understandable that shares of Chinese banks have outperformed their peers. 

Chinese banks also look cheap. For example, Industrial and Commercial Bank of China, the country’s largest bank, trades at 0.4 times tangible book value, compared with 1.8 times for JPMorgan Chase, according to S&P Global Market Intelligence.

But the shares are cheap for a reason. 

Worries that official nonperforming loan ratios may not reflect the reality of their balance sheets have depressed valuations, despite a significant effort to recapitalize parts of the system in recent years.

And right now, the property downturn could put more pressure on growth and margins. 

Small regional lenders are especially vulnerable as they are more exposed to the housing market, have weaker capital buffers and are less able to attract traditional deposits.

Massive bank failures aren’t likely though. 

When the government let a small lender called Baoshang Bank fail in 2019, that sparked a scramble for liquidity despite the bank’s size. 

With Beijing now squarely focused on boosting economic growth, it is unlikely to allow that to happen again. 

But big lenders may still need to prop up weaker ones.

And profit and net interest margins were already declining in the quarter ending in December for China’s largest banks. 

Lower mortgage rates have triggered a wave of repayment from borrowers, which could further dent growth. 

The ratio of new mortgage loans to new home purchases by value plunged to 4.1% in 2022, compared with an average of around 28% in previous years, according to Nomura. 

And while the property market has started to rebound, new mortgage loans are still being issued at the lowest level in more than a decade, says Nomura.

Chinese banks will likely avoid the troubles of their global peers. 

But they still aren’t much of a harbor to ride out the storm—or, at best, a rather shallow and murky one.