Friday 15 December 2017

Max Doyle: Short View

Looking east to China, this week Industrial and Commercial Bank of China (ICBC) laid out its plans to raise yet more capital -- $6.8bn -- through a new rights issue.

Readers will be aware of reservations previously expressed surrounding the loan-loss provisioning of ICBC (now the largest bank in the world).

Like everything in China, the scale of the operations is enormous. ICBC has 386,000 employees, 3.6 million corporate clients and 216 million individual customers. With a return on equity over 20 per cent and falling non-performing loans, it seems picture-perfect. An alternative view is that ICBC will be the sting in the tail of the Chinese miracle. The rate of growth of the bank's lending book in 2009 was in excess of 20 per cent.

Chinese regulators have sought to increase the capital ratios of its banks to fortify future losses. But the extent of ICBC's true exposure to Chinese property remains shrouded.

As we have learnt here, a property bubble cannot occur without lenders pumping out money all the way to the top of the market. Similarly, we know that regulators remain silent when this happens. Nonetheless, the Chinese have recognised a property bubble exists and are trying to fashion a soft landing by strengthening regulation.

But a soft landing has proved elusive for regulators and property markets. Last month, Goldman Sachs sold $2bn worth of its shares in ICBC. Considering the fanfare Goldman's entry into the Chinese market received, this is a significant reverse of strategy.

Max Doyle is a principal of Prime Focus Management Ltd specialising in investment and turnaround of Irish companies

Sunday Independent

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