Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/bank-of-jiujiang-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:23745:1">Bank Of Jiujiang (6190 HK)</a> may have a limited "free float" but the bank is illustrative of issues today within specific areas of the Chinese Banking ecosystem though less so at the SOE banks.While the headline NPL ratio edges lower, problem loans have exploded over the last six months, especially the "doubtful loans" bucket which have trebled while charge-offs have doubled. Forceful credit growth keeps the NPL ratio optically under control at just 1.97%. But how wise is double-digit loan, in US$, especially in SMLs, since the start of the year given the well-documented softening of the economy? Liquidity weakens as deposit growth fails to catch up with loan expansion, more debt is issued, and capital adequacy erodes.  In short, medium-long term fundamental trends are impaired structurally by the need to keep the credit spigot open artificially to support a weaker economy much to the delight of the political class. (The latter has just cut RRRs for the third time this year). Debt has mushroomed by 32% over the last six months, accounting for 2.7x SH Funds today.Provisioning is insufficient (and falling) for problem loans ("stage 3"), let alone bulging Special Mention Loans ("stage 2") which require fewer reserves.Credit growth may protect the top-line, and ensure that the Efficiency Ratio looks better than it really is, yet sky-high credit costs reduce much of the gains from Net Interest Income growth.Trading gains and "other" non-interest income -accounting for nearly 100% of PT Profit- compensate for elevated write downs, mostly on loans but also securities.The bank remains still over exposed to property (about a third of credit portfolio) despite replacing heavy CRI exposure (a quarter of loans back in 2014) with mortgage lending. Since 2014, credit has trebled. Though the bank is not so liquid from a trading perspective, given the risks shares should trade at a deep discount to Book Value and not at Book Value as they do today.

Bank Of Jiujiang (6190 HK) may have a limited "free float" but the bank is illustrative of issues today within specific areas of the Chinese Banking ecosystem though less so at the SOE banks.While the headline NPL ratio edges lower, problem loans have exploded over the last six months, especially the "doubtful loans" bucket which have trebled while charge-offs have doubled. Forceful credit growth keeps the NPL ratio optically under control at just 1.97%. But how wise is double-digit loan, in US$, especially in SMLs, since the start of the year given the well-documented softening of the economy? Liquidity weakens as deposit growth fails to catch up with loan expansion, more debt is issued, and capital adequacy erodes.  In short, medium-long term fundamental trends are impaired structurally by the need to keep the credit spigot open artificially to support a weaker economy much to the delight of the political class. (The latter has just cut RRRs for the third time this year). Debt has mushroomed by 32% over the last six months, accounting for 2.7x SH Funds today.Provisioning is insufficient (and falling) for problem loans ("stage 3"), let alone bulging Special Mention Loans ("stage 2") which require fewer reserves.Credit growth may protect the top-line, and ensure that the Efficiency Ratio looks better than it really is, yet sky-high credit costs reduce much of the gains from Net Interest Income growth.Trading gains and "other" non-interest income -accounting for nearly 100% of PT Profit- compensate for elevated write downs, mostly on loans but also securities.The bank remains still over exposed to property (about a third of credit portfolio) despite replacing heavy CRI exposure (a quarter of loans back in 2014) with mortgage lending. Since 2014, credit has trebled. Though the bank is not so liquid from a trading perspective, given the risks shares should trade at a deep discount to Book Value and not at Book Value as they do today.

Bank of Jiujiang: More Sceptical than Trusting