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Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Wuxi Rural Commercial Bank Co / Equity Bottom-Up

Wuxi Rural Commercial Bank Co (600908 CH)

As is often cited, China maintains certain advantages over other parts of the world regarding the terrible weight of C19 that is so devastating other parts of the globe and in relation to the interrelated current macro picture.Jiangsu-based <a href="https://www.smartkarma.com/entities/wuxi-rural-commercial-bank-co" target="_blank" data-smartkarma-citation="entities:27482:1" rel="noopener">Wuxi Rural Commercial Bank Co (600908 CH)</a> is specialized in SMEs, Corporate and Retail lending, e-banking, Trade Finance, Credit Cards, and FX services. The bank last year took a stake in another rural lender. China has a total of 1,641 rural banks in 31 provinces. Rural commercial banks were originally rural credit cooperatives. Given greater capital constraints and asset quality concerns surrounding the specific space, shares carry a higher risk/reward profile. (Anhui rural banks, Jiangxi Ganzhou Commercial Bank, Jilin Tonghua Rural Commercial Bank, and a rural credit union in Heilongjiang province are examples of how not to function). The brunt of the asset quality pressures in China might not have come through yet because of the still existing moratorium on the repayment of loans as well as its interest payments- but this applies to most jurisdictions with arguably greater pain.The CBIRC has ordered rural banks to boost capital, merge with other institutions (something Wuxi Rural has already instigated), or introduce strategic investors to mitigate financial risks. Regulators are also looking into converting certain high-risk rural banks into branches for larger state-owned or joint-stock banks. If a bank is deemed severely distressed, local regulators will be able to push for a restructuring, assist in a takeover or shut down the bank entirely. The sector is thus ripe with opportunity as well as risk.2020 was indeed a year of deeper “National Service” but countering a growing coterie of high-profile detractors, the System may be one of the world’s more resilient ecosystems.Recent results show positive fundamental momentum and trends with improvement in Profitability, in Efficiency, and in NIM and Spread, while Capital Adequacy, and Liquidity (though LDR is low) showed some erosion though headline Asset Quality (excluding the “substandard” bucket) and Provisioning were pretty stable. Growth in “Core Income” was solid, especially in underpenetrated Fee Income while Net Interest Income expansion was underpinned by forceful credit expansion.<div class="content-highlight">A FV of 8%, a PBV of 0.95x, an Earnings Yield of 11.4%, and a Dividend Yield of 3.1% are not unappealing. The bank commands both an above-average PH Score™ and VFM ranking. Wuxi Rural Commercial also has a “3 year off, 1 year on” profile, positioned in the global top decile:  shares have performed relatively well over the last 12 months after a long period of poor performance which can be a benign combination for investors.</div>

As is often cited, China maintains certain advantages over other parts of the world regarding the terrible weight of C19 that is so devastating other parts of the globe and in relation to the interrelated current macro picture.Jiangsu-based Wuxi Rural Commercial Bank Co (600908 CH) is specialized in SMEs, Corporate and Retail lending, e-banking, Trade Finance, Credit Cards, and FX services. The bank last year took a stake in another rural lender. China has a total of 1,641 rural banks in 31 provinces. Rural commercial banks were originally rural credit cooperatives. Given greater capital constraints and asset quality concerns surrounding the specific space, shares carry a higher risk/reward profile. (Anhui rural banks, Jiangxi Ganzhou Commercial Bank, Jilin Tonghua Rural Commercial Bank, and a rural credit union in Heilongjiang province are examples of how not to function). The brunt of the asset quality pressures in China might not have come through yet because of the still existing moratorium on the repayment of loans as well as its interest payments- but this applies to most jurisdictions with arguably greater pain.The CBIRC has ordered rural banks to boost capital, merge with other institutions (something Wuxi Rural has already instigated), or introduce strategic investors to mitigate financial risks. Regulators are also looking into converting certain high-risk rural banks into branches for larger state-owned or joint-stock banks. If a bank is deemed severely distressed, local regulators will be able to push for a restructuring, assist in a takeover or shut down the bank entirely. The sector is thus ripe with opportunity as well as risk.2020 was indeed a year of deeper “National Service” but countering a growing coterie of high-profile detractors, the System may be one of the world’s more resilient ecosystems.Recent results show positive fundamental momentum and trends with improvement in Profitability, in Efficiency, and in NIM and Spread, while Capital Adequacy, and Liquidity (though LDR is low) showed some erosion though headline Asset Quality (excluding the “substandard” bucket) and Provisioning were pretty stable. Growth in “Core Income” was solid, especially in underpenetrated Fee Income while Net Interest Income expansion was underpinned by forceful credit expansion.A FV of 8%, a PBV of 0.95x, an Earnings Yield of 11.4%, and a Dividend Yield of 3.1% are not unappealing. The bank commands both an above-average PH Score™ and VFM ranking. Wuxi Rural Commercial also has a “3 year off, 1 year on” profile, positioned in the global top decile:  shares have performed relatively well over the last 12 months after a long period of poor performance which can be a benign combination for investors.

Wuxi Rural Commercial Bank: In a Consolidating Space, Wuxi Rural Can Be a Winner