The following points of view are provided by our analysts Patanjali Tamhanaka, Baruch Shapiro, Elbert Klar, Tali Borach and edit by Randi Greenwood.
The information provided is for reference only. It does not constitute an invitation, offer or recommendation or any solicitation of an offer to acquire, purchase or subscribe for any securities.
The content structure of this report follows the Reporting Principles of Medio Research (RPMR), which is to directly present arguments and conclusions to improve reading efficiency.
Point 1. The U.S. banking industry has developed to the maturestage of its life cycle, while China's banking industry has just begun to enter the mature stage.
Chinese commercial banks have higher ROE. In 2022, theaverage ROE of China's banking industry will be 12.71% (calculated based on data disclosed by the China Banking Regulatory Commission), and the ROE of the US banking industry will be 9.23% (calculated based on FDIC data); the ROA of the two countries will be 0.96% and 1.03% respectively during the same period. Although simply looking at the difference comes from the leverage ratio, a simple horizontal comparison of ROE results cannot lead to appropriate operating and valuation conclusions. Through in-depth comparisons of balance sheet characteristics, profit contribution factors, risk curves and other factors, hence, it is recommended to focus on: (1) the economy and thestage of the financial cycle; (2) the structural characteristics of the financial market; (3) the changing trend of the profit contribution factors.
Point 2. Asset allocation structure
Commercial banks in China and the United States have similar asset allocation structures, with about 50% of loans and 20-25% of securities investment, but they are different in the direction of credit and investment: (1) First of all, the difference in the core driving factors of economic growth leads to the fact that China's loans are mainly invested in industrial and commercial enterprises (accounting for 65.43% in 2022), while in the United States, retail credit accounts for half (in 2022, the four major banks account for an average of 49.91%); (2 ) The second-developed securities market provides a rich variety of assets for the investment business of American commercial banks, while Bank of China mainly invests in bond assets (especially government bonds) (accounting for about 50%).
Point 3. Capital and leverage: Theon-balance sheet leverage of the U.S. banking industry is lower, but the large increase in off-balance sheet business may be risky.
In termsof capital, the core tier-one capital ratios of the two major banks are evenly matched (In 2022, ICBC and China Construction Bank will be 12.87% and 12.98%,and the four major banks in the United States are also at the level of 11-13%),but the total capital is sufficient The rate is higher in the United States (for example, Wells Fargo, Citigroup and JP Morgan are both above 16%, while Industrial and Commercial Bank of China and China Construction Bank are only 14.61% and 14.94% among Chinese banks), indicating that American commercial banks are more fully utilizing capital tools . In terms of leverage, we analyze it from two dimensions: (1) On-balance sheet leverage, the "total assets/net assets" of U.S. commercial banks (9.0 in 2022) is lower than that of Bank of China (13.87), which is consistent with higher regulatory requirements and historical The rich goodwill and intangible assets accumulated in the previous mergers and acquisitions are related; (2) Off-balance sheet business. As of the end of 2022, the risk exposure of off-balance sheet business of American commercial banks accounted for 63.23% of total assets, much higher than Bank of China's 37.56%. Huge off-balance-sheet business will undoubtedly increase banks' implicit repayment pressure.
Point 4. Income Statement: The drivingfactors remain optimistic.
(1) In the past ten years, the growth rate ofnet interest income of Bank of China is generally higher than that of the United States (CAGR14.72% in China, 4.07% in the United States), mainly due to the rapid expansion of asset scale (CAGR15.91% in China, 4.53% in the United States); In terms of interest margin, the U.S. banking industry has maintained a relatively high level of more than 3% for a long time, while Chinese banks are relatively low (especially since 2014). The extremely low cost of debt is the main reason for the high net interest margin in the U.S. reason. (2) In terms of non-interest, the U.S. banking industry accounts for a higher proportion of income (35-40%), and its income sources are more diversified. In addition to fee income, transaction income also makes an important contribution, thanks to mixed operations and huge scale of off-balance sheet business. (3) In terms of operating costs, the adjusted cost-to-income ratio of Bank of China is lower than that of the United States (40% in China and 60% in the United States), mainly due to the difference in labor costs.
Point 5. Risk analysis: the internallogic is consistent, but the cycle and form are different.
(1)Credit risk: It reflects the economic cycle and structural characteristics. China and the United States experience different cycle characteristics, leading to divergence of risk data curves. In 2022, the average "proportion of loans more than 90 days overdue" of China's 16 banks is 1.62%, much higher than the 0.55% in the United States; from the source of non-performing loans, Bank of China is concentrated in the public sector such as manufacturing, wholesale and retail, while The non-performing loans in the United States mainly come from the field of personal loans (mainly real estate-related loans); in terms of risk response, thanks to active provisioning, the average loan-to-loan ratio of Chinese banks has reached 2.75%, which is higher than the 1.29% in the United States. (2) Market risk: it reflects the characteristics of the financial market and institutional behavior. The current accounting treatment methods in the United States (such as the changes in the fair value of securities investment are included in the current profit and loss or net assets, and the DVA method allows banks to pay more than 10% of their liabilities when their own credit status declines. Market value bookkeeping, and then book profits) increase the volatility of net assets and profits, and also reduce transparency. (3) From the perspective of the bottom line of risk, government assistance and financial supervision are both good medicines to deal with the crisis.
Behind the ROE is the difference in the financial system:
1. The U.S. financial market is dominated by direct financing.By the end of 2022, the stock market and bond market will be 30 trillion and 39 trillion U.S. dollars respectively, while the total credit is only 9.3 trillion U.S. dollars. In contrast, China’s indirect financing accounts for a relatively large proportion High, the total credit is 116 trillion yuan, while the stock market and bond market are only 54 trillion and 70 trillion. This means that the balance sheet of China's banking industry is significantly higher than that of the United States in the balance sheet of the entire financial industry;
2. The difference in economic growth models between China andthe United States determines the difference in the direction of bank credit: the GDP growth of the United States is highly dependent on household consumption, while China mainly relies on investment. Therefore, Chinese commercial bank credit is mainly invested in industrial and commercial enterprises, while the United States is the proportion of personal loans More than half. However, maintaining a high degree of correlation with the real estate industry is the common point of the bank credit business of the two countries;
3. The income of Bank of Chinamainly comes from the intertemporal value of funds, and net interest income will account for 70% in 2022; while the income of commercial banks in the United States is more diversified, with non-interest income accounting for about
40% and coming from funds.
Conclusion: Chinese commercial banks still have higher ROI.
The banking industry in both China and the United States is anindustry with high ROI, but Chinese are. We usethe net assets and net profit data of the banking industry disclosed by the FDIC to calculate the shareholder return rate of the U.S. banking industry, while the Chinese banking industry uses the data of owner's equity and after-tax profits of banking financial institutions disclosed by the China Banking Regulatory Commission. The average ROE of China's banking industry will maintain a level of 15-20% from 2014 to 2022, but it has continued to decline since 2015 (rising risk costs and pressure on profit growth), and will drop to 12.71% in 2022. The ROE of the US banking industry has gradually recovered since the financial crisis in 2008, and has remained in the range of 9-10% in
recent years. Although it is lower than that of Chinese commercial banks, it still has a considerable level of shareholder return.
From the perspective of ROA, the return on total assets ofChina's banking industry has been above 1% since 2011 (although it has continued to decline in recent years), while that of the US banking industry has generally remained around 1%.