Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

China's banks are turning the corner -- or are they?

A surprise increase in full-year profit at Agricultural Bank of China Ltd. and better-than-estimated 2016 earnings at Bank of Communications Co., or Bocom, are reinforcing the view that lenders in the People's Republic are getting a grip on their multiyear bad-loan problem. And with short-term interest rates starting to move higher, the banks should now be able to boost income on their assets.

Value Rethink
The price-to-book ratios of the big five Chinese banks climbed steadily over the past 12 months as investor optimism grew
Source: Bloomberg

On a closer look, however, there's reason to believe a rising tide won't lift all boats. Take Bocom. The bank garnered a net interest spread of 1.05 percent. Last year's data aren't available yet for most of its rivals. But they're usually able to achieve a yield on interest-earning assets that's at least 1.5 percentage points above the cost of their interest-bearing liabilities.

Now, a lender that's unable to make much money on borrowed funds should hope to be like Standard Chartered Plc: stuffed with liabilities that don't bear interest. Even here, Bocom doesn't have much to brag about. Less than 37 percent of the funding behind its assets is what analysts consider to be "free," consisting of equity and demand deposits. That's the lowest level among large mainland lenders.

Raw Deal
Bank of Communcations isn't a great bet on rising Chinese interest rates
Source: Bloomberg
* Ratio is used to measure banks' capital strength. Calculated as: [(demand deposits + total shareholders' equity)/total assets ] x 100.

Lenders that don't have access to StanChart-type free liabilities should at least have better assets than the British bank, so they don't have to sacrifice profit on bloated credit costs. Published figures on nonperforming loans mean little in China; it may be more prudent to listen to Bocom President Peng Chun when he says asset quality remains under "huge pressure."

For that pressure to ease, real estate prices must remain stable. A property market downturn in China would expose the economy to bigger risks than three years ago, Moody's Investors Service said in a report Wednesday.

It isn't hard to see why. For one thing, the banks' mortgage business has grown: Bocom's residential loans expanded by 146 percent in the past five years, to 770 billion yuan ($111 billion). The use of property in collateral for loans has also increased.

At the same time, a big chunk of credit to developers is now held in wealth-management products and loans by trust companies. That's a systemic risk, particularly for smaller Chinese banks. They rely too much on getting funded in the wholesale market, and make their money by investing in wealth-management products of larger banks.

Assuming the authorities in Beijing are able to keep a property steamroller at bay, banks can go on picking up pennies in front of it. But that doesn't mean investors have to like them equally.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Paul Sillitoe at