Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

China's big four banks look to be finally escaping their bad-debt woes. Investors still ignoring these behemoths do so at their peril.

Money, Money, Money
Earnings at China's oil and telecom giants are still just a fraction of even the smallest of the big four banks
Source: Bloomberg
Note: China's big three oil companies are Cnooc, Petrochina and Sinopec. The telecom operators are China Mobile, China Telecom, and China Unicom.

Financial results released Wednesday for Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. illustrate the buoyancy.

Bank of China, the smallest of the four, reported a 23 percent surge in second-quarter profit after curbing soured loans and expanding lending margins. The other three posted an average net income gain of 3.5 percent compared with the same period last year. All the lenders' nonperforming loans declined, while net interest margins rose.

When Beijing began hiking short-term interest rates earlier this year to rein in shadow banking, it did big banks a favor. The four control about 40 percent of the country's deposits and one-third of the nation's $36 trillion in banking assets. Those huge money pools mean they benefit from rising rates. Smaller lenders that rely more heavily on interbank funding, like Bank of Ningbo Co., aren't faring as well.

Increased mortgage lending, which tends to be safer than corporate, along with a pick-up in advances to companies closed off from the shadow banking market, also helped. Strong capital buffers and attractive dividends mean there's a lot for investors to like.

Bonus Time
China's big four banks all reported higher second-quarter net income
Source: Bloomberg

Buying into China's largest lenders isn't risk free, however. Rising share prices mean some are close to crossing the one time book trading level at which they can tap the market for funding. Stock in ICBC fell as much as 3.8 percent in Hong Kong trade Thursday amid profit taking.

Fee income growth also remains under pressure from lower agency sales of insurance products, according to Morgan Stanley. Reduced fees for card transactions, as mandated by the National Development and Reform Commission since the third quarter of 2016, aren't great either.

And China still has a debt problem. At 156 percent of GDP, the nation's corporate debt is the highest in the world.

Yet these lenders' sheer size, along with their state backing, amount to one immutable fact: Banks remain the best way to bet on the world's second-biggest economy.

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net