China Banks: Long ICBC, Short Bank of Tianjin

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/22648" target="_blank" data-smartkarma-citation="entities:22648:1">Bank Of Tianjin (1578 HK)</a> results at first look quite encouraging with firmer profitability, enhanced efficiency, improved capital adequacy, and increased provisioning.Valuations are optically attractive: p/book of 0.5x, franchise valuation of 7%, earnings yield of 17%, and a total return ratio of 2.5x. These metrics are within the bargain hunter space.However, optimism fades fast on closer inspection."Underlying" Income decreased by 21% YoY as the bank was squeezed by higher funding costs and non-interest expenses. Expenses on wholesale funding increased by 30% YoY. Debt funding now represents 71% of Gross Loans. Debt now stands at 4.3x SH. Funds. This type of funding has exploded by 10x since 2014. At the same time, deposits declined YoY. Deposits have increased by a more sedate 18% since 2014.PT Profit would have been CNY1.4bn rather than CNY5.2bn but for hefty gains on securities. Loan loss provisions almost tripled YoY.Regarding the Balance Sheet, Special Mention Loans rose sharply (+25% YoY) and represent 2.8x NPLs. A 127% and 108% YoY increase in "doubtful loans" and "loss loans" puts some perspective on a seemingly respectable NPL ratio of 1.64% and a LLR/NPLs of 250%.Thus, <a href="https://www.smartkarma.com/entities/22648" target="_blank" data-smartkarma-citation="entities:22648:1">Bank Of Tianjin (1578 HK)</a> is cheap for a reason. We are reluctant to recommend taking a position at this juncture given the ongoing stresses in source of funding and asset quality.

Bank Of Tianjin (1578 HK) results at first look quite encouraging with firmer profitability, enhanced efficiency, improved capital adequacy, and increased provisioning.Valuations are optically attractive: p/book of 0.5x, franchise valuation of 7%, earnings yield of 17%, and a total return ratio of 2.5x. These metrics are within the bargain hunter space.However, optimism fades fast on closer inspection."Underlying" Income decreased by 21% YoY as the bank was squeezed by higher funding costs and non-interest expenses. Expenses on wholesale funding increased by 30% YoY. Debt funding now represents 71% of Gross Loans. Debt now stands at 4.3x SH. Funds. This type of funding has exploded by 10x since 2014. At the same time, deposits declined YoY. Deposits have increased by a more sedate 18% since 2014.PT Profit would have been CNY1.4bn rather than CNY5.2bn but for hefty gains on securities. Loan loss provisions almost tripled YoY.Regarding the Balance Sheet, Special Mention Loans rose sharply (+25% YoY) and represent 2.8x NPLs. A 127% and 108% YoY increase in "doubtful loans" and "loss loans" puts some perspective on a seemingly respectable NPL ratio of 1.64% and a LLR/NPLs of 250%.Thus, Bank Of Tianjin (1578 HK) is cheap for a reason. We are reluctant to recommend taking a position at this juncture given the ongoing stresses in source of funding and asset quality.

Bank of Tianjin: 太好了, 不可能是真的