The Industrial and Commercial Bank of China, which reports its earnings on Tuesday, is vying with Bank of America for the honour of being the world’s second largest bank. ICBC had just nosed ahead in this extraordinarily tight race. But that means ICBC is probably one of the world’s most overvalued banks—a bellwether of the continuing Chinese stock market mania.
Since its heady IPO last October, ICBC stock has risen around 70% on the Shanghai exchange. The Chinese bank’s market capitalization of $228 billion, on Friday’s close, means it trades at 3.3 times its book value and a massive 28 times its forecast 2007 earnings, according to data provider JCF Factset.
By comparison, Bank of America, which boasts a similar return on equity, is a steal. The largest US bank by deposits trades at around half the book value and a third the earnings multiple of ICBC. Bank of America’s dividend yield of 4.4% is also twice as generous.
Not only does Bank of America offer better value, it’s also decades ahead of ICBC in its business lines.
Commercial loans account for only a quarter of its lending and 11% of its assets. Its net interest income from these loans is only 6% of revenues. Like most large banks nowadays, Bank of America makes most of its money from consumer lending, and from fees and trading.
By comparison, ICBC resembles a US money centre bank from half a century ago. Seventy per cent of its loans were made to domestic companies as of last June, and net interest income from these accounted for 46% of its operating revenues.
Typical of its transactions is the 5 billion yuan ($646 million) loan it made last Wednesday to the state-owned Zhanjiang Port Group. Western banks still make large corporate loans, but they do so in groups, and after taking their fees they pass them on as quickly as possible.
China may be the future, but ICBC looks like the past. Of course, it will adapt as Chinese financial conditions change. But there will be tough challenges ahead, including problems with non-performing loans. This Chinese banking giant is unlikely to retain its No.2 slot for long.