1 of Every 3 Banks in China Would Now Fail LTD Stress Test 2

Investors are now wary of Banks in China

It’s true that President Xi is making all attempts to ‘Make China Great Again.’ Financial institutions such as China Minsheng Bank (CGMBF) (CMAKY) and Anbang Insurance Group have already fallen prey to the CBRC’s (China Banking Regulatory Commission) regulatory crackdown on shadow banking products and interbank lending. The markets expect more to follow. While this does put all financial institutions in China (FXI) (ASHR) (YINN) within the circle of doubt, not all of them are guilty of extending dubious loans. Investors are now increasingly wary of betting their money on banks in China (YANG) (FXP) (CHAD).

Key stress indicator

Hedge fund manager and short seller, Jim Chanos, views the loan-to-deposit ratio as a key stress indicator for any bank. Frontera took a closer look at the loan-to-deposit ratio of Chinese banks listed on the Shanghai Stock Exchange, to determine which banks pass the loan-to-deposit or LTD stress test, using 75% — the government mandated ceiling for the max loan-to-deposit ratio at banks between 1995- 2015 — as the benchmark.

Of the 16 banks listed on the Shanghai Stock Exchange that had reported their LTD ratios:

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  • 11 banks had their LTD ratio below 75%
  • 5 had a LTD ratio above 75%

Hence, approximately 1 of every 3 banks in China, stand to fail the loan-to-deposit stress test.

Which institutions are sound? 

As we move ahead in these series, we will highlight the banks that passed/failed our LTD stress test examination. We will conclude our analysis by revealing three Chinese banks that:

  1. Comfortably passed the LTD stress test
  2. Have delivered good returns so far this year
  3. Continue to trade at exceptionally attractive valuations
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