The LTD ratio
We analyzed the banks listed on the Shanghai Stock Exchange for their respective loan-to-deposit (LTD) ratios. The LTD ratio serves as a good stress indicator as it reflects the amount of leverage the bank has taken on over its liability base. Now, for the two decades up until 2015, the Chinese (FXI) (ASHR) (YINN) central bank had a 75% LTD (loan-to-deposit) ratio mandate imposed on all Chinese banks. This requirement was later withdrawn due to an uptick in shadow banking seen as a consequence.
69% of banks passed the LTD stress test
Our assessment projected 11 banks out of a total of 16 who had reported their LTD ratios, which seem to have passed the LTD stress test. We used 75% LTD as the threshold level for the test. Above is a table enlisting these 11 banks along with their respective LTD ratios and other key financial variables. Considering the regulatory crackdown that is currently upon the financial system in China, these Chinese banks still stand a chance to be considered safe harbor. Given their lower LTD ratios, these banks have lesser need to resort to off-balance sheet financing.
Among these eleven institutions, 3 banks particularly stand out for their good returns, along with attractive valuations. These are Agricultural Bank of China (ACGBF) (ACGBY), Industrial and Commercial Bank of China (IDCBF) (IDCBY), and China Construction Bank Corp (CICHF) (CICHY). We will delve more into each of these banks later in this series.
Let’s first take a look at the 5 banks that should be viewed with caution from an investment perspective.