China dominates FA100 index

Chinese banks continue to dominate FinanceAsia's index of the 100 most profitable companies in Asia ex-Japan, despite rising concerns over China’s slowing economic growth.

China’s big four banks – ICBC, China Construction Bank, Agricultural Bank of China and Bank of China – kept their position at the top of the FA100 index, unchanged from 2014. Collectively, these four banks have a market value of $903 billion compared with $700 billion a year ago.

The FA100 index [refer to the bottom of the story] was drawn up using Bloomberg data to screen for Asia's 100 most profitable listed companies, based on their three-year aggregated net income up till the third quarter of 2014. 

The mainland’s dominance is reflected by the fact 43 of the 100 firms covered are from China. (This is based on the location of a company’s assets rather than the market it is listed on).

Given the massive trade links between China and the rest of Asia, any slowdown in China has wider ramifications for the region. So the risk of a hard Chinese economic landing remains a big concern, along with the country’s growing pile of bad loans.

China's GDP growth rate slowed to 7.4% in 2014, marginally missing the Chinese government's growth forecast of about 7.5%. It was the country’s weakest annual expansion rate since 1990 and there is no sign of any let up just yet, with the economy expected to continue decelerating.

Rating agency Fitch, for one, expects China's GDP growth rate to slow to 6.8% this year and to 6.5% in 2016. Analysts are concerned that economic growth in China is too reliant on the expansion of credit and that, as a result, bank earnings are set to decline.

"Mainland bank lending has expanded very rapidly," Grace Wu, a senior director covering financial institutions at Fitch, said. "We continue to have concerns over asset quality and expect both return on assets and return on equity to decline this year from 2014, but expect return on equity to remain in the high teens."

The slowing economy could expose weaknesses among mainland Chinese lenders as loans turn sour. Already the Chinese property sector is showing signs of stress, with mid-sized developer Kaisa in the midst of restructuring its debt. Additionally, Chinese property bonds prices have fallen, which will affect their ability to tap the market for funding.

The effects of slowing growth are being felt beyond property too. "The non-performing loans at Chinese banks are rising and it's not just within the real estate sector," Christine Kuo, senior credit officer at Moody’s, said. "The general slowdown affects all sectors and as problem loans continue to rise we think the credit cost for Chinese banks is increasing and that will affect their profitability."

In its efforts to avoid a harder landing for the Chinese economy, the government has moved to loosen some credit conditions. According to Chinese media reports, the People's Bank of China is relaxing the rules for calculating bank loan to deposit (LDR) ratios, by allowing interbank deposits from non deposit-taking finance companies to be counted as deposits.

This will allow smaller banks that had previously breached the 75% LDR cap to lend more. "The change in the loan-to-deposit ratio calculation creates room for more credit expansion. We estimate that it could allow mainland banks to increase loans by up to Rmb6 trillion ($773 billion) and will allow smaller banks to lend more to small to medium size enterprises," Fitch’s Wu said.

"However, whether there will be sufficient appetite for loans as the economy slows and whether such loans will be appropriately priced are also factors that may affect the credit profile of Chinese banks," she said.

The FA100 index still remains heavily dominated by financials, which comprise a third of the companies followed by consumer and real estate sectors, which make up 14% and 13% respectively.

Outside of China, most banks improved their position. Singapore banks DBS and Oversea Chinese Banking Ltd improved their rankings to 37th from 45th and to 41st from 52nd, respectively. HSBC's position at eighth place was unchanged from last year while Standard Chartered moved up one spot to 22nd.

Technology is the up-and-coming sector and joining the list for the first time was Jack Ma's Alibaba, which listed on the New York Stock Exchange in September with a world-beating $25-billion initial public offering of shares. The e-commerce company is ranked 47th, a couple of places ahead of Tencent. Meanwhile, Baidu improved its position by moving up to 73rd from 90th last year.

The FA 100 index

Ranked by three years of net profits in billions of dollars





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