Tricky times loom for mainland banks as trust products mature

Tricky times loom for mainland banks as trust products mature
Monday, May 05, 2014
The big four state-owned banks recently announced their first-quarter performances.

Apart from Industrial and Commercial Bank of China (1398), the others saw double-digit growth in profit. But the ideal earning performance cannot eliminate investors’ concerns over mainland banking risk.

Investors are still worried about issues brought by shadow banking and trust products, which will make the bad debts of the banks soar. Because this month the mainland financial markets will meet a peak moment due to the deadline of trust products. The real peak will appear, however, in the third quarter, when 1 trillion yuan (HK$1.24 trillion) of trust products reach maturity – far higher than than 694 billion yuan worth of items that matured in the first quarter.

The trust products are focused on mainly because many involve loans to property developers or coal-mining enterprises. These businesses borrow from the trust products mostly because they cannot get loans from the banks.

Only about one-quarter of the funds from trust companies come from rich individuals or firms, and a lot of the rest are from banks, which sell financial products to individual depositors to obtain the money.

So if relevant enterprises default, mainland banks won’t be able to stay unexposed. Also for this reason, investors are worried that in the third quarter, mainland banks may face big default problems.

In 2012, trust companies also encountered a real estate developer default. But then, the domestic four asset- management companies and private- equity investors helped to alleviate the situation.

So, although the amount of the maturing products from the trust companies is large, the central government has full ability to control the problem.

But any default is likely to bring short-term volatility to financial markets, along with systemic risks for China. Andrew Wong Wai-hong is an independent commentator on financial markets.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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