AgBank: Looking good as rivals struggle?

AgBank may be best positioned to weather the bad loan crisis hitting Chinese banks due to its focus on agriculture, which is relatively unaffected by China's economic slowdown.

PUBLISHED : Monday, 17 September, 2012, 10:56am
UPDATED : Monday, 17 September, 2012, 11:43am

I'll be the first to admit I'm far from an expert on China's banks, but the latest signs coming from the sector lead me to wonder if perhaps Agricultural Bank of China (1288.HK; Shanghai: 601288), the least respected of the country's big 4 lenders, may be best positioned to weather the bad loan crisis sowing chaos in the industry. China's broader banking sector is facing one of the worst crises since many of the nation's banks started going public in the mid-2000s, as lenders are unable to collect billions of dollars in loans made for questionable infrastructure projects during the global financial crisis. The problems is being compounded by the nation's current economic slowdown, fueled in large part by anemic exports and foreign investment as the rest of the world grapples with lingering effects of the global recession.

The latest signals indicate the situation could be particularly bleak for the construction and corporate finance sectors, based on the latest news involving makers of steel and heavy construction equipment. In the former category, media are reporting that a growing number of steel companies are defaulting on loans, prompting their lenders to seize the steel inventories that many had pledged as collateral. The only problem is, as the banks come in to seize the assets, they're discovering that much of the steel pledged as collateral never really existed, and was simply "ghost inventories."

That kind of pledging of non-existent assets as collateral could be bad news for banks that specialize in lending to big state-run commercial manufacturers, with ICBC (1398.HK; Shanghai: 601398) as the biggest lender in that category.

Meantime, other media reports are saying that heavy industrial equipment maker Sany Heavy Industry (Shanghai: 600031) has also run into trouble due to a rapid slowdown in the construction sector. The reports say Sany violated terms of loans agreements with foreign and domestic banks after the default ratio for payments from Sany customers rose above a set limit set out in the  agreements.

Sany is currently trying to renegotiate the particular condition on the $510 million in loans, known in industry terminology as a covenant, after the volume of its unpaid bills jumped by 20 percent in the first half of this year due to China's rapidly cooling economy. But regardless of the outcome of those negotiations, the fact remains that loan defaults from construction-related companies are rising sharply. That could mean bad news for China Construction Bank (0939.HK; Shanghai: 601939), China's second largest bank, which specializes in lending to the building sector.

One of China's other top 4 banks, Bank of China (3988.HK; Shanghai: 601988), also doesn't look too good, as it has traditionally been the country's most outward-focused lender. That gives it the most exposure to external factors like global trade, where things also look bleak as exports remain weak due to anemic demand from the US and especially debt-troubled Europe.

So that leaves AgBank, with its focus on the agricultural sector, as the only one of the top 4 lenders that remains relatively insulated from the looming bad debt crisis that should start showing up in banks' financial reports by the end of this year. AgBank has always been the least respected of China's big 4 lenders and was the last to go public, largely due to its focus on the slower-growth, more politically sensitive agricultural sector. But with all the bigger growth sectors now taking a hit, perhaps AgBank now sits in the enviable position of being best able to weather the bad loan crisis already starting to wreak havoc on Chinese banks.

Bottom line: AgBank may be best positioned to weather the bad loan crisis hitting Chinese banks due to its focus on agriculture, which is relatively unaffected by China's economic slowdown.

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