Singaporean sovereign wealth fund Temasek says the big mainland lenders should be able to weather recent rate liberalisation but warns that the banks, in which it is a key stakeholder, face a lower return on equity.
Temasek president Gregory Curl told a conference yesterday that the 'big four' mainland banks - Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), China Construction Bank (CCB) and Agricultural Bank of China (ABC) - should have enough cash flow to handle a fall in return on equity.
The loan-to-deposit ratio for mainland banks was kept under a ceiling of 75 per cent, while US banks had loan-to-deposit ratios of between 75 and 90 per cent, Curl said.
Temasek allocated 70 per cent of its portfolio to Asia - down from almost 80 per cent five years ago - as it boosted investment in other emerging markets, establishing a presence in Mexico and Brazil, Curl said. Temasek had S$193 billion (HK$1.18 trillion) of assets as of March 2011.
Curl expected Asian investments to outperform the market, but said returns for the asset management industry overall might drop, given the grim global outlook in the next few years. Citing the US economy as a key destabilising factor, Curl said the fund had little exposure to the US market except for agriculture and energy, and had 'no position' in US financials. He said Temasek was more comfortable investing in mainland banks than in the US sector.
'There are less ambiguities about policies and regulatory changes in China than in the US,' he said.
Temasek suffered a loss when it sold its stake in Bank of America three years ago in the aftermath of the global financial crisis.
Curl also said political and regulatory debates on the US financial system added uncertainty and cast a pall over US banks' profitability. But mainland banks were 'better run than most people would think', and their balance sheets more relevant to the country's real economic development, which made them more predictable, he said. Beijing supported economic growth and sent clear signals to its banks, he added.
And Curl described China Securities and Regulatory Commission chairman Guo Shuqing as 'very smart, very energetic and, most importantly, very stubborn'.
He said Guo backed growth in both the equity and bond markets, as well as development of the qualified foreign institutional investor (QFII) scheme.
Earlier this month, Temasek applied for a QFII quota of US$700 million to invest in A shares, the yuan-denominated stocks traded on the Shanghai and Shenzhen exchanges. It was granted US$300 million in QFII quotas between 2005 and 2009.
Curl, once a candidate for the top job at Bank of America, is one of four presidents at Temasek. He joined the company in September 2010 after retiring from Bank of America.
Temasek has been criticised for 'behaving like a hedge fund', with short-term speculative block trades in the H shares, or Hong Kong-listed stocks, of mainland banks.
Shares of the big four mainland banks listed in Hong Kong closed lower yesterday and the benchmark Hang Seng Index lost 1.3 per cent to end at 19.265.07. ICBC was the worst performer, undershooting the market to lose 1.58 per cent, ending at HK$4.36. BOC, CCB, and the ABC all lost less than 1 per cent.