Postal Savings Bank is worst at creating shareholder value, says McKinsey

Postal Savings Bank of China, which launched the world’s largest initial public offering of the past two years in Hong Kong, has become the worst among the mainland’s top 40 lenders at creating value for shareholders, said an industry report on Wednesday.

The mainland banking industry as a whole is facing challenges including heavy reliance on interest income, deteriorating assets quality, questionable coverage on impairment, and polarising return on capital among different groups, according to the study by McKinsey & Co.

Postal Savings Bank led four lenders in reporting economic losses, a key indicator of whether a listed firm is generating shareholder value, based on analysis of banks’ financial data in 2015, the consultancy giant said in a report looking at who is creating and destroying value among the nation’s top 40 banks. Economic profit was one of two main indicators used by McKinsey in the evaluation, the other being risk-adjusted return on capital (RAROC).

The 40 banks created 494.3 billion yuan of economic profits between them, with an average return on capital of 20 per cent in 2015, the report said.

Beijing-based Postal Savings Bank, with an economic loss of 8.3 billion yuan (HK$9.6 billion) in 2015, was the poorest performer in terms of economic profits and the second-weakest by RAROC, the report found.

Economic profits, different from accounting profits, refer to the difference between revenue and opportunity cost - the value of the trade-off when a decision is made. Thus, a company can report a significant accounting profit with little or no economic profit.

McKinsey highlighted a strong correlation between listed banks’ economic profits and market value. Year-end data for 2015 showed a correlation of 91 per cent.

September’s US$7.3 billion offering by Postal Savings Bank saw the second-worst debut among companies that raised over US$7 billion when its shares only edged up 0.2 per cent on their first day trading.

The bank operates more branches than any other lender in the country, with 8,301 of its own outlets and 31,756 agency outlets run by the postal service, dotted across China from Lhasa in Tibet to Beijing and extending deep into rural areas.

It is the latest of the nation’s state-owned banks to go public as Beijing hopes market forces can help improve the fortunes of its banks.

The top 40 banks in the McKinsey study include the nation’s six largest lenders such as Industrial and Commercial Bank of China, 12 joint stock banks like China Merchants Bank, 17 major city commercial banks and five rural commercial lenders.

Between them, they account for 71 per cent of China’s banking industry in terms of assets and 72 per cent in terms of net profits contribution. By number, however, they represented just 0.9 per cent of China’s 4,262 banking institutions as of 2015, McKinsey said.