Credit Suisse Buries China's Banks

Tyler Durden's picture

Wonder why China just bailed out its banks, preemptively, on Monday? Here's why. In a report issued by Credit Suisse's Sanjay Jain, the China strategist, who joins such now infamous skeptics as Bank of Countrywide Lynch's David Cui, has revised his base case Non Performing Loan ratio forecast from 4.5%-5.0% to 8.0%-12.0%: a unprecedented doubling in cumulative losses. Why unprecedented? Because as he explains, this could "would work out to 65–100% of banks’ equity." Crickets? Yes, Credit Suisse just singlehandedly said the equity value of the entire Chinese banking system is between 66% and 100% overvalued (with a downside case of $0.00). So for those putting two and two together, on one hand we have the four horsemen of the Chinese apocalypse, already presented visually before by Bank of America, consisting of i) a surge in underground lending, ii) a property downturn, iii) bad bank debt and iv) and "hot money" outflows, and on the other we have the vicious loop of what this means in terms of a central planning reaction. Simply said look for China to scramble to undo all the signals that it had been trying to spark while it was fighting with the Fed-inspired inflation bubble. Only problem is that like in the US and Europe, finding the Goldilocks point where all 4 are in equilibrium will be next to impossible, especially if investors in the country's banks realize the equity they hold is worthless and scramble to get the hell out of Dalian. Then the fears over a parliamentary vote in Slovakia will seem like a pleasant walk in the park.

Summary from Credit Suisse:

How bad could things get?


A view on China’s banks is completely a call on the potential impairment. Hence, we attempt here to dig deeper into the various sources of credit risk, both on- and off-balance sheet. Real estate, manufacturing, local government and SMEs are the four main sources of risk. They account for about 55% of the loan book, in our view, and are expected to contribute more than 80% of potential NPLs. We revise our overall NPL ratio forecast to 8.0–12.0% (from 4.5–5.0% earlier) of loans in the next few years, and NPLs would work out to 65–100% of banks’ equity. Still, we note that this is at best an estimate, and the impairment range could vary, depending on the economic growth and backdrop.


Assuming a loss ratio of 60%, typically the case in many banking crises, the potential loss on the revised NPL range would be 40–60% of the equity in the banking system. At the individual bank level, we recognise the differences (ABC and Minsheng have the highest real estate exposure, BOC and CITIC have grown real estate the fastest, Minsheng has lent the most to small enterprises and has the highest exposure to real estate and local government, etc.). However, we believe they are operating in the same environment and the margin of error would not be significant if we apply the 8–12% NPL range. The results are largely similar, with potential loss being 40–60% of their equity. 


What is the market pricing in?


Using the Gordon Growth Model and current P/B, we estimate the market-implied ROE for each bank. Then we back-calculate the market-implied credit cost, which works out to 170–180 bp annually. This corresponds to incremental NPLs of 3.0% of loans every year. 


Introducing price-to-adjusted book


How to value banks when we cannot rely upon the earnings and, possibly, even the book value? If we apply our base case range of 8–12% NPL ratio, the price-to-adjusted book would work out to 1.6–2.1x using consensus profits for 2012E. As a corollary,  every 1% NPL ratio jump would shave off roughly one-fifth of the profits, and NPL ratio rising beyond 5% would wipe out the consensus-projected profits for 2012E.

Full report:


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Reggie Middleton's picture

Is the assertion that Chinese bank equity is worthless news to anyone that was paying attention?

SheepDog-One's picture

Chinese bank equity worthless? OK, so when do we get back to how US bank equity is even more worthless?

CClarity's picture

Yup!  Many bank board room discussions in US about how the loans that cobbled together some payments in recent difficult years are now really struggling and starting to miss payments.  Loan loss provisions, reduced for bank profits a couple quarters back, now need reprovisioning.  Talk in the rooms now.  Expect to see the numbers in regional and community bank reports 4th Qtr.  For now, they're hoping magical thinking will turn it around . .  . but they'll need to take medicine before December.  Regulators are visiting more frequently and being tougher out in the field.

tekhneek's picture

Oh my god, you mean when people lose their jobs they don't make their loan payments?

Me-oh-my! What a pickle!

Let's raise taxes.

DaBernank's picture

We've all (here at least) been maintaining that US banks have no equity quite consistently since 2008. This is not a pro-US article. Did you not catch the reference in this very article to "Countrywide Lynch"? - the fact that China's banks are up to 100% overvalued is fairly underreported, especially by the "China will save us" and "China is invincible" crowd. The China bubble is not news to anybody who has been avoiding groupthink in the FinSvcs echo chamber but those inside the chamber are beginning to catch on.

disabledvet's picture

Fast Money vs Jim Chanos. They both can't be right.

ironymonger's picture

More worthless? Is that like 'more unique?'

Alvaro de Esteban's picture

Nope, apart from central bankers, politicians, media, "market makers", investors........ of course

Archimedes's picture

Reggie! What's up! Hey I know I have given you grief for your Apple predictions but I think your time may be coming! But I have been hearing mixed meesages in the MSM. First I hear Ipads sales are off 25% then I hear that Iphone 4s sell out at the fastest pace in history.

Looking forward to your next post on this.


NotApplicable's picture

As you well know Reggie, "bank equity" is an oxymoron.

Schmuck Raker's picture

Maybe BAC.


PS-Love your posts Reggie.

Chain Gun Smoke's picture

How come your avatar isn't you being shirtless and kicking something?

Smiddywesson's picture

It has been clear for a long time that China was a bubble.  If for nothing else, the hype around "The Century of China" story and the viciousness with which it was defended was the tell.

Now we are seeing the rule of hot money in play.  Fraud chases hot money, so you see companies like Sino Forest pop up, and even solid companies are found to be in worse shape than anyone thinks because hot money blinded everyone to them cooking the books.  Unfortunately, nowhere in the world has money been as hot as it was in China.  Hot money and no transparency will burn everything down.

Seer's picture

Of course it's all a bubble.  GROWTH is a bubble!  And, 10%+ growth?  Anyone thinking that this kind of number could hold out for very long has ZERO understanding of the exponential function: 10% means a doubling time of 7 years- yes! in just seven years China's economy would double! try to keep this up- can't happen.

Once I came to understand what exponential growth meant to economics (and other human activities) I found that it's all pretty easy to know what's ahead.

YHC-FTSE's picture

I'm probably one of those who has not paid attention. Back before Summer, we did the rounds of NPL estimates on Chinese banks, somebody's report had to be revised with apologies all round and now it turns out they were (almost) right after all. CS has been pretty good with their research this year, so I'm definitely awake this time. 

vote_libertarian_party's picture

Thus another reason for a Bizarro World stock rally.


More signs of global economic collapse = buy buy buy

HelluvaEngineer's picture

Yes!  Just when my coke induced buying frenzy was waning, this news came out.  Party on!

SheepDog-One's picture

Im happy with my investment strategy, just last night picked up 4 more cases of Jim Beam pints. When this shit market implodes suddenly 1 morning, those will be worth more than Krugerands!

BandGap's picture

Alcohol content not high enough, only about 40%.  Low yield flame. Stick to cheap gas/diesel.


Gene8696's picture

That reminds me, I have some Woodfords to restock.

deebee's picture

That's the human interpretation. HFTs are only interested in quantifiable data..

SheepDog-One's picture

Im sure its all bad for the dollar so great for bubble equity markets!

Irish66's picture

CDS told us this weeks ago

Lady Heather...UNCLE's picture

as Tears for Fears sang: "It's a Mad World"

hedgeless_horseman's picture

A bit suprised to see the Swiss are not staying neutral in this war.

moskov's picture

Swiss are neutral about war?


They have been Hitler's bitch for years during the world war II,How many Jewish slaves from the Nazi concentration camps have been shiped to Switzerland for human soup production...You figure

LongSoupLine's picture

"What's important here is stocks are at their highest in a couple of months" - Bob "shitbull" Pisani

SheepDog-One's picture

How is the dollar down and not UP on all this?? Truely retarded.

GeneMarchbanks's picture

It really isn't SD1, you just have to let go of the [fixed] delusion that the dollar is a 'free floating' currency at the mercy of 'markets'. No such animal. Market makers are in control, until one day they aren't. Or they set fire to the currency deliberately which is, to paraphrase Hugh Hendry, a political event not economic/monetary.

SheepDog-One's picture

Yea well thats pretty much the same as Ive been saying here all along.

Zonker's picture

Two words - Useful Idiots.. get with the program ZH you are making your readers poorer by the hour

SheepDog-One's picture

ZH isnt making anyone do anything. Since Ive been on ZH, Im far richer, totaly prepared, and safely out of the rigged vampire casino.

Now scurry on along back to CNBC break time is over Cramer!

jdelano's picture

So many of these freaking tools all of a sudden.  Getting my ass kicked so far this week but still up 32% for year on my two investments---Gold and Spy puts, one of those two definitely ZH approved.  In other words, scoreboard bitchez.  

Raynja's picture

You do realize zh offered no investment advice? Forwarding a research report at no cost is a benefit to readers.
The only ones making us poorer by the hour is our govt.

SheepDog-One's picture

Kill The Dollar.....Save The Banksters......Kill The Dollar.....Save The Banksters.....

Schmuck Raker's picture

With the amazing efficiency inherent in a centrally planned economy, I expect China will be able to rectify this little issue yesterday.

bankonzhongguo's picture

Half the assets of any Chinese bank are non-performing rollovers.

Just like the trans-Atlantic banks.

The difference is every once in a while China takes a banker out back and shoots them in the head.

Sad when infrequent spats of Chinese justice undercut everything wrong in Amerika.

Millions for the Fed's (Red Coats) to chase grungy pot heads in the Emerald Triangle for once of Mother Earth, but NOT ONE PROSECUTION OF A BANKSTER culpable of trillions in fraud.

Now Fast & Furious.  This so-called government loses its legitimacy every day.




monopoly's picture

And the markets just move higher. What else is new.

moskov's picture

So basically they are saying Chinese banks are worthless because People's Bank of China didn't give enough fake money like Fed did to the Wall St.? So UBS, CREDIT SUISSE, DEUTCHBANK, GOLDMAN SACHS, BANK OF AMERICA are all so self-sufficient themselves they can write their daily troll report about China all day everyday instead of looking after their shares plunging like failing stone due to their phoney trading.

Tic tock's picture

China-area non-performing !? - under what scenario, China has ten times the growth potential of Europe under any scenario

monopoly's picture

Well, true. But if the growth of Europe is 0 then 10 x 0 = 0. That is what we are saying here. There is no growth in China with these numbers.

moskov's picture

Who's going to buy French bags and German cars if China plunges? Africa?

Seer's picture

Yup.  AND, if Europe is growing(?) at 0% then China's exports are pretty much shifted downward.  Can't push on a string.

Internal growth really isn't growth, it's just self-parasitism (bound to burn out [quicker]).  But, increased internal growth will result in decreased trade, which will then mean a decrease in the purchase of US Treasuries, which then means a reduction in available liquidity for the US to cycle back to China (in trade).

People ought not confuse a less negative downward spiral as being a positive (upward) spiral.