This page has been archived and commenting is disabled.

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:



- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 10/12/2011 - 10:57 | 1765716 Reggie Middleton
Reggie Middleton's picture

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

Wed, 10/12/2011 - 11:00 | 1765726 SheepDog-One
SheepDog-One's picture

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

Wed, 10/12/2011 - 11:06 | 1765762 CClarity
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.

Wed, 10/12/2011 - 11:47 | 1765971 tekhneek
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.

Wed, 10/12/2011 - 11:47 | 1765969 DaBernank
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.

Wed, 10/12/2011 - 11:51 | 1765990 disabledvet
disabledvet's picture

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

Wed, 10/12/2011 - 12:30 | 1766180 ironymonger
ironymonger's picture

More worthless? Is that like 'more unique?'

Wed, 10/12/2011 - 11:01 | 1765735 Alvaro de Esteban
Alvaro de Esteban's picture

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

Wed, 10/12/2011 - 11:08 | 1765774 Archimedes
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.


Wed, 10/12/2011 - 11:09 | 1765777 NotApplicable
NotApplicable's picture

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

Wed, 10/12/2011 - 11:15 | 1765805 Schmuck Raker
Schmuck Raker's picture

Maybe BAC.


PS-Love your posts Reggie.

Wed, 10/12/2011 - 11:15 | 1765809 BurningFuld
BurningFuld's picture

Quick answer. NO.

Wed, 10/12/2011 - 11:27 | 1765867 Chain Gun Smoke
Chain Gun Smoke's picture

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

Wed, 10/12/2011 - 11:49 | 1765974 Smiddywesson
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.

Wed, 10/12/2011 - 12:41 | 1766230 Seer
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.

Wed, 10/12/2011 - 11:51 | 1765987 covert
Wed, 10/12/2011 - 12:46 | 1766245 YHC-FTSE
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. 

Wed, 10/12/2011 - 10:58 | 1765722 vote_libertaria...
vote_libertarian_party's picture

Thus another reason for a Bizarro World stock rally.


More signs of global economic collapse = buy buy buy

Wed, 10/12/2011 - 11:00 | 1765730 HelluvaEngineer
HelluvaEngineer's picture

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

Wed, 10/12/2011 - 11:03 | 1765736 SheepDog-One
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!

Wed, 10/12/2011 - 11:15 | 1765810 imaginalis
imaginalis's picture

For Molotovs?

Wed, 10/12/2011 - 11:40 | 1765936 BandGap
BandGap's picture

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


Wed, 10/12/2011 - 11:44 | 1765957 Gene8696
Gene8696's picture

That reminds me, I have some Woodfords to restock.

Wed, 10/12/2011 - 12:00 | 1766032 covert
covert's picture

shorting is the right trend for a while.


Wed, 10/12/2011 - 17:26 | 1767262 deebee
deebee's picture

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

Wed, 10/12/2011 - 10:59 | 1765724 SheepDog-One
SheepDog-One's picture

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

Wed, 10/12/2011 - 11:00 | 1765732 Irish66
Irish66's picture

CDS told us this weeks ago

Wed, 10/12/2011 - 11:02 | 1765740 Lady Heather...UNCLE
Lady Heather...UNCLE's picture

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

Wed, 10/12/2011 - 11:03 | 1765742 hedgeless_horseman
hedgeless_horseman's picture

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

Wed, 10/12/2011 - 11:06 | 1765763 GeneMarchbanks
Wed, 10/12/2011 - 11:12 | 1765791 hedgeless_horseman
hedgeless_horseman's picture

Yes, but the Swiss Alps get pretty cold in the winter, and the wood only lasts so long.

Wed, 10/12/2011 - 11:24 | 1765855 moskov
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

Wed, 10/12/2011 - 11:04 | 1765758 LongSoupLine
LongSoupLine's picture

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

Wed, 10/12/2011 - 11:04 | 1765759 SheepDog-One
SheepDog-One's picture

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

Wed, 10/12/2011 - 11:10 | 1765785 GeneMarchbanks
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.

Wed, 10/12/2011 - 11:11 | 1765789 SheepDog-One
SheepDog-One's picture

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

Wed, 10/12/2011 - 11:09 | 1765776 Zonker
Zonker's picture

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

Wed, 10/12/2011 - 11:14 | 1765799 SheepDog-One
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!

Wed, 10/12/2011 - 11:31 | 1765881 jdelano
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.  

Wed, 10/12/2011 - 11:26 | 1765862 Raynja
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.

Wed, 10/12/2011 - 11:10 | 1765787 SheepDog-One
SheepDog-One's picture

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

Wed, 10/12/2011 - 11:12 | 1765792 Schmuck Raker
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.

Wed, 10/12/2011 - 11:18 | 1765822 bankonzhongguo
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.




Wed, 10/12/2011 - 11:18 | 1765824 monopoly
monopoly's picture

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

Wed, 10/12/2011 - 11:19 | 1765828 moskov
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.

Wed, 10/12/2011 - 11:56 | 1766010 buzzsaw99
buzzsaw99's picture


Wed, 10/12/2011 - 11:19 | 1765830 Tic tock
Tic tock's picture

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

Wed, 10/12/2011 - 11:21 | 1765841 monopoly
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.

Wed, 10/12/2011 - 11:26 | 1765860 moskov
moskov's picture

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

Wed, 10/12/2011 - 11:32 | 1765891 Seer
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.

Wed, 10/12/2011 - 11:23 | 1765845 Schmuck Raker
Schmuck Raker's picture

Thank you Tyler for all the times you post reports like this.

I'd probably be paying to get this information if I didn't need to set aside thousands of dollars to pay back my share of the national debt.

Wed, 10/12/2011 - 11:23 | 1765847 Belarus
Belarus's picture

I've long advocated not sellling short with NYSE Short Interest near record levels. However, I will say it here first: I will soon be shorting copper related companies (as a hedge against silver longs mostly but may go net short) because it's the way to play it I think. Chanos is committed to staying short worthless bank stocks and he's probably right to do so. But this is all cause and effect for China's property bubble going ka-boom. China won't buy copper stocks, there is no incentive to keep the price high as their bubble pops, whereas the banks have basically been used as SPV's for china's supposed 2 trillion is surplass treasury capital. Expect that 2 trillion to be continually funded into the banking stocks, local SPV's. But what this won't do? It certainly won't stop the crash in related commodities that are sure to turn far lower as the Global Powers that Be have a hard time printing enough money with the collapse of all debt related overhangs the world over. 


Wed, 10/12/2011 - 11:33 | 1765902 jdelano
jdelano's picture

short interest has dropped from 74% to 60%--given that the short interest is 110% justified by the macro picture, I'd say definitely nearing time for the vix to shoot back to the moon....

Wed, 10/12/2011 - 12:24 | 1766143 Belarus
Belarus's picture

thanks for the info, jd! 

Wed, 10/12/2011 - 11:25 | 1765856 agent default
agent default's picture

A scramble for liquidity from China will result in mass liquidation of treasuries.  China will land hard. On the FEDs head.

Wed, 10/12/2011 - 11:27 | 1765864 Nedly66
Nedly66's picture

Which is worth more (less)?


1) Chinese Banks

2) TBTF US Banks

3) European Banks



Wed, 10/12/2011 - 11:31 | 1765880 agent default
agent default's picture

I'll give you five berniebucks for the package.

Wed, 10/12/2011 - 11:32 | 1765889 Tic tock
Tic tock's picture

if Europe crashes, Chinese will be rich - they will start consuming - European car industry will boom -

Wed, 10/12/2011 - 11:34 | 1765906 supermaxedout
supermaxedout's picture


China is since a few weeks selling its treasuries back to Bernanke (operation twist) so that they have the money to prop up their banks before the storm.

Its not printed, its real hard worked for money but that makes no difference in this world as one can see. Now still a Dollar is a Dollar. Important is only what functions and what does not function.  Its all open ended and only the gods know how this is all going to end.

Looks like there is no Happy End for anybody.

Wed, 10/12/2011 - 17:01 | 1767165 pcrs
pcrs's picture

What will the sellers of the bonds do with all the cash?

Wed, 10/12/2011 - 11:34 | 1765910 kaiserhoff
kaiserhoff's picture

At least the Chinese will make liberal use of firing squads.

Wed, 10/12/2011 - 11:36 | 1765919 Mitch Comestein
Mitch Comestein's picture

Que the banker's panic music.  Wait, we should pick a song for that.

Wed, 10/12/2011 - 11:57 | 1765959 shokdee
shokdee's picture

 So the US tried to needlessly provoke China with underwear bombers! Jumping Crickets!  We’re now looking for China to scramble signals and sparks, then jets. Putting one and one together, the problem for Ho is finding the "Golden point" where all 4 horsemen of the "Chinese apocalypse" are in equilibrium! Good luck Goldilocks, this is impossible unless you Chinese convert to Christianity!

Wed, 10/12/2011 - 11:51 | 1765985 lairdwd
lairdwd's picture

My curren thinking is that a hard landing is more of a 2013 scenerio. With U.S. Presidential elections, and China "elections"  in 2012, you can bet that reflate will be the theme for 2012.


Buy gold now!

Wed, 10/12/2011 - 12:31 | 1766185 twotraps
twotraps's picture

pretty funny that the election carries so much weight when the rest of it is crumbling.  What if this volatility is just a warm up?  Could we look back and call the past two months 'quaint' little area of price development?  Honestly at this point, we might be up or down 300 S&P points from here.  

Wed, 10/12/2011 - 12:00 | 1766028 slackrabbit
slackrabbit's picture

Looking at my copper shorts - no my shorts are not made of copper but cotton, but thats shorted too.


...hey Liesman on, better than Scooby Doo and more funny  than Obama job speech 

Wed, 10/12/2011 - 12:08 | 1766066 nyse
nyse's picture

I find it extremely hard to believe that Chinese banks are as opaque as they are being made out to be. C'mon, this is China we're talking about here!

Wed, 10/12/2011 - 12:19 | 1766110 slewie the pi-rat
slewie the pi-rat's picture

chinese paper bankster zombies

why tf should they be any different?

Wed, 10/12/2011 - 12:19 | 1766118 Volaille de Bresse
Volaille de Bresse's picture

"Which is worth more (less)?


1) Chinese Banks

2) TBTF US Banks

3) European Banks"


Answer : all of them?

Wed, 10/12/2011 - 13:04 | 1766320 letitgo
letitgo's picture

Not a bad read, largely confirms what I read here:

With the same apparent omission (noted in a comment on that Minyanville piece): isn't the difference with the sub-prime situation that China has a truckload of government assets to pour on any fire that might spring up?  Couldn't they just use repatriate foreign reserves to prop up the housing market (and therefore save their banks) through, I don't know, generous first-home buyer grants or something?  Sure they'd lose some of their foreign reserves, but aren't they just getting eaten up by foreign currency devaluation anyway?

Would appreciate some views on this from more economically-minded ZHers than myself. Thanks.





Wed, 10/12/2011 - 13:22 | 1766347 cosmictrainwreck
cosmictrainwreck's picture

BULLISH! (of course) the FXP (only a 2x short) is LEADING good ol' TZA, a 3x, PLUMBING EVER NEWER DEPTHS. If this gets any more fun, I'm gonna shit my pants from the sheer excitement of it LOL

Wed, 10/12/2011 - 21:56 | 1766348 Party with Berl...
Party with Berlusconi's picture

Why do we even refer to these entities as Banks. Ever been to one? I have and each time I need the paddles to bring me out of my tantrum induced paroxysm. They are SOE's A third world retail extension of the Finance Bureaucracy to be pillaged by the corrupt and connected. "When the water is too clear there are no fish".

Wed, 10/12/2011 - 13:25 | 1766372 reader2010
reader2010's picture

This Time Is Different beacuse all banks are zombies.

Wed, 10/12/2011 - 16:09 | 1766987 OffShorewHore
OffShorewHore's picture

I just wish i had the capacity like Chanos to short some of these chinese banks.   anybody have ideas on how a retail -e investor can get some exposure to these banks in china?

Chanos, hedging accordingly.

Wed, 10/12/2011 - 16:55 | 1767140 pcrs
pcrs's picture

I always understood that the leverage was very low in banks china. The required reserver ratio is about 25%. Compare that to 1:35 leverage of Deutsche bank. But maybe I am overlooking something.

Do NOT follow this link or you will be banned from the site!