Ning Ma was able to find an answer to biggest question held by investors about China’s banking sector: how bad were their non-performing loans (NPLs)?
Through detailed analysis of corporate margins, EBITDA interest cover and implies NPLs, Ma ascertained that NPLs were about 4%-6% of outstanding loans instead of the 10% that investors were expecting.
The results allowed Ma, who works at Goldman Sachs, to extinguish their fears of a looming systemic banking crisis.
“China is entering a modest credit cycle as GDP growth is slowing down and corporate earnings are also slowing. NPLs will gradually trend up but I don’t think there will be a banking crisis,” says this year’s number-one ranked banking analyst in Asiamoney’s Broker’s Poll.
“When we look at the medium-term drivers of China’s economic growth, urbanisation is increasing, more factories are moving inland and there is continued consumption growth. Liquidity and capital levels at Chinese banks are still reasonably high.”
The findings also helped him provide clients with recommendations of the industry, including H-share picks like Industrial and Commercial Bank of China, China Construction Bank and China Minsheng Bank, which have gained 13%, 11% and 12% respectively year to date, compared to the HSCEI’s 8.9%.
“Going forward, deposit franchise, the ability to manage credit risk during the cycle and high profitability will determine stock performance,” says Ma.
Ma says he will continue to keep a close eye on Chinese banks’ asset quality, as that will be a major focus among investors in 2013.
Conducting detailed due diligence on banks take up most of Ma’s time. But he doesn’t forget to take spend some time with family.
“It is a good way to recharge and keep my mind fresh. When you have long hours, you need to step away for a while to get the big picture.”