Postal Savings Bank of China began life as part of the country’s postal network. But for prospective investors in the lender’s impending Hong Kong offering, it’s not as safe as such staid origins might imply.
The bank’s broad reach is one of the things that sets it apart from other big Chinese lenders. More than one in three citizens has an account at one of PSBC’s 40,000 branches scattered throughout the People’s Republic. In many rural areas it is the only bank in town, which makes its deposit base fairly sticky – though the growth of internet finance poses a threat to that market position.
PSBC has also made fewer loans to bloated state firms than rivals, which means it has avoided racking up as many bad debts. Non-performing loans accounted for just 0.81 percent of the total at the end of March – less than half the official industry average. With a loan book equivalent to just 40 percent of its deposit base, PSBC has plenty of scope to extend credit to consumers and small businesses.
Yet its sleepy profile masks several risks. For one, profitability is low. PSBC’s return on assets was an anaemic 0.67 percent in March, up from 0.57 percent in December 2013 but still well below the industry average of 1.1 percent. Its core Tier One capital ratio is a skimpy 8.35 percent of risk-weighted assets – though the IPO proceeds will help strengthen this.
PSBC has also poured its excess deposits into some questionable investments. Last year, it spent $116 billion on long-term bonds issued by China Development Bank and Agricultural Development Bank of China – two state-owned policy banks – to help fund a government drive to boost construction. That looks more like party apparatchiks following orders than an institution driven by commercial logic.
The lender has also strayed into riskier assets in an attempt to boost its profitability. At the end of March, instruments such as wealth management products, funds and investment products issued by other financial institutions accounted for 12.4 percent of its $1.2 trillion balance sheet – up from just 2.7 percent at the end of 2013.
PSBC may look safer than many of China’s overextended state lenders. But that doesn’t make it risk-free.
This item has corrected the number of branches to 40,000, not 80,000, in paragraph two.