Greg Kuhnert, Investec Asset Management
With improving corporate profits, leading to better loan repayment and a higher demand for new loans, the operating environment for China’s banks has been improving. A growing demand for consumer credit, such as mortgages, has allowed them to earn more from the lending business.
Nevertheless, mainland banks have been earning less in service fees, as they fail to compete with new online platforms that sell financial products, Kuhnert told FSA. Many of them struggle to respond to the structural change taking place in finance sector.
“The leading Chinese social platforms are eating up part of the banks’ revenue from online payments and sales of mutual funds and money market funds,” he said. “These platforms are just so much more flexible and quicker to offer a wider range of products.”
For instance, Yuebao, a money market fund sold on Alibaba’s platform, has gathered $233bn in assets so far. Merely six months after it was launched in 2013, the fund attracted 30 million investors who together invested RMB 100bn in assets. Its rival Tencent was also granted licence to sell mutual funds via the messenger Wechat early this year.
Kuhnert attributed the banks’ failure to keep up in this area to their “not very entrepreneurial” management culture.
“These banks are just too big, with a high debt level,” he said. “Their management is generally not very aggressive or entrepreneurial. That sets up obstacles in changing their business model quickly enough to adapt to the moving market landscape.”
Moreover, Kuhnert said that there is an absence of obvious differentiation among the banks and a lack of long-term growth prospects. His portfolio, the Investec All China Equity Fund, has taken an underweight position and now owns only two names. “Banks are cheap [in valuation], but there are more interesting opportunities elsewhere,” he said.
However, David Gaud, chief investment officer at Pictet Wealth Management, argued that China’s banks sit on good foundations. His rationale for being bullish on banks is that many of them have been able to pay out 14% of their profits in dividends during the past five years. He believes that the payout capability cannot be a matter of merely clever accounting, as some analysts believe. Instead, there are fundamental reasons why banks can support the payouts.
Bullish on insurance
Within the financial sector, insurers present more exciting opportunities with a longer-term and sustainable growth outlook, according to Kuhnert.
“Compared to the rest of the world, the penetration of insurance products in China is low,” he said. “People save a lot but they do not buy insurance products. However, things are changing. The government has encouraged people to save money in insurance products, rather than in bank deposits,” he added.
He expects that the leading insurers will be among the beneficiaries of this shift. Ping An is one of his fund’s top ten holdings.
Kuhnert manages the Investec All China Equity Fund, which takes a bottom-up approach to stock selection. His team runs a weekly screening process of 2,000 Chinese companies based on metrics that include capital return to stakeholders, valuation and earnings.
Investec All China Equity Fund
– performance since inception
