Thursday, August 21, 2008

ICBC World’s Largest Bank Makes Largest Profit. - That makes sense?

ICBC (HK 1398) which appears to be the world’s largest bank has announced what appears to be the worlds largest bank profit. That all makes sense from a financial institution point of view. Size begats size. This explains much of the behaviour of senior banking officers around the world. All business models seem to need bulk, bulk and then more bulk.

Much is being made of the lack of sub prime exposure. Yes it is true that US sub prime debt is relatively low and will not be a factor in any future earnings and or credit losses. The bank is state controlled and has extensive exposure in what is a hyper hot economy. Growth is expected to slow in the coming year.
But what does this mean for the ICBC? If commodity pricing stays high and the west slows down purchases of cheaply priced products, the Chinese economy will do more than slow.

Large bank investing is difficult to fathom. On one hand investors analyze to determine if its a reasonable prospect. Some banks are better than others. On the other hand banks become proxies for economic activity and to buy, sell or hold a bank becomes a defacto opinion on the economy. So why buy a bank? Why not buy an ETF or index in its stead?

One thing for sure. You should not get excited about a bank stock because it has relatively modest levels of sub prime investments.