The rise of China's shadow banking system and increased
concerns about non-performing loans in the world's second-largest
have prompted some global investors to be skittish about Chinese
Although it is fair to say emerging markets financial services
firms are riskier than their U.S. equivalents, rising dividends
could be one reason investors should consider exposure to Chinese
In addition to the rising dividends, the major Chinese banks
recently offered up some pleasant surprises in the terms of their
year-end profits for 2012.
"Many of the largest Chinese banks recently released their
year-end earnings reports for 2012. What might be surprising to
some is that the reports came out better than many analysts had
expected," said WisdomTree Research Director Jeremy Schwartz in a
new research note.
Of the three major Chinese banks, all three "reported an
increase in net profits of more than 10% compared to the previous
said Schwartz in the note
For example, China Construction Bank's net profit jumped 14.26
percent last year from 2011. Industrial and Commercial Bank of
China posted a net profit increase of 14.5 percent while Bank of
China's after-tax profit climbed 11.51 percent. Schwartz also
noted the return on equity for the big three China banks was
superior to some developed market peers.
The average return on equity for the aforementioned Chinese
banking giants in 2012 was nearly 21 percent. By comparison, J.P.
Morgan Chase (NYSE:
) and Wells Fargo (NYSE:
) had an average return on equity of just under 12 percent,
according to WisdomTree data.
One ETF that could benefit from a more positive outlook
surrounding Chinese banks is the WisdomTree Emerging Markets
Equity Income Fund (NYSE:
). As is the case with many diversified emerging markets
, DEM has a large weight (27.8 percent) to the financial services
sector. However, a significant portion of that allocation goes to
major Chinese banks.
China Construction Bank is DEM's largest holding with a weight
of nearly 8.2 percent. Industrial and Commercial Bank and Bank of
China are DEM's fifth- and seventh-largest holdings,
respectively, combing for nearly five percent of the ETF's
The WisdomTree Emerging Markets Equity Income Index (WTEMHY)
weighs constituents based on annual cash dividends paid,
according to the issuer
. That means Chinese banks could take on an increasingly
important role in terms of driving DEM's performance.
"The increased dividends and profitability have contributed to
generating positive stock price performance since these companies
were added to the WisdomTree Emerging Markets Equity Income
Index," said Schwartz in the note.
Recently, the large Chinese banks have delivered some
impressive dividend increases. China Construction raised its
payout 16.2 percent while Industrial and Commercial boosted its
dividend more than 20 percent. Bank of China raised its dividend
"Since being added to the Index, these companies have grown
both their profits and their dividends, and their share prices
have reacted positively as a result," said Schwartz.
Investors looking for a more concentrated bet on Chinese banks
can consider the Global X China Financials ETF (NYSE:
). Bank of China, China Construction and Industrial and
Commercial combine for about 30 percent of that ETF's weight.
CHIX is small with just $7.33 million in assets, but the fund
does have a solid return on equity of just over 15 percent. This
ETF, however, arguably embodies the volatility associated with
emerging markets bank shares. CHIX has a beta of 1.19 against the
MSCI Emerging Markets Index and a three-year standard deviation
of almost 33 percent,
according to Global X data
For more on ETFs, click
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