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Which of the “Big 4” Chinese Banks is the Most Efficient Bank Now?

In China, there are four major banks, namely Industrial and Commercial Bank of China Limited (SEHK: 1398), Agricultural Bank of China Limited (SEHK: 1288) Bank of China Limited (SEHK: 3988), and China Construction Bank Corporation (SEHK: 939).

For investors who have followed these banks closely, they would have noticed that all four banks are trading at attractive valuations now. Thus, it might be a good area to search for investment ideas.

Yet, which of the four banks should investors invest in? Personally, I would go for the best-run bank among them.

Now, there are many aspects that we can look at to form our conclusion. Here, I’ll look at one important aspect that investors should pay attention to; efficiency.

This is important as most of the services provided by these banks are not that much different from each other. In fact, since the bulk of the banks’ income is derived from interest income, the more efficient bank will generate higher profits for its shareholders.

In this article, I’ll look at one of the most important metrics – cost-to-income ratio – to help us find the best-run Chinese bank from the “Big Four”.

Cost-to-income ratio

For those who are new to the ratio, the cost-to-income ratio is calculated by dividing the operating expenses by the operating income generated i.e. net interest income plus the “other” income. The idea here is that the bank with the lowest cost-to-income ratio is more efficient, generally due to better management.

With that, let’s look at the cost-to-income ratio of all four banks in 2018.

Source: China Banks’ Annual Reports

Key takeaway

From the above, we can see that the cost-to-income ratios of the four banks are not much different from each other (all within a 5% range of each other). Still, ICBC appears to be the most efficiently-run bank due to it having the lowest ratio among them.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned