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Shrinking valuations cast shadow over smaller Chinese bank IPOs


AS China's crackdown on shadow banking shrinks smaller banks' valuations relative to larger peers, the outlook is dimming for the country's regional lenders queuing up to list their shares.

Small bank shares have been slipping relative to China's lending giants like Industrial & Commercial Bank of China Ltd and Agricultural Bank of China Ltd, due to their deeper involvement in the shadow banking sector.

That points to lower pricing prospects for the 18 or so rural and city commercial banks currently planning to sell new shares when compared with their 16 small bank peers which have listed since 2016.

"China's banking landscape is increasingly tilted - the strong get stronger, and the weak get weaker," said Liao Chenkai, a Shanghai-based analyst at Capital Securities Co. "Small banks are the most hurt by the deleveraging campaign which has squeezed their margins and weakened their capital strength."

Terry Sun, an analyst at RHB Securities Hong Kong Ltd, argues that China's small banks are still overvalued, even after recent price declines, given the accelerating pace of the shadow banking crackdown on the mainland.

Even after recent share price declines, for example, Guangzhou Rural Commercial Bank Co and Zhongyuan Bank Co are trading in Hong Kong at about 0.9 times their book value, near the level of ICBC and other large banks with a better profit outlook.

The deleveraging campaign, which got underway in April last year, has pushed up the small banks' borrowing costs, weakened their profit growth and increased solvency risks. Many are vulnerable to the strict new regulations on the country's 100 trillion yuan (S$21 trillion) of asset management products, being phased in by the end of 2020.

The shares of the six smaller Chinese banks which have listed in Hong Kong since the beginning of 2016 have dropped about 9 per cent so far this year, compared with an 11 per cent gain for China's big five lenders, and a 3.8 per cent rise in the benchmark Hang Seng Index.

"Investors will remain lukewarm to the shares and upcoming IPOs of small lenders," said Mr Liao. "We haven't seen any light at the end of the tunnel." BLOOMBERG

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