Not too rosy for China banks, but investors bullish

Hong Kong

CHINA's banks, already saddled with mounting bad debt, face the risk of sagging profit growth after an interest-rate cut slashed their margins on loans - but some investors are getting more optimistic, not less, about the outlook for the industry's shares.

Victoria Mio, chief investment officer for China at Robeco Hong Kong, whose parent company oversees about 237 billion euros (S$382 billion), said last Friday that bank stocks are very attractive because they are priced at levels that assume an economic "hard landing". Hours later, the People's Bank of China (PBOC) cut the one-year lending rate by 0.4 percentage point and the one-year deposit rate by 0.25 percentage point. Afterwards, Ms Mio said sustained monetary easing may drive an economic rebound and a jump in banks' share prices. She is "more positive" on the stocks.

Industrial & Commercial Bank of China (ICBC) led banking shares higher in Hong Kong, gaining 0.8 per cent to HK$5.00 as at 9.54 am local time. China Construction Bank Corp rose 1.3 per cent. Chinese banks are trading at an average 4.8 times estimated earnings for this year, the lowest globally for lenders with a market value of more than US$10 billion, according to Bloomberg data.

Another fund manager, Baring Asset Management Ltd's Khiem Do, said he is "still bullish" on banks after the rate move and that dividends of more than 6 per cent would become even more attractive as interest rates fall.

"You tell me which banks in the world are paying out this yield, and making money, and working in an environment where the economy is growing at about 7 per cent per annum," said Mr Do, who oversees about US$60 billion as Hong Kong-based head of Asian multi-asset strategy.

Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities, has a "buy" rating on the industry. He said banks' share prices have fallen even when earnings have exceeded expectations because investors have focused more on "perceived risks" than profits.

Chinese banks' profit growth may slide next year by 10 percentage points to zero or turn negative as net interest margins contract, says China International Capital Corp.

In an additional source of pressure, the central bank fuelled competition between lenders by raising the cap on the interest they can pay customers to 120 per cent of the benchmark for deposits from 110 per cent. Five of 16 listed banks offered rates at the ceiling, according to their websites on Sunday.

"We expect the overall market to react positively to the PBOC's actions, but China bank shares are likely to underperform given the now lower net interest margin and profit outlooks," May Yan, a Hong Kong-based analyst at Barclays plc, said in a weekend note.

Chinese bank shares fell in Shanghai, which is largely closed to foreign investors. ICBC lost 0.5 per cent to 3.71 yuan, while Construction Bank declined 0.7 per cent.

Rising defaults and constraints on credit growth have battered bank shares over the past two years even as lenders managed to maintain about 10 per cent annual gains in profit. China's economy is poised for the weakest expansion since 1990 and Communist Party leaders have discussed lowering the 2015 growth target from this year's 7.5 per cent goal, a person familiar with the matter said.

"The banks are clearly undervalued," Tony Chu, a Hong Kong-based money manager for RS Investment Management, which oversees about US$22 billion, said on Friday. At the same time, he said, "you need a strong signal for investors to recognise the re-rating potential". BLOOMBERG