China's worst banking stock last year is the best performer this year

[SHANGHAI] Ping An Bank Co., China's worst banking stock last year, is now the best performer as investors bet that the lender's strength in retail banking will shelter it from the nation's economic slowdown.

Shares of Ping An Bank rose 39 per cent in 2019, the biggest gain on the CSI 300 Banks Index, erasing last year's 29 per cent loss. The rally stoked demand for its 26 billion yuan (US$3.9 billion) convertible bond sale, which received orders for nearly 1,400 times the amount on offer. Analysts say the bull run may yet continue.

While Chinese banks are benefiting across the board from policy makers' pledge for capital and regulatory support, Ping An Bank and China Merchants Bank Co. are being particularly rewarded for their focus on retail banking. The Shenzhen-based lenders dominate the sector, where competition is less fierce and returns higher than those in corporate lending.

"Investors are willing to pay a premium to retail banking especially in the economic downturn because it's less cyclical than wholesale banking," said Liao Chenkai, a Shanghai-based analyst at Capital Securities Ltd. "Ping An and China Merchants Bank have a lot in common. But the latter trades at a much higher premium, which I believe reflects its fair value, so that means Ping An shares can go up more."

China Merchants Bank, known as the nation's king of retail-banking, traded at 1.6 times its forecast price to book, compared with about one for Ping An Bank and the banking gauge's average level of 0.8, according to data compiled by Bloomberg. Tianfeng Securities Co. estimates that return on risk-weighted assets for China Merchants Bank's retail operation was 3.7 per cent, compared with 2.6 per cent for the overall business.

Ping An Bank began transitioning from corporate to consumer banking in late 2016, years later than China Merchants Bank, when retail contributed just 41 per cent of its profit. The share rose to 68 per cent by September 2018, and Ping An Bank's bad-loan ratio of its retail operations stood at 1.05 per cent, lower than the 2.49 per cent for corporate lending. Yet, Ping An Bank's return on equity, a key measure of profitability, is 11 per cent, below the sector's average of 13.3 per cent, as it continues the transition.

"By providing earnings stability and being less capital consuming, retail banking is the bright spot," Tianfeng analysts led by Liao Zhiming wrote in a recent note.

BLOOMBERG