China Banks Stage Comeback
Chinese banking stocks, perennial under-performers with valuations hovering near record lows, may finally have some good news to cheer up investors.
China Merchants Bank Co., dubbed as China’s retail banking king, had its best ever start to the year with its shares rallying 24% Hong Kong, more than doubling the gain in the benchmark Hang Seng Index and leading other lenders higher. Analysts and investors expect the boom to continue, with China International Capital Corp. predicting a 60% upside potential for mainland banks’ Hong Kong-listed stocks in 2021.
Much of the euphoria was driven by Chinese authorities’ ongoing crackdown on Ant Group Co. and other fintech giants in everything from consumer lending to credit scoring. Some analysts say the move should provide a breathing space for traditional banks to win back some of their lost ground. Banking stocks also stand to benefit from potential fund inflow as investors have fled technology names with lofty valuations for cheaper alternatives.
“The worst for Chinese banks is over. Investors are expecting China’s economy to further improve and banks are trading at low valuations in a market where liquidity is strong,” said Linus Yip, chief strategist with First Shanghai Securities. “Once tech stocks get a little bit expensive, investors may start parking their funds with old-economy stocks such as traditional banks.”
Shares of the nation’s four largest state-controlled banks are trading at about half of their estimated book value or less in Hong Kong, and five times their 12-month forecast earnings. That compared with an estimated price/earnings ratio of 25 times for Alibaba Group Holding Ltd. and 43 times for Tencent Holdings Ltd.
China on Monday reported economic growth that exceeded its pre-pandemic rates in the fourth quarter, enabling it to post a full-year expansion as major peers suffered contractions.
While the growth in 2020 was the slowest in four decades, a V-shaped recovery following the successful control of Covid-19 cases is set to alleviate pressure on Chinese banks to perform their patriotic duty. Big banks suffered their worst profit slump in more than a decade in the first half of last year as they were enlisted to ease the financial hardship of millions of people and businesses amid the pandemic.
Merchants Bank and Industrial Bank Co. last week reported the strongest profit growth since 2012 in the fourth quarter and an unexpected decline in their bad-loan ratios. The sector’s earnings might grow 9.2% from a year earlier in 2021, following an estimated 4.5% drop for 2020, CICC analysts.
Chinese banking stocks have been a losing trade since 2018, after the government kicked off a deleveraging campaign that led to a pile-up in soured credit. The pandemic has brought more pressure to banks as they were required to forgo a combined 1.5 trillion ($231 billion) in earnings and provide more cheaper funding to borrowers.
“What’s different this time is China’s anti-monopoly actions had prompted funds to shift to value shares from growth names, and that rotation may last in the first quarter,” said Terry Sun. “Tighter scrutiny over fintech firms will benefit traditional financial institutions, especially banks with a nationwide network of branches.”
