HONG KONG (Nov 24): 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.
The twist: 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 (US$294 billion), said on Nov 21 that bank stocks were very attractive because they were priced at levels that assumed an economic “hard landing”.
Hours later, the central bank cut the one-year lending rate by 0.4 percentage point and the one-year deposit rate by 0.25 percentage point.
Afterward, Mio said sustained monetary easing may drive an economic rebound and a jump in banks’ share prices. She was “more positive” on the stocks.
Industrial & Commercial Bank of China led banking shares higher in Hong Kong, gaining 0.8 percent to HK$5.00 as of 9:54am local time. China Construction Bank rose 1.3 percent.
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 data compiled by Bloomberg.
Another fund manager, Baring Asset Management's Khiem Do, said he was “still bullish” on banks after the rate move and that dividends of more than 6 percent would become even more attractive as interest rates fall.
Where else?
“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 percent per annum,” he said earlier by phone.
Do helps oversee 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, according to 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 percent of the benchmark for deposits from 110 percent.
Five of 16 listed banks offered rates at the ceiling as of yesterday, according to their websites.
Profit outlook
“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, said in a note yesterday.
Chinese bank shares fell in Shanghai, a market that is largely closed to foreign investors. ICBC lost 0.5 percent to 3.71 yuan, while Construction Bank declined 0.7 percent.
Rising defaults and constraints on credit growth have battered bank shares over the past two years even as lenders managed to maintain about 10 percent 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 percent goal, a person familiar with the matter said this month.
“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 Nov 21.
At the same time, he said, “you need a strong signal for investors to recognize the re-rating potential”.