Analysts stay cautious over H-share banks

Stock prices of HK-listed mainland lenders to stay flat despite expected earnings boost in Q4 of 2012

Analysts remain conservative on the stock-market performance of H-share mainland banks, although recent data point to stronger profitability and balance sheets.

Sheng Nan, a banking industry analyst with CCB International Securities Ltd, China Construction Bank Corp's investment bank unit, said mainland banks' share prices in Hong Kong will still be "range-bound", despite an expected improvement in earnings for the fourth quarter of 2012.

"We are still fairly cautious on the sector for the near-term," Sheng told a news conference in Hong Kong on Tuesday. "In our view, it is unlikely that the market will react materially to the fourth quarter figures to be reported at the end of this month."

The mainland's major H-share banks are expected to start reporting 2012 earnings on March 22, with Agricultural Bank of China Ltd leading the way.

CCB International expects its earnings to grow 12.6 percent on average, as bottoming out by the Chinese economy in the fourth quarter helped improve banking profitability.

Two smaller banks, China Minsheng Banking Corp Ltd and China Merchants Bank Co Ltd, have already flashed 2012 figures, with the former's net profit up 34.5 percent and the latter's up 25.3 percent, underscoring strong profitability.

The expected strong earnings were due to a stabilization of the net interest margin in the fourth quarter, a key measure of loan profitability for Chinese banks.

Most Chinese banks' net interest margin narrowed in the second half of 2012 following two rate cuts by the central bank in June and July.

China Minsheng, for example, predicted that its net interest margin would drop 0.08 to 0.1 percent in the second half of 2012.

Sheng said the narrowing of the net interest margin temporarily stabilized in the fourth quarter as most short maturity loans had already completed re-pricing, while loans with longer maturity only started re-pricing in January.

The growth of non-performing loans also slowed. Chinese banks' NPLs balance grew only 2.9 percent quarter-on-quarter in the fourth quarter, a significant slowdown from the second and third quarter.

That helped alleviate fears of an NPL deluge caused by massive local government lending, estimated at around 10 trillion yuan ($1.6 trillion) at the end of 2010.

The positive developments, however, failed to turn into a rally for mainland banking shares in Hong Kong.

Eight H-share mainland banks traded at an average price-to-earnings ratio of a little over six, and price-to-book ratio of around 1.2. That stands as a big under-valuation given that their return on equity ratios nears 20 percent.

Bank of China, for example, closed at HK$5.46 on March 7, with a PE ratio of 6.8 and PB ratio of 1.4.

"It's definitely an under-valuation from a short-term perspective," said Sheng. "The reason for that is that investors see a drop in Chinese banks' profitability in the long term as funding channels diversify and the economy relies less and less on bank loans."

Khiem Do, head of asian multi asset Investing with Barings Asset Management Ltd, earlier this month told China Daily that the fact that investors have an unclear picture of Chinese banks' real exposure to local government debt also helped drag down their share prices. "Investors tend to be cautious when they don't have a clear idea about what's really going on," he said.

The banks' first quarter results this year may have a more material impact on their share prices, Sheng said, but macroeconomic and policy developments will be the primary market drivers.

Industrial and Commercial Bank of China Ltd, China's biggest bank by market capitalization, is CCB international's top pick among large-cap banks, while China Minsheng is preferred among smaller banks.

gaochangxin@chinadaily.com.cn