Income rise buoys bank valuations

SHANGHAI－China's largest banks posted double-digit increases in lending income in the July-September quarter, validating some of the earnings optimism that has fueled a rally in their shares this year.

Industrial & Commercial Bank of China Ltd, Bank of China Ltd and Agricultural Bank of China Ltd reported average net interest income gains of 15 percent on Oct 30.

The figures come after China Construction Bank Corp reported a 10 percent rise last fortnight.

For the most part, the four banks' results reflected improvements in interest margins and asset quality, though Bank of China's figures were marred by a jump in impairment losses.

"People are selling shares after a recent rally of Chinese banks," said Marco Yau, a senior analyst at CEB International Investment Corp.

"Investors have been expecting an improvement in asset quality and a rebound in margins since the beginning of the year and that has supported the momentum."

Share prices of China's biggest lenders have been rallying year-to-date despite fluctuations after profit-taking from time to time.

Shares of Shanghai-listed ICBC rose from 4.4 yuan ($0.66) at the beginning of this year to 6.1 yuan at the end of October, a 38.6 percent growth.

Shares of Agricultural Bank of China rose from 3.1 yuan to 3.7 yuan during the same time, a 19.4 percent gain.

This year's rally drove the Big Four banks' average price-to-book ratio to the highest level since late 2015.

The lenders have benefitted from some of the government efforts since April to curtail financial risks. As authorities moved to increase policy coordination among the country's regulators, they also sought to curb interbank borrowings, a step that has boosted margins at the big banks.

ICBC, the world's largest lender by assets, said its net interest margin rose to 2.17 percent by the end of September, compared with 2.16 percent in the first half, while Bank of China and China Construction Bank also reported increases.

Analysts said that across the banking sector, interest margin and quality assets have been improving for big and small lenders alike, thanks to better macroeconomic environment.

According to a research note by Sinolink Securities, it is likely that the momentum of improved banking sector performance will continue in the fourth quarter, supported by rising rate of return on equity.

"Valuation of the entire banking sector is likely to grow. NPL risks are likely to gradually dissolve as a number of sectors recover, reflected by better real economy data in Q3," said the report.

Ma Kunpeng, analyst with China Merchants Securities, said that investors need to study lenders' shares case by case, as banks are developing in a divergent manner. Some banks with not-so-strong fundamentals are likely to experience difficulties in the next few quarters.

BLOOMBERG-CHINA DAILY