Dual-listed banks trading lower in HK

Dual-listed mainland banks are trading at a discount in Hong Kong amid worries over loan quality and potential interest rate liberalization, which pose a threat to profit margins.

The eight mainland banks that are listed both in Hong Kong and Shanghai are seeing their H shares trade at lower prices than their A shares.

Analysts said the A-share prices of mainland banks will soon follow the trajectory of their H shares. Since the Hong Kong market has no capital controls, experts said it better reflects the opinion of global investors.

The CSI 300 Banks Index, which tracks big-cap banks, was up by 0.4 percent on Friday to 3,429.53 points. That's down by 31 percent from 4,982.17 points at the close on Dec 31, 2009.

As of the close on Friday, China Minsheng Banking Corp Ltd's H-share price was about 31 percent lower than its A-share price. China CITIC Bank's shares were about 24 percent lower in Hong Kong and China Merchants Bank shares were traing at a 10 percent discount.

That's in stark contrast with January this year, when most of the bank's H shares were offered at a premium over their A shares.

On the Shanghai Stock Exchange, banking shares' price-to-book ratio is about 0.9, which means that they are trading at below book value. The A-share average is about 1.8.

Chinese banking shares have been trading at a low for quite some time, after concerns about the quality of their loans surfaced in the aftermath of the government's 4-trillion-yuan ($651.7 billion) stimulus plan to save the economy from the global financial crisis in 2008. Many analysts said they believe some of the loans went to projects that have hardly generated any cash flow.

The central bank last year for the first time allowed lenders to set their lending and deposit rates within a range of the benchmark interest rate. At the time, the markets interpreted the move as one that will encourage competition and hurt weaker lenders. Banking shares took a dive last June following the People's Bank of China's decision to pay as much as 10 percent more than the benchmark on deposits and offer a 20 percent discount on borrowing costs.

Worries about mainland banks deepened last month following a rare cash crunch in China's inter-bank money market, which sent lending rates to a staggering 30 percent. The rate later dropped after the central bank provided loans to selected banks, but experts said they believe that it exposed some banks' problems in risk management.

"The incident definitely had a negative impact on the market's confidence in Chinese banks," said Wang Jianhui, chief economist at Southwest Securities Co Ltd.

But big banks, especially China's largest four — Agricultural Bank China Ltd, Bank of China Ltd, China Construction Bank Corp and Industrial Commercial Bank of China Ltd — are considered to be in a better position, given their huge deposit reserves.