Crunch puts Big Four valuations near record lows
Bloomberg in Shanghai
Mainland banks' valuations are close to their lowest on record after an interbank funding crisis last month exacerbated investors' concerns that earnings growth will stall and defaults may surge as the economy slows.
Industrial and Commercial Bank of China, the world's largest lender by market value, ended Hong Kong trading last week at 5.3 times estimated earnings, well down from its October 2006 high of more than 29. Analysts forecast it may report a US$41 billion profit this year. By comparison, United States bank Wells Fargo, with net income forecast at US$20 billion, trades at 11 times earnings.
Investors' disenchantment with mainland banks reflects concerns that a crackdown on shadow banking will trigger a surge in bad loans. President Xi Jinping also signalled last week that the new leadership in Beijing would tolerate slower growth.
"The golden era of banking is over," said Mike Werner, an analyst at Sanford C. Bernstein. "Investors have to recognise that more market discipline is going to be imposed upon the banks."
Shares of ICBC and its three largest domestic competitors - China Construction Bank, Agricultural Bank of China and Bank of China - fell by an average 12 per cent in Hong Kong last month and by an average 9 per cent in Shanghai.
The plunge was precipitated by money-market rates climbing to records on June 20 as the People's Bank of China refrained from addressing a cash crunch in the economy. Premier Li Keqiang's government is cracking down on informal lending and deposit-collection activities that have undermined attempts to cool property prices and local-government borrowing.
The interbank cash crunch led to ICBC's brief displacement last week as the world's most valuable bank for the first time since September 2008. San Francisco-based Wells Fargo took the top spot before ICBC reclaimed it on Friday following a rebound in its shares.
Still, Sophie Jiang, an analyst at Religare Capital Markets in Hong Kong, said the funding crunch was not a watershed moment for the banks' shareholders.
"People have been quite worried about Chinese banks," Jiang said, with investor sentiment moving "not from bullish to bearish; it's from cautious to more cautious".
Bad loans at the mainland's commercial lenders have climbed for six consecutive quarters. At the end of March they stood at US$86 billion - up 20 per cent year on year and accounting for 0.96 per cent of total lending - the China Banking Regulatory Commission said.
But aggregate financing, a broader picture including bank loans, corporate bonds, equity raising and other off-balance-sheet credit, surged 50 per cent in the first five months of the year to a record US$1.5 trillion, the central bank said last month.