China Economy

Future earnings a worry for banks

Profit growth has been good for the mainland's lenders this quarter but analysts think the poor economic outlook will hurt their performance

PUBLISHED : Monday, 12 November, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:00pm


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Is it still a good time to be holding bank stocks? After the most recent quarterly earnings reports that ended just a few weeks ago, some investors may already be wrestling with the question, analysts say.

On the face of it the results showed that profit growth of major mainland lenders, including the Big Four, remains strong. But beneath the deceptively calm surface trouble may be brewing - in particular from the continuing economic slowdown on the mainland.

With this in mind, several mainland brokerages, among them Changjiang Securities, have warned their clients that although profitability of the sector remained stable in the third quarter, the valuations at which bank shares were trading suggested expectations of earnings declines ahead.

The average price-to-book ratio of the 16 mainland-listed banks in the third quarter stood at 1.09 times, down from 1.44 times in the same period last year, analysts at Changjiang Securities said in a recent research note for clients.

The ratio is calculated by dividing the current closing price of the stock by the latest quarter's book value per share, and the dip suggests investors are growing wary about the next batch of bank results.

The Big Four banks were trading at between 0.98 and 1.27 times their book values in the third quarter, but the valuations are likely to edge lower.

Changjiang forecast that the price-to-book ratios of the Big Four may remain stable this year at between 1.04 and 1.24 times, but fall to between 0.92 and 1.15 times next year.

"The forecast is based on future expectations for the macroeconomy and banks' business operations," said Liu Jun, an analyst with Changjiang Securities in Wuhan, suggesting the mainland's economic outlook would have a negative impact on banks' earnings in coming quarters.

The sector's bad debts and interest margin trend would continue to hinder gains in stock prices although they are now undervalued, Liu said, adding that the mainland's economy has yet to see a significant turnaround despite recent signs of some recovery.

On the plus-side, however, the Chinese government is trying to boost both exports and domestic consumption to avoid a so-called hard landing of the economy, and Lou Jiwei, chairman of China Investment Corp (CIC), the nation's US$300 billion sovereign wealth fund, has pledged support for the Big Four.

Lou said last week in Beijing that bank share prices did not reflect the strength of their businesses.

In October, Central Huijin, the wholly owned unit of CIC, which controls the Big Four banks on behalf of the government, said it would continue buying shares in the four banks over the next six months.

But that vote of confidence has so far failed to boost bank share prices, with investors taking the view that the support was symbolic rather than practical, given the limited number of shares that Huijin has bought.

Dongguan Securities said in a research report it did not foresee more declines in the valuations of the banks since current A-share prices had factored in negative expectations of the banks' asset quality. However, the outlook would depend on the performance of the mainland economy, which has yet to bottom, it added.