Future earnings a worry for banks

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.