Chinese banks drop below book value
Decline in lenders' share prices spurs investors to mull buying on the cheap but analysts say worst is yet to come for banking sector
Mainland banks' A shares have dipped below net book value or are about to breach that level, prompting some to ask whether it is a good time to buy the seemingly undervalued stocks.
However, many analysts say the worst is yet to come. They are concerned about banks' continued accumulation of bad loans, which will reduce their capital strength at a time when they face lower profits because of fierce competition sparked by the impending interest rate liberalisation.
The price-book ratio at 14 of the mainland's 16 listed banks was less than one at yesterday's close. The other two were just above that level, with China Minsheng Banking at 1.04 and China Merchants Bank at 1.03.
Bank shares were trading at an average ratio of 2.18 on June 6, 2005, when the Shanghai Composite Index hit 998 points, the lowest level this century. The index closed at 1,991.25 yesterday.
The pessimism prevalent in the mainland market has not deterred some international investors, who can buy mainland bank shares through the Hong Kong market or tap A shares under the qualified domestic institutional investor scheme.
"International investors have recently asked us whether they could buy some bank shares," said Lucy Feng, the head of regional banks research, Asia ex-Japan, at Nomura.
The share price index for the 14 Shanghai-listed banks has lost 6 per cent so far this month after falling 5 per cent last month, with both falls bigger than the declines in the Shanghai Composite Index in the same periods.
Feng recommends against buying bank stocks until their prices reflect the challenges brought about by progress in deposit rate deregulation, the opening up of the banking sector to private investors and regulations that will allow lenders to go into bankruptcy.
"These things have not taken place, so we say they are not reflected in the share price yet," she said.
Following a meeting in November last year, the Communist Party promised to quicken the pace of interest rate liberalisation.
The central bank freed up lending rates in July, but has not made any progress in liberalising deposit rates since June 2012.
"Regulators are firmly resolved to push ahead with interest rate deregulation this year and next, so I think it will make progress quickly," Feng said.
Banks will see profits squeezed by rising deposit rates when reform sets in.
Analysts say lenders will also face fiercer competition after the banking regulator grants the first batch of bank licences to private companies this year under a pilot scheme.
When market forces are allowed to play a bigger role in the banking sector, those who lose out in the resulting competition will be allowed to go into bankruptcy under a regulation expected to be introduced soon, according to Yan Qingmin, a vice-chairman of the China Securities Regulatory Commission.
May Yan, a banking analyst with Barclays Capital, said mainland bank shares were expected to remain "rangebound" this year, as deepening reforms were likely to result in bankruptcies and slow credit growth in the second and third quarters.
Average profit growth for the six Hong Kong-listed mainland banks would slow further to a high single-digit level this year, Yan said, with many banks expecting a moderately paced deterioration in asset quality to continue.
Commercial banks' non-performing loan ratio rose for an eighth consecutive quarter to 0.97 per cent in the third quarter of last year, official data showed.
However, many analysts say the real situation is much worse.
Bankers say big banks sped up the sale of non-performing assets to asset management companies in the second half of last year to keep non-performing loan ratios artificially low.
The bad loans were expected to erode lenders' profitability and further dent their capital strength this year, imposing restraints on their ability to buy back shares to bolster their prices, analysts said.
The securities watchdog has asked large banks to buy back shares when their price falls below book value.
However, Yan, citing bankers, said buy-backs were unlikely to happen, mainly because such purchases would hurt the banks' capital adequacy ratios at a time when they were already under pressure to meet regulatory requirements.
However, there are a few optimists. A report by Guotai Junan Securities last week said the mainland's listed banks were "severely undervalued" because they had higher profit growth rates and lower price-book ratios than their international counterparts.
"Chinese bank shares have lots of room to rise as banks in foreign mature markets are usually priced at 1.5 to 2 times book value," the report said.