Shares of Bank of China hit a six-month high in Hong Kong yesterday as Beijing's decision to cut cash dividend payouts shored up investors' confidence in the mainland lender.
The mainland's fourth-largest bank by market value rose as much as 1.77 per cent to HK$3.45 in the morning session before closing at HK$3.39 at the end of the day, unchanged from Friday.
Although stocks fell off in the afternoon, mainland banks are widely expected to trigger a buying rush amid the regulator's ongoing loosening of capital requirements and easing of monetary policies.
Central Huijin Investment, the controlling shareholder of the country's so-called Big Four banks, last week said dividend payouts ratios for last year would be cut by five percentage points to 35 per cent at Industrial and Commercial Bank of China, Bank of China and China Construction Bank. Agricultural Bank of China's ratio would be kept at 35 per cent.
Huijin's move could save the four lenders 32 billion yuan (HK$39.3 billion), a sign that Beijing intends to step back from the protective stance it took on banks in the past two years.
'It is unlikely the regulators will further tighten capital requirements,' said Orient Securities analyst Jin Lin. 'Banking stocks are good buys this year since they could expand business faster as the regulators loosen the reins.'
Beijing allowed the biggest banks to retain more profits last year in an attempt to bolster lending activity this year. It has set higher capital adequacy ratios and increased the reserve requirement ratios to limit banks' lending in the past two years. Those policies were aimed at containing the stubborn inflation rate and bad-loan risks.
As a result of the tightening, investors have been shunning banking stocks. But the reduction in dividend payout ratios sent a message to the market that Beijing would ease the pressure on banks, giving them a freer rein, analysts said.
'It will have a positive impact on banking stocks,' Shenyin Wanguo Securities said in a research report. 'Banks are now traded at a low level and valuations look set to increase.'
Mainland banks enjoy a high net interest margin as the regulators set the deposit and lending rates.
The decision to allow banks to retain more earnings is viewed as an incentive as the saved cash could be used to support loan growth. Analysts said mainland banks would no longer need large-scale financing activities such as share placement and bond issuance to replenish capital this year.
Last year, massive additional share sales by big banks prompted investors to dump banking stocks because of fears of diluted per-share earnings. Mainland-listed banks now trade at an average 7.5 times forecast earnings for last year and 6.5 times forecast profits for this year.
Analysts said the low price-earnings multiple meant the shares were undervalued. Hong Kong-listed banks would also rally , they added.