Report cites irrational sell-off and misplaced fears Misplaced fears over Beijing's tightening monetary policy and concerns over the slowing economy have caused an 'irrational sell-off' of mainland banking stocks, according to a new report by JP Morgan. Despite widespread anxiety that higher financing costs and a slump in corporate profits could see a surge in bad loans and declining earnings growth, mainland banks continue to offer value for long-term investors, the bullish report says. 'Concerns over the sector's prospects are overplayed ... Investors have been in an extreme state of nervousness, just the opposite to an extreme state of greed nearly a year ago,' the report said. Shares of Industrial and Commercial Bank of China, Bank of China, Bank of Communications, China Construction Bank, China Merchants Bank and China Citic Bank have slumped by an average 43 per cent in Shanghai and 13 per cent in Hong Kong this year, wiping off almost US$300 billion of their market value, according to Bloomberg. The sell-off came despite robust profit growth at mainland banks during the first half of the year. China Minsheng Bank, Shanghai Pudong Development Bank and Citic Bank all released preliminary earnings growth estimates in excess of 100 per cent. ICBC, the mainland's biggest bank, said profits had expanded more than 50 per cent. '2008 remains a good year for Chinese banks,' the report concluded, blaming next year's uncertain macroeconomic outlook for bearish sentiment among investors. Despite a further slide in most banks' Shanghai share prices yesterday - only Minsheng and Huaxia bucked the trend, gaining 2.03 per cent and 0.42 per cent respectively - analysts said that recent earnings estimates might halt the slump. 'The confirmation that profits still remain healthy and on track, with no major negative shocks should underpin share prices,' said Warren Blight, a China banking analyst at Fox-Pitt Kelton. Economists expect the mainland economy to grow at about 10 per cent this year, despite softening demand for Chinese exports. However, Mr Blight said investors were realistic to fear a so-called 'asymmetrical' rise in interest rates as part of the central bank's attempts to control inflation, which remained at more than 7 per cent. That would see deposit rates rise more quickly than loan rates, narrowing banks' interest spread - a major source of earnings. With this year's loan quotas restricting lenders' ability to accelerate lending to compensate for higher deposit costs, banks face a double squeeze on profit margins. 'There are certainly reasons to be concerned about the tightening monetary environment. But it is too early to see how that will affect asset quality,' said Charlene Chu at Fitch Ratings, warning that any deterioration in the credit data would probably not show up until next year. Central bank governor Zhou Xiaochuan's comments last week that further rate rises could not be ruled out caused panic among investors fearing the impact on corporate borrowers already reeling from currency appreciation, slowing global demand and wage inflation. Higher interest rates would make it much tougher for borrowers to repay loans, potentially resulting in a new clutch of non-performing loans - a huge worry for mainland banks, which have yet to be tested by a major economic downturn since they were reformed earlier this decade. Conversely, there is evidence that this year's credit quotas have forced banks to discriminate more carefully when making loans, which could result in improved asset quality. 'In the short-term, the earnings numbers are all going to be good but we have not seen so many clouds over the banking system for some years. Whether that manifests itself as a storm remains to be seen,' said Ms Chu.