Chinese banks surge at pace not seen since 2015 as traders chase perennial laggards on valuation, SOE bets
- The rally in banks suggests they have become the new darlings of investors searching for fresh bets
- The run-up has been mainly driven by sentiment and valuation expansion rather than earnings
Such a broad-based rally in banks, which have been market laggards over the past few years amid concerns about their asset quality, suggests they have become the new darlings of investors searching for fresh bets after their reopening plays fizzled out.
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“There’s more downside room for the deposit rates,” said Xiao Feifei, an analyst at Citic Securities in Beijing. “We expect both revenue and profit growth to accelerate throughout the year, and the sector has entered a stage of active allocations.”
More banks will join Bohai Bank and Zheshang Bank in reducing deposit rates this month to bolster profitability, as the pressure on net interest margins mounts and controls over deposit costs top lenders’ priority, according to China Merchants Securities.
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Listed banks’ net interest margins, which contribute the bulk of the industry’s earnings, dropped by 16 basis points from the end of 2022 to 1.84 per cent in the first quarter of this year after three cutbacks in prime loan rates – the benchmark borrowing costs set by major commercial lenders – last year, the brokerage said.
Policy tailwind has also created confidence in banking stocks, with the industry’s major players all being state-backed. The SOE trade, which was spurred by a call by the head of the stock-market regulator for a new methodology for valuing such stocks, got a fresh boost after the China Securities Journal said that the Shanghai Stock Exchange would hold a special meeting this week for the “discovery of SOE investment values and promotion of valuation return”.
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Banks’ distressed values boost the case for chasing the rally as traders look for cheap and safe bets amid a bumpy recovery in China’s economy after data showed that home sales remained sluggish and the manufacturing industry risked contraction. The 24 banks trading on the Shanghai exchange trade at 0.64 times their book values on average, the only sector to trade below water, according to Bloomberg data. Meanwhile, the sector’s dividend yield is 4.7 per cent, the highest among all, the data shows.
The run-up in banks has been mainly driven by sentiment and valuation expansion rather than earnings. First-quarter profits for listed banks rose 2.4 per cent from a year earlier, slowing from the 7.6 per cent full-year growth rate in 2022, according to Guotai Junan Securities.
BOC reminded investors of potential risks after the gain in its stock exceeded 20 per cent over the past three trading days, and said there was no big change in business operations, according to an exchange statement on Monday.
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Its shares have risen 44 per cent in Shanghai this year and a gauge of mainland China-listed banking stocks has gained 11 per cent in the same time span, according to data provider Shanghai DZH. The benchmark CSI 300 Index has advanced 4 per cent.
The enthusiasm for banks will continue to persist as they stand to benefit from state backing, high dividend payouts and revaluation, according to China Galaxy Securities. Smaller lenders, such as Bank of Hangzhou and Bank of Jiangsu, are also a bright spot, posting a more than 20 per cent increase in profits in the first quarter to beat consensus estimates, it said.
“The banking sector benefits from … perception of valuations with Chinese characteristics and some banks’ better-than-expected first-quarter results,” said Zhang Yiwei, an analyst at the brokerage in Beijing.
“That has left the door open for revaluing banks.”
