Chinese banks still worth a look despite rise in NPLs, say analysts
Lower NPL provision coverage seen positive to mainland banks’ profits over the longer term
Banks with risk control capacity, capital strength, risk-based pricing power and margin resilience could become winners in the Chinese market, although headwinds brought on by the continuous economic slow down persist, analysts said.
Ahead of their Chinese peers, HSBC and Standard Chartered both announced worse-than-expected annual earnings this week, with the latter reporting its first losses in 26 years, partly due to sluggish Asian business, as trading conditions continue to deteriorate while China loses steam.
Struggling at the epicentre of the economic shake up, Chinese banks face even bigger challenges as the quality of their assets deteriorated, pushing non-performing loan (NPL) ratios higher. Latest official numbers show NPLs and special-mention loans (SMLs) with mainland banks had risen sharply to 4.2 trillion yuan (HK$5 trillion) by the end of 2015 from 2.9 trillion yuan in 2014 – with analysts saying the official number could still be an underestimate.
However, some analysts still believe certain mainland Chinese banks are worth attention.
“It will be very hard to see a turnaround performance of bank shares as investors tend to stay away from this sector unless there is a solid rebound in the macro economy,” said Alex Fan, managing director of GF Securities in Hong Kong. “However, sentiment wise, the current low valuations of bank shares on both mainland and Hong Kong markets also make them sensitive to major market rebounds.”
Mainland media reported last week that the Chinese authorities were considering lowering the provision coverage ratio requirement on banks, in a bid to expand credit and curb the sharp economic slowdown.
The minimum requirement is currently 150 per cent, while the sector coverage ratio was 181 per cent at the end of 2015, down from 232 per cent at the end of 2014, according to the China Banking Regulatory Commission.
