What bargains? China’s cheapest stocks are valuation trap as banks lose margin protection
- China’s move to set lending rates in reference to borrowing costs on money market will narrow banks’ net interest margins, investors and analysts say
- Worsening earnings outlook outweighs banks’ valuations, the cheapest among all sectors
Chinese banking stocks, already the cheapest among all sectors, may see their share prices beaten down more, as a new market-based way to price loans is set to take away a shield that protected their profit margins for decades.
As of this week, commercial lenders must link the loan prime rate to their funding costs from the money market. It is a move aimed to lower borrowing costs for companies and support economic growth.
But it comes at the cost of banks’ profits, as net interest margins – or the difference between the lending and deposit rates that make up a big chunk of earnings sources – are poised to narrow.
Chinese banks’ earnings will probably fall by as much as 4.5 per cent next year, Northeast Securities says, with the whole industry moving to charge clients more based on demand and supply.
The sector’s battered valuation, at a 41 per cent discount to the benchmark equity gauge, is not convincing investors that the China-listed stocks are bargains. They are looking more to the deteriorating earnings outlook.