China’s banking shares head for ‘V-shaped turnaround’, to rise 60 per cent, CICC says

A gauge of 38 Chinese banks is due for its best quarterly performance this month, as bargain hunters pile in amid improving profitability
Banks will rise to levels that match book values, implying gains of 60 per cent, according to China’s largest investment bank

Stocks

Zhang Shidongin Shanghai

Published: 8:30am, 23 Oct 2020

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China’s strengthening economic recovery has already spurred the buying of abandoned banking stocks, as the sector heads for its biggest quarterly gain this year, and China International Capital Corporation (CICC), the country’s biggest investment bank, has forecast a 60 per cent rise.

A gauge of 38 mainland China-traded commercial lenders has risen 5.7 per cent this quarter, according to a gauge compiled by data provider Shanghai DZH. That beats the performance of the benchmark Shanghai Composite Index, which has risen 2.9 per cent in that period. This momentum will strengthen and lift shares to trade at their book values, as earnings continue to improve amid accelerating economic growth, CICC said this week.

The rotation to banking stocks, viewed by traders as a proxy of economic growth, comes as China’s economy grew for a second consecutive quarter over the past three months, with economic activity further normalising after coronavirus-driven lockdowns were lifted across the country. The stocks were among industries most battered by the outbreak early this year, amid fears that the shutdown of factories and weak consumer spending would increase bad loans and sap credit demand. The banking gauge tumbled 13 per cent in the first quarter, posting a bigger decline than the benchmark.

“Banks’ earnings probably troughed in the second or the third quarter,” said Zhang Shuaishuai, an analyst at CICC. “Earnings growth will accelerate going forward, in a V-shaped turnaround.”

Ping An Bank’s latest quarterly result, the first released by a major Chinese lender, bolsters the case for placing bullish bets on the sector. Its third-quarter net income increased 6.1 per cent from a year earlier, reversing an 11 per cent decline in the first half, as asset quality improved in the post epidemic era. Shares of the lender have gained 16 per cent so far this quarter. Its profit growth will probably reach 11 per next year and 16 per cent in 2022, according to Shenwan Hongyuan Group.

CICC said profit growth at China Merchants Bank, Bank of Ningbo and Ping An Bank will surpass the industry average. China Merchants Bank and Bank of Ningbo have a price target of two-and-a-half times their book values, implying gains of as much as 44 per cent, it said. The share price estimate of Ping An Bank is one-and-a-half times its net asset value, suggesting that the stock will rise 27 per cent from its current level.

Beaten down valuations will be another potential nudge for the stocks. China’s banking shares have long traded at discounts to their book values, as investors fled the sector with China transitioning to economic growth driven by consumption instead of credit expansion. The stocks now trade at an average 36 per cent discount on their book values, according to Shanghai DZH.

The sector, however, remains a laggard this year, having fallen 4.2 per cent against an 8.6 per cent gain by the Shanghai Composite.

A CICC securities brokerage branch in Beijing. The investment bank said profit growth at China Merchants Bank, Bank of Ningbo and Ping An Bank will surpass the industry average. Photo: Bloomberg

Chinese banks have also been ramping up efforts to increase provisions for bad loans this year amid the outbreak of Covid-19, leaving more room for an improvement in future earnings and asset quality, according to China Galaxy Securities. The whole industry plans to dispose of non-performing loans worth 3.4 trillion yuan (US$510 billion) this year, an increase of 48 per cent from a year earlier, according to the banking regulator.

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