Chinese banks report lacklustre first-quarter profit growth, but a bargain thanks to cheaper valuations, says Credit Suisse
- Four biggest state-owned banks report net profit growth of about 4 per cent, below forecast
Leading mainland Chinese banks reported lacklustre first quarter profit growth this week, with flat, even shrinking, net interest margins. The good news is their cheaper valuations make their stock a bargain compared with global peers and the overall market for the next three months at the least, according to Swiss bank Credit Suisse.
The four largest state-owned banks – Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China – were among lenders that had reported earnings by Monday evening. All four posted net growth of about 4 per cent, below an average of 5.7 per cent forecast by investment bank China International Capital Corporation for listed Chinese banks.
China Merchant Bank reported the strongest growth on Monday, with its net profit rising by 11.32 per cent to 25.24 billion yuan. The bank said the improvement in its net interest margin (NIM), a gauge of a bank’s profitability, which rose 0.17 basis points to 2.72 per cent, was down to an improvement in its assets and liabilities mix.
The NIM at Bank of China, however, declined by 3 basis points to 1.82 per cent, and to 2.29 per cent at CCB.
The five largest Chinese banks must grow their lending to small businesses by at least 30 per cent this year, as directed by Beijing, and the stock market has been concerned this might lead to a worsening of their non-performing loan (NPL) ratios down the road. Small and micro enterprises are often viewed as riskier borrowers and more vulnerable to a slowdown in consumer demand than larger, state-owned enterprises.
“But overall, the average NPL ratio of all the 31 Chinese banks listed in the A-share market during the first quarter is flat, sliding slightly to 1.49 per cent from 1.5 per cent as of the end of 2018,” Chen Xiang, analyst at China Securities, said in an interview.
Meanwhile, Dan Fineman, the co-head of equity strategy for Asia-Pacific at Credit Suisse, said he viewed Asian banks overall, including Chinese banks, as a new favourite stock pick over the next three-month horizon.
Many of these banks are trading at near the post-Asian financial crisis trough in terms of their price-to-earning multiples compared with the PE multiples of Asia-Pacific equity markets, excluding Japan. And this has led Credit Suisse to rate the Asian banks as overweight.
“Although we do not expect a strong rebound, bank loan growth is likely to tick up in selected markets. Overall total social financing in China is accelerating, and the share of banks’ on-balance sheet lending versus shadow banks adds to the gains of bank lending,” Fineman said in a report.
Compared with their global peers, Asia banks, including those in China, are also trading at a discount of 14 per cent, down from a premium of 9 per cent and 22 per cent in 2018 and 2017, respectively.
For the full year of 2019, Credit Suisse expects a 5.6 per cent growth in Chinese banks’ earnings per share, and a forward 2019 PE multiple of 6.5 times, down from 6.9 times in 2018.
However, given that Asian banks have exited a period of strong credit growth since the global financial crisis, there is less scope for credit growth in the region and this makes sustained outperformance unlikely. Between 2007 and 2018, bank credit to GDP in Asia rose at its strongest pace compared with rest of the world.