China’s major banks are expected to post strong first-half results in coming days, with investors viewing them as a proxy for betting on China’s growth, although bad debts that threaten to overwhelm the financial system are seen as a key risk.
“Most fund managers have found owning China banks difficult in the past 18 months because of continuous regulatory and market headwinds,” said Macquarie analyst Victor Wang. “They’ve had to repeatedly explain to internal colleagues why they should own Chinese banks.”
With expectations so low, shares of Chinese banks are now trading near record low valuations and analysts including Macquarie and Barclays Capital expect a short run-up in shares after their earnings, beginning with China Construction Bank Corp. (CCB) on Sunday.
CCB, the world’s No. 2 lender by market capitalization and the country’s biggest mortgage lender, is expected to report a 30-per-cent jump in first-half net profit to 92.3 billion yuan ($14.4-billion U.S.), a poll of nine analysts surveyed by Reuters showed.
The other three of the Big Four are expected to post similar growth in first-half earnings, with Agbank expected to lead the pack with a bigger rise on increased financial services and lending growth in China’s counties, analysts said.
Bank of China Co. Ltd. is expected to announce its earnings on Aug. 24, while Agricultural Bank of China Ltd. and Industrial and Commercial Bank of China Ltd. (ICBC) will announce their earnings on Aug. 25.
CCB’s Hong Kong-listed shares closed down 0.18 per cent at HK$5.53 on Tuesday, an 8.5-per-cent potential upside from the median price target of HK$6.01, according to Thomson Reuters I/B/E/S.
Chinese banks as a whole have had a busy year so far, with three interest rate increases, expectations that about 1.7-trillion yuan worth of local government debt may sour, and fears that foreign investors such as Bank of America Corp. may soon sell out.
These factors have all weighed on their shares, with ICBC and Bank of China lagging the performance of Hong Kong’s Hang Seng Index this year.
Chief among worries is that the lending boom of 2008 and 2009 during the global financial crisis is likely to catch up with them soon, with Moody’s projecting the 14-trillion yuan ($2.2-trillion) lent to local governments to be most at risk.
Most of these bad loans are likely to have gone to local government financing vehicles (LGFV), companies set up by city and provincial governments to pay for local real estate and infrastructure projects.
Signs that Beijing is worried about the situation have not helped. It has reclassified a third of local government debt as corporate debt, and sources told Reuters in May that the central government may step in.
Few analysts expect loan quality to have worsened in the first half of this year, with analysts from Barclays Capital and JP Morgan Chase & Co. saying they expect non-performing loan ratios to have remained largely stable.
“Investors should understand that banking in essence is taking an appropriate level of risk,” JP Morgan analyst Samuel Chen wrote in a note. “Extremely low NPLs may also mean insufficient risk-reward balance.”
Also weighing on Chinese banking shares, especially CCB, is talk that cornerstone investors such as Bank of America are in talks with Middle East wealth funds to cash out.
The lock-up period for AgBank’s cornerstone investors, which include the Qatar Investment Authority, expired in mid-July, meaning they are now free to sell the shares they bought during the lender’s initial public offering.