SHANGHAI (Reuters) – Beijing’s mandate to aid virus-hit sectors has left China’s banking sector lagging behind a broader market rally as the economy reopens, with investors fearful a cash splash by lenders will increase bad loans and squeeze already wafer-thin margins.
China’s easing of monetary conditions – at odds with the policy direction in most countries – is designed to revive growth and has triggered a robust rebound in stocks.
Over the last month, as COVID-19 rules were relaxed in Shanghai and Beijing, blue chip index CSI300 rose nearly 8%, while the tech-focused STAR 50 Index jumped more than 18%.
However, the CSI300 Bank Index, which tracks the “Big Four” state banks and other lenders, including local government-controlled Shanghai Pudong Development Bank, has lost 0.7% over the same period amid concerns over the financial health of lenders.
The China Banking and Insurance Regulatory Commission (CBIRC) last week urged banks to boost support to companies affected by COVID, allowing a higher tolerance for bad loans.
Chinese lenders face “an increasingly apparent trade-off between remaining profitable and supporting the economy,” said Natixis economist Gary Ng. The mandate to help the economy will mean banks will need to “sacrifice their profitability … to help corporate and households.”
Banks’ net interest margin already fell to 2.04% in the first quarter, from 2.1% in 2020, and will likely be squeezed further, he said.
In late May, the People’s Bank of China (PBOC) urged banks to “raise political standing” by implementing stimulus measures, and called for an incentive mechanism that would enable loan officers “willing” and “daring” to lend to small companies.
The regulators’ calls come amid signs risk-averse banks are parking money in low-risk, short-term financial instruments, pushing such yields toward zero.
LOW VALUATIONS
Xie Chen, a fund manager at Shanghai Jianwen Investment Management Co, says monetary easing is a double-edged sword for banks.
While credit expansion increases revenues, “if you slash lending rates without proportionate cuts in deposit rates, profitability will naturally go down,” Xie said.
Banks’ very low valuations show the market expects write-offs from non-performing loans, he added.
China-listed lenders trade at 5.18 times earnings and 0.65 times book value, making banking the cheapest sector in China, where consumer staples trade at an earnings multiple of 38.4.
Chinese banks are also much cheaper than the average 9.74 times earnings and 1.03 times book value for global banks in the Refinitiv Global Banks Price Returns Index.
As a result, some investors say the pessimism toward Chinese banks is overdone.
“The current valuation of banks is so low that it seems to be pricing in large-scale bankruptcies in the sector,” said Dong Baozhen, fund manager at Lingtong Investment, who deemed such a scenario unlikely.
Despite the recent rebound, “China’s tech stock bubble is bursting, and money will eventually flow into lowly-valued banking shares,” he added.
(Reporting by Samuel Shen, Jason Xue and Andrew Galbraith; Editing By Vidya Ranganathan and Jamie Freed)