Chinese financials have been some of the best performing and most attractive stocks at the beginning of 2018, and we have noticed. Asia Unhedged has been a broken record on the subject since January, noting the belated recognition among investors that China’s banks are trading too cheaply. As David Goldman wrote last month, the forward-looking price-earnings ratio for major Chinese banks is about half that of their American counterparts, despite significantly reduced risk.
There are now fewer reasons for Chinese lenders to be so cheap, and the financial news outlets are finally starting to report what we have been saying for months.
The Financial Times writes this week on a plethora of developments that support the shift in sentiment:
- Figures released on Friday last week showed that Chinese banks’ overall non-performing loan ratio held steady at 1.74 per cent for a fifth straight quarter, after rising every quarter for more than four years through early 2016.
- Overall return on equity averaged 13.9 per cent last year, down from 21.9 per cent in 2011 — when then-premier Wen Jiabao lamented that Chinese banks “make profits far too easily” — but still comfortably ahead of the 9.4 per cent average for US banks through the first three quarters of last year.
- Hong Kong-listed Chinese banks had an average price-to-book ratio of 0.95 as of Friday’s close, well below the 1.5 ratio for US-listed banks.
- Net interest margin — a measure of the difference between what banks pay for deposits and what they earn on loans — has risen for four straight quarters following five years of consistent declines.
- Capital adequacy has improved too, especially among small and mid-sized lenders whose corporate clients tend to be less creditworthy than those of the “big four” state-owned banks — Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China.
- “There’s an increasing view among investors that policy tightening may do a lot of good for Chinese banks’ long-term viability, even though everyone knows that it will have a negative short-term impact on their performance.”: Qiang Liao, senior director for China banks at Standard & Poor’s in Beijing