China Banks' Profit Growth Slowed Last Year as Economy Weakened
Comment of the Day

April 24 2013

Commentary by Eoin Treacy

China Banks' Profit Growth Slowed Last Year as Economy Weakened

This article from Bloomberg News may be of interest to subscribers. Here is a section
In 2013, the CBRC will guard against rising defaults and risks associated with lending outside the banking system, it said in the annual report. The regulator will continue to limit loans to local government financing vehicles and the real estate industry, it said.

Bad loans in the banking industry rose to 1.07 trillion yuan last year from 1.05 trillion yuan in 2011, the regulator said. Non-performing loans accounted for 1.6 percent of banks' total advances in 2012, compared with 1.8 percent in 2011, according to the CBRC report.

Eoin Treacy's view The Chinese market has endured a process of mean reversion over the last two months that has set it apart from the performance of most of its neighbours, not least Japan. Concerns centring on the debts of local governments, the high price of property, declining manufacutring and uncertainty as to how much change the new administration can achieve have weighed on the stock market.

The Shanghai A-Share Index has returned to the region of the 200-day MA where it has at least paused. The FTSE Xinhua A600 Banks Index has also almost completely reverted back towards its mean. The Hong Kong listed China Enterprises Index (H-Shares) has pulled back to test the psycholical 10,000 area where it has at least paused.

Consdiering the extent to which these indices have pulled back and the fact that they have returned to potential areas of support, the valuations of the banking sector are particularly noteworthy. Bank of China (P/E 5.53, DY 6.27%) ICBC (P/E 6.1, DY 4.68%), Bank of Communications (P/E 5.3, DY 2.08%), China Construction Bank (P/E 6.4, DY 4.59%), China Merchants Bank (P/E 5.93, DY 3.28%) and Agricultural Bank.of China (P/E 6.42, DY% 4.53%) have all returned to test the region of their respective 200-day MAs and have firmed over the last couple of weeks.

China Minsheng Bank (P/E 5.28, DY 2.04%) broke emphatically above HK$8 in December and encountered resistance near HK$12 in February. It has now firmed in the region of the 200-day MA near HK$9.

While the Chinese market may be in need of a catalyst to stoke renewed investor interest, valuations are attractive at these levels.

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