Analysts Still Bullish on China Banks Despite Stocks Battering

(Bloomberg) -- Top market analysts are clinging to their bullish forecasts for China’s largest banks, despite the recent share price battering from mounting trade tensions with the U.S. and worries about corporate defaults.

Following a record 14-day losing streak, the spread between the market price of Industrial & Commercial Bank of China Ltd. and the analysts’ average 12-month target stood late Thursday at the widest level in almost three years, according to data compiled by Bloomberg.

Citigroup Inc., Macquarie Group Ltd. and China International Capital Corp. are among the banks sticking to their optimistic outlook for the four largest Chinese lenders, arguing that the 13 percent share price plunge in the past three weeks is overdone.

"Now is a good buy window for big China banks,” said Dexter Hsu, a Taipei-based analyst at Macquarie Capital. “When the dust is all settled investors will find that big banks won’t be hurt as much.”

Analysts Still Bullish on China Banks Despite Stocks Battering

Investors who followed those bullish calls must be hopeful the forecasters will be proved right. CICC analysts have a 12-month prediction of HK$11.61 for ICBC shares; they closed Thursday in Hong Kong at HK$5.74.

Large bank shares have been hit by a double whammy of growing trade tensions and fears that China’s deleveraging campaign will lead to more corporate defaults. They are also seen as bellwethers for the wider Chinese economy at a time when wider market indicators, such as the currency and the benchmark Shanghai stock index, are falling sharply.

The fears are exaggerated, according to the bulls. At current valuations, Chinese bank shares are pricing in a “hard-landing” scenario, presenting a good buying opportunity, Citigroup analysts Judy Zhang and Lu Sun said in a note on Wednesday.|

Indeed, the shares finally broke their losing streak on Friday, with ICBC gaining 2.4 percent in Hong Kong and China Construction Bank Corp. up 1.8 percent. Both stocks were up more than 1.2 percent in Shanghai, outperforming the benchmark.

Bullish Case

Bond defaults, while on the rise, remain contained. Financial stress has yet to affect loan repayments, according to the CICC analysts. And the larger banks lend mostly to China’s lumbering state enterprises, which are less export-oriented than smaller firms and so not as badly exposed to a trade war.

“The banks’ good fundamentals remain unchanged,” argues Chen Shujin, chief financial analyst at Huatai Securities Co. in Hong Kong.

In terms of return on equity, China’s banking giants still outpace their U.S. peers, though the gap has been narrowing as the Federal Reserve hikes rates and as Chinese lenders bolster their capital. Chinese banks have traditionally enjoyed better ROE due to the slow pace of interest rate deregulation and relatively low capital buffers.

Analysts Still Bullish on China Banks Despite Stocks Battering

In another measure of the battering received by Chinese banks, shares in ICBC are trading at a discount of more than 40 percent to JPMorgan Chase & Co., despite the higher ROE, according to data compiled by Bloomberg.

Analysts Still Bullish on China Banks Despite Stocks Battering

“Chinese banks are a good buy now because the valuations are low and the country’s economy isn’t deteriorating,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co. “How long this slump will last largely depends on the overall market sentiment, which is dragged by concerns over the trade war and depreciating yuan.”

To contact Bloomberg News staff for this story: Alfred Liu in Hong Kong at aliu226@bloomberg.net;Jun Luo in Shanghai at jluo6@bloomberg.net

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With assistance from Editorial Board