Beijing Sacrifices Bank Profits in Campaign to Save Economy

(Bloomberg) --

Not even the cheapest shares in five years can lure buyers to China’s banks.

While investors this week balked as U.S. banks’ price-to-book ratio dipped below 1 for the first time since 2016, that’s been the norm in China for two years. On that valuation metric, Chinese financial firms are trading near the biggest discount since 2015 to the benchmark CSI 300 Index. Down more than 6% this year, the index of banks, brokers and insurers has underperformed most of China’s other industry groups -- bar energy and utilities.

Banks were left on the shelf even when a $1.3 trillion rebound in Chinese equities triggered a round of bargain hunting. At the heart of investors’ reluctance to embrace bank shares is the country’s latest stimulus drive: lower rates will eat into profits just as an increase in bad loans is due to test balance-sheet strength. A new benchmark underpinning the cost of one-year corporate and household loans has been cut three times in the past six months.

“There’s so much uncertainty facing this industry -- economic fundamentals, narrowing margins, as well as bad debt piling up from the virus outbreak,” said Liao Zhiming, chief banking analyst at Tianfeng Securities Co. “China’s retail buyers tend to like shares with more upside.”

The impact of the spreading coronavirus risks bringing to life the worst-case economic scenarios that could see a spike in bad loans and further squeeze bank margins. Last year’s stress test showed the bad loan ratio at China’s 30 biggest lenders would rise five-fold if annual economic growth slowed to 4.15%. Analysts now say first-quarter growth could be as low as 1.2%.

Banks, insurers and securities firms have all been told to do their part to help combat the virus outbreak. Banks were required by the People’s Bank of China to provide some firms with loans at preferential interest rates of no higher than 3.15%, with some as low as 2.4%. After operating expenses and potential bad loan charges, lenders may barely break even.

Trading in Bank of Jinzhou Co., one of several small banks in China that have come under extreme pressure from a slowing economy, was due to resume Wednesday after a three-month suspension. That’s after the bank said China’s government will inject about $1.7 billion to bolster its capital strength. But there were no recorded transactions as of 11:15 a.m. Hong Kong time.

All but five of the 24 banks on the CSI 300 Index trade at a price-to-book ratio that’s lower than 1, according to data compiled by Bloomberg. Bank of China Ltd. and Agricultural Bank of China Ltd. trade near a record low multiple of just under 0.7 and 0.8, respectively. Mainland-listed shares of Industrial & Commercial Bank of China Ltd., the 19th most valuable stock in the world, is trading at 0.85 book value.

By comparison, the ratio for JPMorgan Chase & Co. dropped to 1.2 from about 2 at the end of last year.

Chinese banks may get some help if China decides to adjust deposit rates for the first time since 2015, something authorities hinted at last month. Lowering rates on 175 trillion yuan ($25 trillion) of household and corporate savings would make lending more profitable. The industry’s net interest margin narrowed to 2.2% at the end of last year from 2.7% five years ago amid fierce competition for deposits.

For now, Chinese banks will most likely be required to sacrifice profits as part of Beijing’s push to save the country’s economy -- and its companies. After a record year of defaults in 2019, 17.25 billion yuan worth of bonds have defaulted onshore this year, up 5% from a year earlier, with high profile cases including the business arm of a top Chinese University.

“Banks have had to concede their ‘interest’ for the benefit of the real economy,” said Wang Jian, chief financial industry analyst at Guoxin Securities Co.

--With assistance from Mengchen Lu.

To contact Bloomberg News staff for this story: Lucille Liu in Beijing at xliu621@bloomberg.net;Zheng Li in Shanghai at zli698@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Fran Wang

©2020 Bloomberg L.P.

With assistance from Bloomberg