HSBC Says Bank of Communications Is Worth More Than $100 Billion

(Bloomberg) -- If HSBC Holdings Plc is right, one of China’s largest banks could be worth twice its current market value.

Bank of Communications Co., China’s sixth-largest lender by assets, has a market capitalization of just over $50 billion. HSBC, the second-largest shareholder of Bocom after the Chinese government, thinks the business is worth more than $100 billion, according to its latest corporate filing.

The gap underscores investors’ skepticism over the plight of Chinese banks, which are grappling with the potential for a surge in bad loans as the coronavirus outbreak grounds most activities and pummels the economy. Big Chinese lenders have long sacrificed profits in the name of national service, and that prospect has become increasingly worrying as they are called upon to bail out smaller businesses and even weaker peers.

Bocom’s shares have lost 6% this year in Hong Kong after a 9% decline in 2019. Bocom now trades at only 0.46 times its estimated book value for 2020, according to data compiled by Bloomberg.

Yet in its annual report published this week, HSBC said that though the fair value placed on its 19.03% stake in Bocom was just $10.1 billion, its internal models valued the holding at $21.5 billion. HSBC’s calculation implies a valuation for the Shanghai-based bank of about $113 billion, more than double its current market value.

HSBC said that its valuation of the stake had been above the market for the past eight years leading it to carry out an impairment test to confirm it didn’t need to write down the value.

“Our discussions and focus on assumptions was driven by consideration of the current levels of uncertainty due to the impact of China-U.S. trade tensions, and the overall outlook for the Chinese banking market, and the broader Chinese economy,” HSBC said in its annual report.

HSBC’s interest in Bocom goes beyond just its financial holding. Under an agreement between the two banks, it operates a technical cooperation program involving the secondment of its staff to the Shanghai-based lender to help with what its says is the “maintenance of Bocom’s financial and operating policies.”

HSBC intends to maintain its long-standing partnership with Bocom and has no plans to sell or increase its stake, a spokeswoman in Hong Kong said in an email.

Investors are turning more downbeat on the Chinese banks, whose shares have underperformed the benchmark in most of the past five years. The “big six” state-owned lenders, which together control more than $17 trillion of assets, currently trade at an average 0.58 times their forecast book value, near a record low.

--With assistance from Alfred Liu.

To contact Bloomberg News staff for this story: Harry Wilson in London at hwilson57@bloomberg.net;Jun Luo in Shanghai at jluo6@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Jonas Bergman, Katrina Nicholas

©2020 Bloomberg L.P.

With assistance from Bloomberg