Untouchable in 2018, China Bank Stocks Are Now All the Rage

(Bloomberg) -- Most of the world’s best-performing bank stocks are now in China, a nation that’s barely started to recover from last year’s liquidity crunch.

After snapping up Ping An Bank Co., traders have turned their attention to its larger rival China Merchants Bank Co. The Hong Kong shares jumped 15 percent in nine days through Monday to an all-time high, the longest winning streak since 2007. It was also near a record in the onshore market Tuesday. The Shenzhen-based firm focuses on retail banking in China, a business that’s more profitable and less capital-intensive than lending to corporates.

Chinese bank stocks are making a comeback after surging bond defaults, souring loans and a home-grown liquidity crunch made them untouchable for most of 2018. A shift in government policy has outweighed concern over the slowing economy, with Beijing focusing on ways to boost growth rather than reduce financial risk.

China Merchants Bank stands out as it already has a strong capital position and has no urgent need for equity financing, according to Shujin Chen, chief financial analyst at Huatai Securities Co. in Hong Kong. Other banks -- including Ping An -- have been replenishing their buffers by issuing debt or equity.

“China Merchants Bank is a hot target," said Chen. “Its dividend payout is relatively assured, thanks to its strong capital and high return on equity.”

Some investors question if the strong performance can be sustained. The stock is down 1.9 percent in Hong Kong since its Monday peak, while the onshore shares have lost 2.4 percent.

Several brokerages including Credit Suisse Group AG, CCB International Securities Ltd. and HSBC Holdings Plc, have since March downgraded their ratings on the lender’s stocks. Bank of China International Ltd. was the latest to join the cuts on Tuesday. The proportion of sell ratings for its Hong Kong shares are at the highest since January 2018.

"Although the bank’s large base of high-quality clients now brings high investment income revenue, this may change with the trends," said Raymond Chen, portfolio manager at Keywise Capital Management Beijing Ltd.

The bank’s A shares now trade at a historical price-to-book value of around 1.8 times, while its listed peers change hands at only about 0.9 times, according to data compiled by Bloomberg.

Huatai’s Chen, who downgraded the Hong Kong shares to hold from buy two weeks ago after they became too expensive, remains upbeat on the firm’s long-term prospects.

"China Merchants Bank is one of the best banks in China in terms of corporate governance and risk control," she said. "It is also one of the best in exploring retail business, which has been a key growth area for China’s banking industry."

--With assistance from April Ma.

To contact Bloomberg News staff for this story: Ken Wang in Beijing at ywang1690@bloomberg.net;Sofia Horta e Costa in Hong Kong at shortaecosta@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Magdalene Fung, Ron Harui

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With assistance from Bloomberg