World Economy

Gains in China Banking Stocks to Continue

Gains in China Banking Stocks to ContinueGains in China Banking Stocks to Continue

Traders are rerating Chinese banks, betting that the nation’s steady economic recovery will fuel a rally in the stocks that are cheaper than global peers by major valuation metrics.

Shares of the Industrial and Commercial Bank of China, and China Construction Bank, the nation’s two biggest lenders, and China Merchants Bank rose to their highest levels in a decade this week in Shanghai, while the stocks of Agricultural Bank of China set a record high, Xinhua reported.

Moreover, China’s first uptick in full-year economic growth in seven years and Chinese bank shares trading at a discount to global counterparts are a signal to investors that the stock boom will continue.

“The quality of the banks is improving and valuations are cheap,” said Wang Chen, a partner at Xufunds Investment Management, in Shanghai. “That is a very good combination for asset allocations. Judging by valuations, the banking stocks have the potential to rise further.”

China’s listed commercial banks are valued at an average of 1.14 times their book value compared with 1.37 times for the global lenders, according to data compiled Bloomberg. In terms of price earnings ratio, Chinese banks are half as expensive as their global counterparts, the data showed.

The sector has been long in the doldrums, with the stocks trading close to or even below their book values for most of the past decade. China’s slowing growth, coupled with dwindling external demand and excessive output in industrial products from coal to steel, prompted investors to sell the stocks fearing a rise in bad loans.

Now, investors are re-gauging the approach on how they value banking stocks. Gains in the sector have been accelerating this year on expectations that an uptick in China’s growth and a cutback in overcapacity will bolster earnings by curbing non-performing loans. The nation’s economic expansion quickened to 6.9% last year, the statistics bureau said on Thursday.

ICBC has gained 15% in Shanghai this year, taking its price to book ratio to 1.27 times, and China Construction Bank has climbed 18%, trading at 1.36 times book value. China Merchants Bank and Agricultural Bank have advanced at least 12%.

 “It is time to reassess China’s banking industry,” said Xiao Feifei and Ran Yuhang, analysts at Citic Securities, the nation’s biggest listed brokerage.

BOC International said Chinese banks’ earnings growth would probably increase to 7.7% in 2018 from 5% a year earlier, and the current stock prices were undervalued as the valuations take in the risk of more bad loans.

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