BEIJING/HONG KONG - Chinese banks, despite reporting record earnings last month, have had a rocky ride on the Shanghai and Hong Kong stock markets lately, as investors balk at their plans to raise billions to shore up balance sheets after a 2009 lending binge.
Some say the months-long sell-off has created buying opportunities as shares trade at industry-trailing multiples, after bad news has been priced in.
Others argue the sector is overvalued and profits are peaking, making the shares a risky place to deposit money just as banks face the prospect of more souring loans.
Negatives factored in
China's top-three listed banks all posted record quarterly earnings over the last two weeks, but one would never know from looking at their stocks.
Hong Kong's HSI-Finance Index, in which Chinese lenders are key components, is down 11 percent so far this year, underperforming an 8 percent drop for the broader market.
Fund managers say the sector is set to rebound following China Construction Bank's unveiling of an $11 billion capital-raising plan last week. That announcement removed a long-time overhang from the sector, as CCB became the last of China's major banks to announce such a plan.
"Credit tightening, fund raising, or a fall in property prices, it's all been factored into the current share price," said Andy Lam, a strategist at Harris Fraser.
"When you look at all the indicators, like the P/E ratio, P/B ratio or return on equity, everything says it is cheap," he said.
Price-to-book ratios, a widely watched metric of bank valuations, now stand at 2 times for most Chinese banks, lower than other Hong Kong-traded banks, such as Hang Seng Bank, whose P/B exceeds 3 times.
Most analysts are bullish about the top three Chinese lenders, according to Starmine data.
All but three of 29 polled have "Buy" or "Overweight" ratings on CCB, the world's No 2 lender by market cap. Some 26 of 32 have similar ratings on Industrial & Commercial Bank of China, the world's largest lender by market cap, and 22 of 32 have favorable ratings on Bank of China, China's No 4 lender.
"We are bullish on the banking sector due to stable growth in both profits and assets," said Chen Xingyu, an analyst at Phillip Securities Research. "Stock prices have been falling for some time, valuations are looking good now.
'Bad mix'
Some worry about uncertainties many Chinese banks now face due to exposure to local governments that may have overspent under China's economic stimulus plan and the country's property sector that may be overinflated.
Beijing, wary of an asset bubble forming, has been trying to cool the soaring real estate market, raising mortgage rates and down payments for second homes buyers and pushing local governments to control speculative buying.
"The current outlook for Chinese banks is uncertain," said Patrick Yiu, a director at CASH Asset Management, which has more than $100 million under management. "If the property market turns bad or prices see a sharp pullback, that all adds to a bad mix for banks in China.
China's banking regulator is also planning to order banks to downgrade some loans, probably to a "special mention" category, to local government special purpose financing vehicles if the only collateral is local fiscal revenue.
Some researchers estimate that local government finance vehicles have borrowed more than $10 trillion and fret that many of the projects they are funding will never be profitable, saddling banks with bad loans."Initially it will be a blow to market sentiment," said UOB Kay Hian analyst Sheng Nan. "If the special mention loans deteriorate into non-performing loans, banks profits will be hit as well."
