Main­land banks lose lus­ter in Hong Kong among in­vestors


A rally for Chi­nese main­land banks listed in Hong Kong has cut their price gap to main­land shares in half, and that seems to be about as much as in­vestors are will­ing to tol­er­ate.

In the five months through Septem­ber, a gauge of the big four lenders’ Hong Kong shares jumped 15 per­cent as south­bound cash poured into the stocks, trump­ing the Hang Seng In­dex’s 11 per­cent ad­vance. The bank­ing stocks are now giv­ing up some of their gains af­ter the dis­count to their Shanghai val­u­a­tions nar­rowed to the least in more than a year.

The de­clines sig­nal that price equi­lib­rium be­tween Hong Kong and main­land shares, a prospect that’s been burn­ing ar­bi­tragers for years, may still be a long way away. With in­flows into the city’s shares via a link with Shanghai dry­ing up and con­cerns over ris­ing bad debts weigh­ing on the sec­tor, a re­vival of the rally in Chi­nese main­land banks looks un­likely in the near term.

“Based on fun­da­men­tals, the sec­tor’s slow­ing. And there’s no big cat­a­lyst (to raise share prices),” said Pauline Dan, Hong Kong-based head of Greater China eq­ui­ties at Pictet As­set Man­age­ment, which over­saw about $154 bil­lion as of the end-2015. “Peo­ple are still con­cerned whether the non-per­form­ing loan cy­cle will de­te­ri­o­rate fur­ther or im­prove.”

China Con­struc­tion Bank

Iris Tan,

a Shen­zhen-based an­a­lyst at Morn­ing star Inc Corp recorded HK$33.4 bil­lion ($4.3 bil­lion) of net south­bound pur­chases in the five months through Septem­ber, while In­dus­trial & Com­mer­cial Bank of China Ltd lured HK$17.8 bil­lion of net in­flows. That helped the two stocks to jump 12 per­cent in Au­gust alone. Other com­pa­nies fa­vored by main­land buy­ers in­cluded HSBC Hold­ings Plc and Ten­cent Hold­ings Ltd.

The rally has sapped the rel­a­tive ap­peal of Chi­nese banks’s H shares.

CCB and ICBC have now fallen more than 6 per­cent from their Septem­ber highs, ex­ceed­ing the 5 per­cent de­cline by the Hang Seng In­dex.

“The val­u­a­tion gap is not very at­trac­tive,” said Iris Tan, a Shen­zhen-based an­a­lyst at Morn­ingstar Inc who is among the top three fore­cast­ers for five H-share banks. While there are still some op­por­tu­ni­ties in joint­stock lenders, like China Citic Bank Corp, “in­vestors tend to have a stronger pref­er­ence for large banks due to their strong de­posit base and much smaller shadow bank ex­po­sures,” she said.

Cau­tion over Chi­nese main­land banks grew fol­low­ing Postal Sav­ings Bank of China’s Septem­ber ini­tial pub­lic of­fer­ing, the big­gest world­wide since Al­ibaba Group Hold­ing Ltd’s in 2014.

With the help of State com­pa­nies that acted as cor­ner­stone in­vestors, the Hong Kong of­fer­ing was priced at at least one time book value, com­pared with the 0.87 av­er­age for H-share banks, ful­fill­ing a re­quire­ment that State firms’ IPOs be priced above net as­sets. De­spite hav­ing a larger re­tail client base and higher credit qual­ity than most of its peers, the stock has since plunged 9.5 per­cent.

While val­u­a­tions are lower in Hong Kong than Shanghai, the city’s bourse re­mains at­trac­tive for main­land firms due to a long queue for main­land IPO ap­provals. Zhongyuan Bank Co is plan­ning a $1 bil­lion first-time sale in the city, IFR Asia re­ported on Mon­day.

With main­land in­vestors curb­ing their ap­petite for main­land banks, global funds are un­likely to come to their res­cue amid con­cern over the na­tion’s $25 tril­lion pile of pub­lic and pri­vate debt.

In­vestors tend to have a stronger pref­er­ence for large banks due to their strong de­posit base and much smaller shadow bank ex­po­sures.”

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