Bad news mounts for Chinese banks

The twist: Some investors are getting more optimistic, not less, about the outlook for the industry’s shares

China’s banks, already saddled with mounting bad debt, face the risk of sagging profit growth after an interest- rate cut slashed their margins on loans.

The twist: some investors are getting more optimistic, not less, about the outlook for the industry’s shares.

Victoria Mio, chief investment officer for China at Robeco Hong Kong Ltd, said on November 21 that bank stocks were very attractive because they were priced at levels that assumed an economic “hard landing.”

Hours later, the People’s Bank of China cut the one- year lending rate by 0.4 percentage point and the one- year deposit rate by 0.25 percentage point. Afterward, Mio said sustained monetary easing may drive an economic rebound and a jump in banks’ share prices. She was “more positive” on the stocks.

Industrial & Commercial Bank of China Ltd led banking shares higher in Hong Kong, closing up 2.4 per cent, the biggest gain in more than two months. Chinese banks are trading at an average 4.8 times estimated earnings for this year, the lowest globally for lenders with market values of more than $ 10 billion ( Dh36.7 billion), according to data compiled by Bloomberg.

Another fund manager, Baring Asset Management Ltd’s Khiem Do, said he was “still bullish” on banks after the rate move and that dividends of more than six per cent would become even more attractive as interest rates fall.

“You tell me which banks in the world are paying out this yield, and making money, and working in an environment where the economy is growing at about seven per cent per annum,” he said earlier by phone. Do helps oversee about $ 60 billion as Hong Kong- based head of Asian multi- asset strategy.

Ma Kunpeng, a Shanghaibased analyst at Sinolink Securities Co, has a buy rating on the industry. He said banks’ share prices have fallen even when earnings have exceeded expectations because investors have focused more on “perceived risks” than profits.

Chinese banks’ profit growth may slide next year by 10 percentage points to zero or turn negative as net interest margins contract, according to China International Capital Corp.

In an additional source of pressure, the central bank fuelled competition between lenders by raising the cap on the interest they can pay customers to 120 per cent of the benchmark for deposits from 110 per cent.