Value Hunters Are Homing In on China's Unloved Bank Stocks

(Bloomberg) -- Value chasers are paying more attention to China’s unbeloved banking stocks after the government softened its deleveraging drive.

Spurned for months, they’ve been some of the biggest beneficiaries of China’s coordinated efforts to mitigate growing risks to its slowing economy. The policy shift triggered a 6.8 percent rally in the country’s largest lenders over four days through Wednesday, putting Industrial and Commercial Bank of China Ltd. and China Construction Bank Corp. on course for their first monthly gain since January.

Evidence of a liquidity squeeze this year and a tougher regulatory environment had clouded the outlook for banks, taking their shares to the cheapest since 2014 relative to a benchmark of global lenders. Despite the recent bounce, the risks mean banks still trade below the value of their assets on average, a valuation that stands out as China refocuses policy on boosting demand. Citigroup Inc. analysts predict multiples will rise.

“Banking stocks are pricing in such a negative scenario that the risk-reward is quite favorable,” said Felix Lam, a fund manager at BNP Paribas Asset Management in Hong Kong. “Authorities have a lot of tools at their disposal if the environment turns sour again.”

Banks have languished in a bear market since May. They make up 17 percent of the CSI 300 Index, the largest industry group, and generate the majority of the profits. Analysts have yet to change their tune: the 21 lenders on the CSI 300 have average rating of 3.97, where 5 is the highest, according to data compiled by Bloomberg. That’s the second-lowest rating among the 23 industries on the benchmark.

Steps taken by policy makers in July have started to lift the mood. China’s central bank told some banks on Wednesday that a specific capital requirement will be eased to support lending. That was just days after it made a record injection of longer-term funding available to commercial banks, and followed its looser-than-expected rules for the asset management industry. Analysts also predict more cuts to the reserve-requirement ratio this year.

To be sure, Thursday’s 0.6 percent drop in the CSI 300 Banks index suggests investors are still cautious. The government is clearly still committed to reducing risk in the financial system, a transition which for banks may take years. Skeptics also say that China’s policy tweaks won’t immediately alleviate tightening credit conditions.

“The rebound earlier in the week is overdone,” said Dai Ming, Shanghai-based fund manager with Hengsheng Asset Management Co. “People bet on policy easing and a liquidity boost, but that takes time to materialize and authorities have said it’s not going to be an aggressive stimulus.”

For now, all eyes are on whether lending data shows that bet will pay off. While China’s broadest measure of new credit expanded in June, that followed a slump in May which had taken it to the lowest in almost two years.

The policy tweaks “indicate a shift towards a more ‘pragmatic’ regulatory environment, which may help ease the headwinds,” China International Capital Corp. analysts including Shuaishuai Zhang wrote in a July 25 note. They have buy ratings on almost all Chinese banks in their coverage, data compiled by Bloomberg show.

©2018 Bloomberg L.P.