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source from：barron's
INTERNATIONAL TRADER - ASIA
The Best Chinese Bank Stocks to Buy Right Now
After a big rally, Nomura suggests tightening buying focus to ICBC, CCB, and BOC Hong Kong.
By DANIEL SHANE
Updated April 8, 2017 12:51 a.m. ET
A worker at Industrial and Commercial Bank of China Ltd in Shanghai Agence France-Presse/Getty Images
It’s time to get picky about China’s big bank stocks. in just under a year, shares in the Middle Kingdom’s state-owned lenders have gained almost 40%, including dividends. That rally came despite near-nonexistent earnings growth and shrinking net-interest margins, a key financial metric that squares interest received from borrowers against that paid to depositors.
For an explanation, look to the recent enthusiasm over the health of the world’s second-biggest economy. That’s backed up by cold, hard data. For example, both producer price inflation and the local purchasing managers index are ticking up at a fairly healthy clip, signalling a recovery in profits for China’s huge industrial and manufacturing sectors. That has been pushed along by structural reforms to curb production overcapacity in the economy.
For investors, this newfound discipline has raised hopes that Chinese banks are finally about to get on top of the gargantuan issue of nonperforming loans. By the gloomiest estimates, up to 15% of outstanding loans in China are troubled. But better corporate earnings should provide an inflection point, as borrowers hopefully find themselves in a stronger position to cough up cash. Reflation has also seen lending rates tighten, paving the way for deleveraging. Beijing has recently indicated that it’s willing to stomach a slightly slower pace of growth and has made tackling debt risks a top policy priority.
The stocks remain cheap. A decade ago, they traded on average at almost five times their forward book value, points out Nomura. And today? Even after their rally, China’s big lenders trade for less than forward book value on average. At current prices, dividend yields are chunky, too, often 5% or more.
Still, investors should do their homework before piling into this trade.
NOMURA’S TOP BUY for the sector is Industrial & Commercial Bank of China (ticker: 1398.Hong Kong), which could have 40% upside. China’s biggest bank benefits from robust net interest margin and an improving capital position. ICBC pays a 5% dividend and trades at a 20% discount to book value. No. 2 in the broker’s pecking order is China Construction Bank (0939.Hong Kong), even if its current target price suggests a modest 5% upside. The lender’s stock has been the top performer among the so-called Big Four of Chinese banking. CCB’s asset quality is getting better, and profits are good. It’s another stock that pays a big dividend, too.
Among Nomura’s Sells are Bank of China (3988.Hong Kong), which has the weakest net interest margin among China’s big lenders. The bank recently missed analysts’ earnings estimates for the financial year, as BOC provisioned more for future loan losses. Investors should give Bank of Communications (3328.Hong Kong) a wide berth, as pressures from nonperforming loans look set to rise. China Merchants Bank (3968.Hong Kong), another Sell, has seen its capital ratio dwindle lately. Agricultural Bank of China (1288.Hong Kong) and China CITIC Bank (0998.Hong Kong) are also no-gos.
A wild card is BOC Hong Kong (2388.Hong Kong), the Hong Kong and international arm of Bank of China. The city has its own currency, which is pegged to the U.S. dollar, and follows U.S. monetary policy. The bank’s asset quality is good, and further interest-rate hikes stateside should expand its net interest margin. Investors should consider a deposit in this stock.
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