Positive on China’s banks
Perhaps the dominant theme running through our recent China banking reports is cautious optimism. At base, China’s economic prospects for the year ahead look positive, with CICC’s macro team raising its economic growth forecasts for this year and next. The team expects nominal GDP to grow 0.4ppt and 0.7ppt to 10.9% and 10.9%, and think a hike in the benchmark interest rate hike of 25bps is likely sometime in 1Q or 2Q.
This should boost net interest margins at listed banks and profit growth, while a steepening yield curve during the second quarter would also be welcome news for banks, currently struggling with heavy debt even while having to adjust to tightening regulations.
Historical experience elsewhere suggests that China’s banks may have been undervalued. Consider the macroeconomic situation facing the US economy in the 1990s. The country was just emerging from a decade where the twin impact of the savings and loan crisis and Latin American debt crisis had seen US nominal GDP growth fall from 13% in 1980 to just 3% in the early 1990s. By contrast, China’s banks are still trading at below book value.
Are China’s banks undervalued?
Following four successive quarters of falling NPLs in China’s banking sector, stabilized growth of nominal GDP since 2016, and assuming the country doesn’t suffer an economic setback or excessive liquidity tightening, we think reasons to be upbeat about the country’s banks this year are pretty compelling. We expect listed banks’ net profits to grow 5.1%, 7.2% and 8.2% over 2017, 2018 and 2019, with ROAA stabilizing at 0.9% and the decline in ROAE to slow.
For more information, please refer to the report Expecting interest rates rise once; Chinese banks to benefit published in January 2018.
