For China Bank Stocks, The Bull Run May Be Over
SHANGHAI -- Odds are increasing that the high prices of Chinese bank stocks won't be sustained. One possible trigger: faster-rising interest rates.
Banks are the biggest investments in China available anywhere, particularly after the record-breaking $22 billion initial public offering by Industrial & Commercial Bank of China Ltd.
Banks and other financial companies account for much of the $90 billion in proceeds generated by the country's overseas IPOs in the past two years. And with run-ups in their shares last year, Industrial & Commercial Bank, Bank of China Ltd. and China Construction Bank Corp. rank among the biggest lenders in the world by market value.
The rise in bank stocks has exemplified a broad turnaround in China's stock markets, an extended rally that has gained international notice. The bull market for bank shares reflects investor optimism about China's overall economy and about improvements in the health of the country's financial system.
Yet, a vocal body of investors argues that the lofty prices reflect only the rosiest expectations, while ignoring some of the risks. Some investors are placing bets that financial shares will fall.
"Based on a two-year horizon, shorting Chinese banks is a no-brainer," said Andy Mantel, founder and chief investment officer of Pacific Sun Investment Management (HK) Ltd.
"There is a lot of bad news that should be in the prices but is not," Mr. Mantel said, including risks that lending will slow. Lending is critical because Chinese banks earn nearly all of their money on the highly regulated "spread," or difference, between lending and deposit rates.
Efforts by China's government to cool lending activity are nothing new, but analysts generally agree that the People's Bank of China will ratchet up interest rates. The central bank appears poised to raise rates for the second time this year -- and only the fifth time in a decade -- as authorities become more concerned the economy is overheating.
Such concerns have mounted since the government last week said that gross domestic product expanded by a higher-than-expected rate of 11.1% in the first quarter. Higher rates could make borrowing more expensive and lead to less demand for loans.
Zhang Jianguo, vice chairman of China Construction Bank, said last week that the bank's "credit growth may be held back to a certain degree" this year. He cited both the government's economic controls and increased competition from foreign banks.
China's financial shares trade primarily on two markets, Hong Kong and Shanghai. The Hong Kong exchange is far more internationally oriented and sensitive to the stock-picking recommendations of industry analysts who make global comparisons between markets. Pacific Sun's Mr. Mantel said the biggest Chinese state banks trade in Hong Kong at price-to-book ratios that make them a third to 50% more expensive than Asian and global peers.
On the Shanghai exchange, prices for essentially the same Chinese bank stocks are significantly higher still. The Shanghai market is mostly closed to foreign investors and driven by individual Chinese investors who have poured money into the few bank stocks available -- on the basis of scarcity value as much as fundamental analysis.
The Hong Kong-listed shares of China's top banks, after soaring late last year, fell early this year. But they have recovered some of their lost ground in recent weeks. Shares of Industrial & Commercial Bank, or ICBC, closed unchanged at 4.33 Hong Kong dollars (55 U.S. cents) in Hong Kong trading Friday. The stock has climbed 41% since it was listed in October. ICBC's Shanghai-listed shares have risen higher, finishing Friday ahead 1.9% at 5.32 yuan (69 cents), compared with the original offering price of 3.12 yuan -- a 71% gain.
Some analysts said there isn't any reason to worry about loan growth this year. They said that overall profits in the banking sector -- barring an external shock like a U.S. recession -- will expand 30% in each of the coming two years after rising roughly that much in 2006.
Simon Ho, an analyst at ABN Amro Holding NV in Hong Kong, calculates that the wide spread in interest rates -- banks pay 2.79% for a one-year fixed deposit and charge 6.39% for a one-year loan -- ensures strong profits.
Garry Evans, an equity strategist in Hong Kong for HSBC Holdings PLC, said "China's ongoing tightening is unlikely to have a significant impact on loan growth," which has averaged 15% annually. However, that doesn't mean he thinks the stocks are a "buy," because China's financial industry is "quite fully priced" and HSBC is, therefore, "neutral" on it rather than "overweight," as he is for the sector more generally in Asia.
Sensitivity to pricing was evident in the just-concluded IPO of midsize China Citic Bank Corp. The bank raised $5.4 billion for this week's simultaneous listing of shares in Shanghai and Hong Kong, but only after the maximum offering price was reduced about 5%.
In several cases, analysts are comfortable with the prices of the stock traded in Hong Kong but bearish about the Shanghai-listed shares of the same banks. Samuel Chen, an analyst for J.P. Morgan Chase & Co., is bullish about the stock price of China Merchants Bank Ltd. as it trades in Hong Kong, but is neutral on China Merchants Bank's Shanghai shares. The Shanghai price is lofty compared with the bank's potential earnings. The lender also faces challenges such as hiring enough talented staff to expand, said Mr. Chen.
From: Wall Street Journal, By JAMES T. AREDDY
Date: Monday 23, 2007 Back