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MNI: Slowing Economy, Credit Fears Weigh On China Bank Stocks
Narrowed interest margins and fears of official calls for banks already heavily-exposed to property and local government debt to do more to prop up a slowing economy are eroding investor confidence in China’s state-owned banks despite a government drive to lift their share prices, policy advisors and analysts told MNI.
A one-third rally by stocks in China’s lenders since November, when China Securities Regulatory Commission Chairman Yi Huiman called for a capital market “with Chinese characteristics” boosting the valuations of state companies, went into partial reverse in May, with the sector dropping by 1.85% compared with a 4.56% rise in April, according to Choice, a local data provider. Price-to-book ratios for state-run banks have stalled at about 0.5 in the A-share market, from a peak of above 8 in 2007, despite banks promising dividend yields as high as 6.6%, with about 30% of profits handed over to investors, and returns on equity near 10%.
Recent delistings of heavily-indebted real-estate developers have stoked concerns over banks’ assets quality, said Yin Zhongli, senior fellow at the National Institution for Finance and Development, adding that property-sector regulation and Federal Reserve monetary policy will drive China’s equity markets and investors should monitor mutual fund issue volume to assess sentiment.
A slowing economy and the fear that state banks will be called upon to support it are also weighing on bank shares, said an advisor to China banking authorities, who asked for anonymity. (See MNI: China Faces H2 Headwinds As Consumption Weakens)
In 2020, the government told banks to sacrifice as much as CNY1.5 trillion in profits and lower interest rates for small businesses and key sectors, and the memory of this has left investors wary, the advisor added. Still, so far this year authorities have not stated officially that banks should forego profits, whilst the phased withdrawal of some Covid support measures should benefit lenders, the advisor said.
Investors are also skeptical of official data showing low levels of bad loans, the advisor noted, given the heavy exposure of banks to property developers, mortgage borrowers and local governments.
Loans to the property sector and government total about 60% of overall bank credit, according to China Merchants Securities, which foresees credit expansion slowing to 5% over the next few years from the current 10%-plus as real-estate and infrastructure spending peak.
Investors are watching credit quality as the economy slows, and are keeping a close eye on debt that was deferred during the pandemic, said Lian Ping, chief economist at Zhixin Investment.
Banks’ net interest margins (NIM) are already being squeezed. Stated interest margin in Q1 dropped 23bp y/y to 1.74%, while large state banks suffered more at 1.69%, due to the reduction of loan rates and the rise in savings, particularly fixed-term deposits, according to a recent note from CMS. This resulted in a record-low rise in Q1 net profits of just 1.3%.
Lenders must have a net-interest margin above 1.68%, or they must tap wholesale markets to replenish capital, noted Wang Jian, bank analyst at Guoxin Securities. (See MNI: China Local Gov'ts Face Risks From Bank Recapitalisations)
Vivian Xue, director of the financial institutions group at Fitch Ratings, predicted interest-margin pressure will continue this year as prices of new and existing loans drop following cuts to the benchmark Loan Prime Rate in 2022. Interest rates on loans for targeted sectors – such as micro and small companies – have also also guided down, which will further weigh on net margins, she said. On the liability side, continuous deposit-rate cuts will be limited as competition rises and capital markets recover, Xue noted. Savings will grow more slower than in 2022, which will drive competition, she added.
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