HONG KONG—Shares of China’s private banks have plunged this year as the country’s property slump began to take its toll.
shanghai listed stocks
Ping An Bank Ltd.
— Two of China’s largest and most prominent private lenders — have fallen 32% and 25% respectively since early 2022, wiping out $68 billion from their combined stock market value.
The decline is just the latest sign of the problems a slowdown in the real estate sector is having for the economy as a whole. The two-year deleveraging campaign will Damaged Chinese property companyIt has caused a liquidity squeeze, leading to defaults by developers, suspension of ongoing construction projects and a significant drop in new home sales. again, fueled a boycott among some homebuyers People who are refusing to pay their mortgage.
This is bad news for Chinese banks, but the impact on China Merchants Bank and Ping An Bank will be worse than on the largest state-owned banks, said Kenny Ng, securities strategist at Everbright Securities International. Falling real estate asset values will slow down their mortgage business and hit wealth management products the two banks sold to customers, he said.
China Merchants Bank and Ping An Bank shares have easily outperformed the country’s big state-owned banks over the past five years. We are betting on digital banking to boost retail. But analysts warn that privately owned commercial banks will find it more difficult to find new sources of business in China’s slowing economy.
“The biggest problem facing the Chinese economy is not liquidity,” Ng said. “Banks have ample liquidity, but consumers and investors are unwilling to borrow from banks to spend or invest. This shows a lack of confidence.”
China’s “big four” state-owned banks—
— Stock markets have fared much better this year, bucking long-term trends. Year-to-date, it has fallen an average of 4.9%.
This is because giant state-owned lenders have less exposure to the real estate sector. According to Macquarie, real estate companies account for only 4% to 5% of total loans, with Merchants Bank and Ping An Bank each tying 7.2% and he 9.4% to real estate.
But another major reason is that as the Chinese economy struggles, state-owned banks can find other options than providing loans to developers. Vincent Zhang, a China strategist at Aletheia Capital, said lending could shift from mortgages to large-scale infrastructure loans.
Private banks already trade like state-owned banks according to their price-to-book ratio (a measure of how expensive a stock is to a company’s book value). Because bank earnings can fluctuate, investors and analysts often use price-to-book ratios as a way to compare bank stocks.
As of the end of 2021, China Merchants Bank and Ping An Bank were trading at futures stock indices of 1.49x and 0.88x respectively. Those numbers he dropped to about 0.92 and 0.61 by Aug. 26, according to FactSet. This is still a significant premium for the Big 4, all trading below 0.50.
“How long will the gap continue to close before stabilizing?” Mr Chan said. “If the Chinese economy remains in its current state, stock banks will struggle for a long time,” he said.
Chinese stock banks operate with a broader shareholding structure than state-owned banks. The term includes private lenders such as Merchants Bank and Ping An Bank, but also other government-controlled institutions.
Not everyone is so down on these companies. Elizabeth Kwick, investment director for Asian equities at abrdn, said commercial banks still have an advantage over state-owned giants, and that deserves to be reflected in share prices.
“Commercial banks tend to operate with a focus on returns and profitability. [and] They tend to have more say in their strategic direction,” she said. .”
But she added that China’s strict zero-corona policy will hurt private banks in the short term as they are exposed to more retail activity than state-owned lenders.
Ping An Bank said the impact of the real estate downturn on its retail business was small and manageable. The bank added that it has made efforts to reduce some product offerings, but said its wealth management business is still seeing strong growth. Ping An said he remains bullish on China’s economy, saying it “has huge market potential and we will see a resurgence of economic growth after the epidemic eases.”
China Merchants Bank did not respond to a request for comment.
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