Date
13 November 2018
Top Chinese lenders are likely to perform better than smaller players as the sector goes through further deleveraging. Photo: Reuters
Top Chinese lenders are likely to perform better than smaller players as the sector goes through further deleveraging. Photo: Reuters

Are Chinese banking counters good bets?

US billionaire Warren Buffett was able to achieve strong investment returns last year as his portfolio had high exposure to financial stocks, some analysts have pointed out.

Banking stocks certainly outperformed in the United States in recent years. Now, what about Chinese financial counters?

As China’s economy bottomed out in 2016, the nation’s banks saw their share prices more than double from the trough.

China posted 6.8 percent GDP growth in the first quarter of this year, indicating that the risk of hard landing is becoming rather remote.

If the positive macro-economic trend continues, banking counters stand a good chance of getting further revaluation.

So how should investors choose among different bank shares?

Amid a continuing deleveraging process, bigger banks appear to be better choices, because Chinese state-owned enterprises and government agencies typically keep their money with the biggest lenders, keeping the funding costs of these top banks down.

By comparison, smaller banks often have to borrow from the interbank market to fill funding gaps, leading to higher interest expenses.

The interbank lending rate is set to rise further amid deleveraging efforts. Big banks with larger deposits pool are hence likely to perform better than smaller banks.

Bigger banks also have the advantage of being less sensitive to the performances of specific regional economies or a few major clients. Whereas in the case of smaller lenders, their financials could worsen notably if certain key customers get into trouble. Such risk is particularly pronounced amid a deleveraging environment.

Wealth management revenue is another factor investors should consider.

Technology is threatening the banking industry and hitting banks’ income from businesses such as money transfer and payments. But wealth management is still relatively intact.

Banks with stronger wealth management businesses may see better growth prospects.

This article appeared in the Hong Kong Economic Journal on May 16

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Columnist at the Hong Kong Economic Journal

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