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As China Slows, Bet on Banks as Defensives: Analyst

CNBC.com
Monday, 30 May 2011 | 10:59 PM ET

As China's economy cools, hurt by tighter liquidity, one analyst is recommending buying the big banking stocks, which have traditionally been highly cyclical, as defensive plays.

The Big Bank Debate; Australia Versus China
Tom Quamby, Director, Regional Banks Sector, Asia Ex-Japan at Barclays Capital says Chinese banks are attractive because of their abundant liquidity and earnings certainty, but Paul Dowling, Principal Analyst at East and Partners argues that Australian banks have been generating record profits with little downside risk.

Tom Quarmby, bank analyst at Barclays Capital, told CNBC on Tuesday, the high level of regulation for China's banking sector will deliver a steady stream of earnings rather than spectacular growth.

"I would say the Chinese banks at any mild slowdown are very defensive, but they do still give you some leverage and strong earnings growth — 20, 30 percent earnings growth in an economy growing at 8 percent," Quarmby said.

Quarmby believes China's big banks have "abundant liquidity", and therefore will be unaffected by increases in the reserve requirement ratio (RRR). Instead, he said, the banks have plenty of room to increase lending.

"Loan-to-deposit ratios in China are around 60 percent, which means not all of the borrowing capacity of the banks is being utilized."

Barclays Capital also expects the bigger banks to benefit from higher profits because of lending to the consumer sectors, where margins tend to be better, as well as from fee income, which Quarmby says is relatively underdeveloped in China.

Asked about concerns the banking sector faced a major risk from a property bubble in the country, Quarmby shrugged them off.

"The underwriting standards in China are very good. We are seeing a huge amount of homebuyer equity into the market. The banks are being very disciplined in how they are lending." Turnover, he noted, was low and property speculation not as widespread as generally thought.

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