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China Banks 'Money Machines', Fears Overdone: Analysts

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The selloff in Chinese banks over concerns over their non-performing loans (NPLs) and a potential hard landing for the mainland economy is overdone, a number of banking analysts told CNBC on Wednesday.

“(They) will have some setbacks but these banks are money machines,” Jim Antos, bank analyst at Mizuho Securities.

Even if China’s economy experiences a hard landing, Antos said he didn't expect a major deterioration of non-performing loan (NPL) ratios because banks had a lot of latitude on how they handle NPLs.

Separately, analysts said China had strong political reasons to prevent the problems in the shadow banking system from impacting the Big Four lenders, namely Bank of China, China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China (AgBank).

“A lot of the banks have essentially ring-fenced themselves from these risks over the past 18 months and the CBRC, the banking regulator, has essentially put a divide between the banks and some of these trust companies last year, so the amount of collaboration between these two entities is on the decline over the past 12 months or so,” said Mike Werner, senior equity analyst covering Chinese and Hong Kong banks at Sanford C. Bernstein in Hong Kong.

Werner believes these lenders are likely to post stellar results in the third quarter. Agbank and Bank of China will kick-off earnings on Wednesday after market close.

May Yan, director and head of China banks research at Barclays Capital, expects the net interest margins to moderate over the previous quarter but, she said, profit growth will still be good, with the NPL ratios decreasing. She foresees the NPL problem worsening only in the second-half of 2012 or 2013.

Yan said there was value in the sector and recommends buying ICBC and CCB.

“This week’s earnings would prove to be short-term positive through this earnings week, enabling banks to outperform the market but after that, the medium term concerns on asset quality, equity raising and a bunch of other things will likely come back,” Yan said. ”So maybe, a more sustained rally, if there is, will be next year in the first half.”

Mizuho's Antos said investors could trade in and out of the stock, given the current valuations and long-term concerns.

“Right now, you could trade in and trade out. Make sure you have your exit price in mind if you buy any shares today," he said. "The point is that global recession and those macro fears are going to reassert themselves next year."

"But I do think over the long term… especially ICBC and CCB, (if) you could put your money there (and) hold it for a likely period, you are going to make money,” he added.

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