Financials

Big Chinese Banks Still a Buy Despite Tightening: Analyst

CNBC.com
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Beijing’s moves to clamp down on bank lending in a bid to contain inflation have sparked concerns about the backlash on lenders. But Lorraine Tan, Vice President of Standard & Poor's Equity Research, remains bullish on the big financial firms, citing their capital strength and cheap valuations.

Pedestrians walk past a branch of the Industrial and Commercial Bank of China (ICBC) in central Beijing.
Teh Eng Koon |AFP | Getty Images

Tan expects lenders like China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC)   will continue to do well even as China’s annual economic growth slows to 8-9 percent.

“It's going to be enough to generate corporate earnings growth of let's say 10 percent to 15 percent, so it's still not too bad,” Tan told CNBC on Tuesday. “ I think you also have a situation we think yeah, definitely there is still going to be risk of a recession, definitely in Euro zone… we're generally going to see sluggish growth coming out of the states, but it is going to be enough to keep things on a growth pattern.”

Both ICBC and CCB have Tier 1 capital ratios around ten - higher than the eight percent required of major banks operating internationally under Basel requirement – which Tan says will be “supportive of their activities going forward."

Shares of both banks also look "attractive" on valuation grounds, says Tan. ICBC currently trades at a price-to-earnings (PE) ratio of 7.5 while CCB trades at a PE of 7.

Tan isn't the only one upbeat on the two banks. According to a Reuters poll of analysts, 18 out of 38 analysts polled have a "buy" rating on ICBC and 12 have an "outperform". Meanwhile, half of the 40 analysts polled have a buy on CCB and 15 of them rated it as an "outperform".

Singapore Banks Also Benefit

According to Tan, the recent tight credit environment in China will also benefit lenders outside China, as domestic firms hungry for capital look beyond their shores for alternative sources of loans.

She recently upgraded Singapore's DBS to a buy, highlighting its strong loans growth, particularly from its Hong Kong operations. “And that's directly related to the activity and the requirements obviously for liquidity in China,” she said.

DBS’ recent third-quarter earnings were boosted by a 26 percent rise in lending, and loans from the Greater China region in September alone made up about a third of the bank's total loan portfolio. "That's been a big boost to profits...We are seeing banks in Singapore benefit from increased loans demand from Chinese companies, due in part to the tight liquidity in China."