China's banks – and its shadow sector – may have spooked investors, but some analysts are starting to see them as a safe investment bet.
When it comes to the country's larger banks, which make up 50 percent of the industry, "they are absolutely fine from the credit stand point," said Ritesh Maheshwari, managing director at Standard & Poor's.
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"If there is any government which can actually manage from the high investment proportion to a consumption-led economy, I think China stands a very good chance, and that's what we are betting on," Maheshwari told CNBC last week. "You end up taking bigger risk, but then you end up getting better returns as well."
China's banking shares certainly appear cheap, trading at 4.6 times 12-month forward earnings, compared with a long-term average of 10.8 times, according to data from Nomura. Consensus expectations are for earnings per share to grow 10.1 percent in 2014, the data show.
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"You're going to see some news coming out of China during this year of banks struggling on liquidity, on asset quality, but that doesn't mean the whole system is going to collapse. And that's where we need be discerning," Maheshwari said.
Out of a top-50 bank survey, "the top 10 are much, much better than the others," he said. "The risks in China are with the smaller banks -- the city banks, the provincial banks, which have taken some not so healthy credits."
Others have also noted the potential for returns amid low valuations.
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"Chinese debt levels are rising too fast and the growth of its shadow banking sector poses risks. However, providing the authorities continue to gradually try and slow both down the risks should be manageable," Shane Oliver, head of strategy at AMP Capital, said in a note last week.
He noted the market as a whole trades at around 7.5 times forward earnings. "This makes it one of the cheapest share markets globally and suggests good returns in the years ahead as Chinese growth remains solid," he said.
He also expects the risks of China's shadow-banking system are likely manageable, partly because it is relatively small, with its total amount only equal to about 30 percent of banking sector assets, compared with more than 50 percent in the U.K., Brazil, South Korea and the Eurozone and more than 100 percent in the U.S.
"Chinese shadow banking companies like trusts are not particularly leveraged, cross holdings of assets between institutions is low, products are very simple and securitization (or the repackaging of loans and on-selling them) is virtually non-existent," Oliver said. "This all serves to limit counterparty risks and contagion and stands in stark contrast to the problems that arose in the U.S. with subprime debt."
Some believe the risks in China's banking system may be exaggerated.
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Daiwa said it is more confident that the consensus view on the outlook for banks' profitability and asset quality.
"The sector's provision coverage (283 percent at the end of 2013) provides a buffer for a 3-4 times increase in non-performing loans," it said in a note last week.
Goldman Sachs also noted that the potential for an increase in bad loans may be on the wane, citing improving corporate profits and profitability.
"Corporate profits have turned around since last year as cyclical demand improved, and the share of companies with repayment difficulties has moderated slightly," Goldman said in a note. "Some of the very weak firms (in sectors with overcapacity) are either being shut down or have received fiscal support, with a reduced need for financial resources."
To be sure, while China's banking sector may offer longer-term investment gains, the ride could be rocky. China-listed banking shares lost ground in Monday trade after local media reported that some banks started to tighten loans to steel, cement and other property-related sectors. Reuters reported several banks have issued denials.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter