Time to Buy Chinese Banks: Strategist

Chinese banks are "a good place to be," Emerson Yip, Greater China fund manager at JP Morgan said on CNBC.


While Yip acknowledged that there were long-term policy risks as China's economy "continues to evolve," he says in the short term, they are still his favored choice.

"I expect to see better than expected net interest margins (NIMs), both on the treasury side as well as the loan pricing side. Those will lead to better than expected results coming out in the third quarter."

Major Chinese lenders will turn in their report cards this week. Bank of China and Agricultural Bank of China report their third quarter results Wednesday, Industrial and Commercial Bank of China a day after and China Construction Bank at the end of the week. They are widely expected to post strong profits due to robust loan demand.

Concerns about banks' loans to local government infrastructure projects have eased in recent months. The Chinese Banking Regulatory Commission (CBRC) had earlier flagged 23% of these loans were in risk of default. But Yip countered that one had to look at the "quality of the individual lenders."

"Not all these loans are going to go bad in one go. Obviously these are going to be multi-year issues, and in the meantime the banks are still slated to post healthy earnings during the next few years, so that will more than compensate for this potential loss from these local government financing vehicles."

In terms of investing in Chinese banks, Yip advised distinguishing "between owning large banks versus owning small banks." He favors the larger lenders given their "greater capital sufficiency, and also the ability to track low cost deposits".

He also highlighted looking at banks' forward price earnings (PE) multiple, since "growth for this year has been well-flagged". He cautioned that there would be "concern for next year's loan growth target".

"There's been a lot of talk overall about China's economic growth slowing down, and a re-orientation towards consumption. And we need to be aware how that may affect the lenders loan growth because they may play a proportionately smaller role in the overall economy."

The standout, he said, in spite of all that, was China Construction Bank, based on its "NIM, but also in terms of the returns on equity, capital sufficiency".