Expect At Least 15% Upside for China’s Top Banks: Analyst

There's strong upside potential for China's mega lenders, says May Yan, Director and Head of China Banks Research at Barclays Capital, citing their strong fundamentals. She expects shares Industrial and Commercial Bank of China (ICBC), the country’s biggest bank, to gain 15 percent in the next 12 months, with a price target of HK$7.40.

According to her, banks such as ICBC have high capital adequacy ratios and strong deposit franchises, rendering them less susceptible to potential regulatory overhang. In recent months, the Chinese banking authorities have imposed measures such as high loan loss reserve and high capital adequacy requirements to clamp down on excessive lending.

Yan isn't the only one bullish on ICBC. Among analysts polled by Thomson Reuters, 16 of them have a "buy" on the stock, while 12 gave it an "outperform" rating.

Besides ICBC, she also likes China Construction Bank (CCB) and Bank of China (BOC), for the same reasons. Yan has a 12-month price target of HK$8.70 on CCB, and a HK$5.20 target on BOC, both suggesting a 20 percent upside from current levels.

On Wednesday, ICBC posted a better-than-expected 28 percent rise in 2010 net profit. The earnings were boosted by growth in lending and expanding margins, which Yan expects will continue for the lender.

Yan also highlighted rising interest rates were a "positive for most, or all of the Chinese banks" as these banks have "extra excess liquidity because of the low loan-to-deposit ratio".

ICBC's loan-to-deposit ratio stood at 62 percent in 2010. A low ratio means banks have higher deposits, and theoretically this would allow them to extend more loans.

While there have been concerns that China's moves to battle asset inflation could be negative for the banks, Yan says it is a positive in the long term.

"With all these control measures in place, it's going to be preventing a bad asset bubble, and it's going to be good for asset quality for banks."

Disclosure: May Yan and Barclays Capital do not have holdings in ICBC, CCB and BOC.