Goldman Likes China Banks as Earnings Growth to Exceed Market

Investors should buy Chinese banks as earnings may beat projections for the MSCI China Index while reforms to interest rates fail to crimp profit margins, according to Goldman Sachs Group Inc.

Chinese lenders may have high single-digit earnings growth this year compared with Goldman Sachs’s 4 percent estimate for companies in the MSCI China Index, Helen Zhu, the bank’s chief China strategist said yesterday. A measure of financial companies that accounts for 40 percent of the MSCI China has slumped 13 percent this year through yesterday, compared with a 35 percent surge by information-technology shares and 17 percent rise by utilities.

Chinese listed banks may see net-income growth slowing to around 8 percent this year, the official Xinhua News Agency reported yesterday, citing a report released by the China Banking Association. While the People’s Bank of China scrapped a floor on borrowing costs on July 19, the central bank said the country isn’t ready to do the same with a cap on what banks can pay for deposits.

“We’re looking for banks’ earnings to grow faster than the overall market-earnings growth this year,” said Zhu. Banks’ preparation for a cyclical downturn, sufficient coverage ratios and a slower loosening of interest-rate controls for deposits may support their earnings, she said.

Expectations that deregulation of rates would compress net interest margins -- the difference between what banks pay for deposits and charge for loans -- may be misplaced, Zhu said. Lenders hadn’t previously taken advantage of leeway they had to charge less, suggesting that even more freedom won’t translate into lower profit, she said.

Lending Statistics

In the first quarter of 2013, about 11 percent of bank loans were made below the benchmark rate, and about 64 percent above it, PBOC data show. The central bank currently sets the one-year lending rate at 6 percent, with a one-year deposit rate of 3 percent, which banks aren’t allowed to exceed by more than 10 percent.

China’s two biggest lenders, Industrial & Commercial Bank of China Ltd. (601398) and China Construction Bank Corp. (939), reported first-quarter profit growth of 12 percent and 16 percent, respectively, while net income at the third- and fourth- largest banks increased 8.2 percent.

The four largest lenders, which include Agricultural Bank of China Ltd. (1288) and Bank of China Ltd. (3988), traded at 5.21 times estimated earnings on average, compared with their five-year average of 8.24 times and MSCI China’s 11.6 times.

Goldman’s 12-month forward target for MSCI China is 59, according to Zhu. That’s 3.5 percent higher than yesterday’s close. The target for the Hang Seng China Enterprises Index (HSCEI) is 10,200, a 5.5 percent increase from yesterday. Previous targets for the indexes were 69 and 12,400.

“The key driver of the trend is not going to be beta but it’s going to be alpha, it’s going to be looking for structurally appealing areas and stocks that will have reform-driven upside,” Zhu said. “A lot of these potential reform impacts are not currently reflected in the earnings consensus so we see a lot of opportunity for earnings to be revised.”

To contact the reporter on this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at

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