World’s No. 1 Bank at Cheapest Ever Isn’t Enough to Lure BNP

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Industrial & Commercial Bank of China Ltd. shares have never been this cheap, and some analysts say there has never been a better time to buy. That’s not enough to win over fund manager Arthur Kwong.

Kwong, the Hong Kong-based head of Asia-Pacific equities at BNP Paribas Investment Partners, says discounts to net asset values and an unprecedented push by Chinese authorities to ease an equity-market rout don’t add up to reason enough to buy Chinese banks, because a slowing economy raises the prospect that they’ll be crippled by bad loans.

“We don’t like banks. They are trading really cheap, but I still don’t like them,” said Kwong, whose firm oversees about 552 billion euros ($624 billion) globally. “These banks, fundamentally, their balance sheets are very questionable.”

On Thursday, ICBC reported a second-quarter profit little changed from a year earlier as the company set aside more money for soured credit and its net interest margin contracted.

Kwong has company. Bearish bets on ICBC, the world’s largest lender by assets, surged from 0.03 percent of outstanding shares on June 29 to 0.39 percent on Monday, after last month reaching the highest level since September 2014, according to Markit data.

Investors’ lack of faith reflects mounting concern that President Xi Jinping will struggle to revive the economy as a stock slump drags down confidence.

Emergency Moves

China’s central bank made emergency cuts to interest rates and lenders’ reserve requirements on Tuesday night after almost $1 trillion of value was erased from the nation’s stock market in two days. For lenders like ICBC, the rate cut adds to pressure on margins, while helping to mitigate bad-loan risks.

The valuations of China’s biggest lenders are trailing below levels seen during the global financial crisis, and later, Europe’s debt turmoil. The five biggest average 0.76 times forecast book value in Hong Kong compared with 1.28 times for global banks with a market value of more than $10 billion. In October 2006, when it listed, ICBC was at 2.6 times. Now it’s at 0.81.

Investors like Kwong are focused on 15 straight quarters of increases in bad loans and they’re also sceptical that the published data give the real picture. Fitch Ratings Ltd. says that China’s nonperforming loan data -- 1.5 percent is the official industry level -- are unreliable because lenders shuffle debt off their balance sheets.

What Crisis?

The view of many analysts couldn’t be more different; they believe that investors are wrong to price the lenders as if a financial crisis was inevitable. Even before this week’s stock market meltdown, the gap between listed banks’ share prices in China and analysts’ estimates of how much higher they may be in a year’s time had blown out to the widest in 18 months, according to data compiled by Bloomberg Intelligence.

“You can’t find a better window than now to buy Chinese banks,” Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities Co., said after the interest-rate cut.

“This is the perfect opportunity because it allows investors to buy China banking shares at a 20 to 30 percent discount to the level bought by the ‘national team,’” Ma said, referring to government-orchestrated share purchases that failed to prop up the market.

The paring back of the biggest lenders’ share prices, with ICBC falling 29 percent in Hong Kong since June 12 after rallying by 37 percent over the previous 12 months, could lure more investors keen on dividend yields of more than 5 percent.

Being Brave

So, too, could state efforts to cut banks’ holdings of high-cost local government debt, tougher regulation of competitors in online finance, and economists’ forecasts that the nation will avoid a collapse in growth with gross domestic product expanding 6.9 percent this year.

At the same time, investors must be brave enough to ignore the warnings of the likes of Junheng Li, the founder of JL Warren Capital, a China-focused research firm in New York.

“China is undoubtedly headed into a recession,” Li said in a note on Wednesday, adding that the nation had wasted almost $200 billion through its stock market stabilization efforts and that the coming slump would “drag the rest of the world with it.”

— With assistance by Jun Luo, and Alfred Liu

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