Photographer: Stefen Chow/Bloomberg

China's Biggest Bank Still Seen as Undervalued at $325 Billion

  • ICBC shares have almost doubled since early 2016 in Hong Kong
  • Benefits from shadow banking curbs, improving asset quality

The world’s largest lender by assets has seen a near doubling of its share price in less than two years.

Now, a growing chorus of analysts argue that improving asset quality, a shadow-banking crackdown and international comparisons could justify a still-higher valuation for Industrial & Commercial Bank of China Ltd., currently worth HK$2.54 trillion ($325 billion).

A government campaign to tackle excessive leverage is curbing China’s shadow banking sector, which will benefit large lenders like ICBC. Asset quality is improving at the major state-owned enterprises, allowing the lenders to reduce reserves against bad debts. And ICBC still trades at a large discount to international peers, even after the 73 percent surge from the low in February 2016.

“Chinese banks’ valuations are definitely trending higher,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co. “Asset quality has been very stable and their profit prospects are so much better than last year.”

Even after the recent rally, ICBC trades at 0.92 of its estimated book value for 2017, below the average of 1.28 among 50 global banks including Wells Fargo & Co. and Royal Bank of Canada, according to data compiled by Bloomberg.

ICBC shares have jumped 11 percent since the People’s Bank of China said Sept. 30 it will cut reserve requirements for most banks from 2018 if they lend enough to small and rural customers. The move was seen as a challenge to shadow loans taken out by such borrowers, reducing competition for traditional lenders such as ICBC.

That prompted analysts at Nomura Holdings Inc. to turn more bullish on Chinese banks, after a year treating the shares with caution -- despite surging share prices. It upgraded China Construction Bank Corp. to buy from neutral and reiterated a buy rating on ICBC, in an Oct 9 report. 

“This round of re-rating is a prelude to a long-term valuation recovery of China banks, as the fundamental concerns about the sector start to be addressed in a structural manner,” the Nomura analysts led by Sophie Jiang said in the note.

Nomura also sized up ICBC, its top banking pick, against Wells Fargo, Citigroup Inc., HSBC Holdings Plc, Spain’s Banco Santander SA and Mitsubishi UFJ Financial Group Inc. Taking into account ICBC’s return on equity and price-to-book multiple, the bank’s shares were 55 percent cheaper than U.S. peers and 76 percent cheaper than those in Europe, Nomura said.

“If you look at the earnings this year, even though much of the earnings improvement is from less bad-debt reserves, it is a sign of quality,” said Hao Hong, chief strategist and head of research at Bocom International Holdings Co. in Hong Kong. “The outlook is improved because the SOEs’ balance sheet has improved.”

Chinese banks have a non-performing loan ratio of 1.74 percent, according to the China Banking Regulatory Commission. However, many analysts say that understates the real figure.

China’s five biggest lenders, a group that includes Construction Bank and Bank of China Ltd., trade in Hong Kong at an average 0.77 times estimated book value for 2017, Bloomberg data show.

— With assistance by Angus Whitley, and Alfred Liu

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