Looking For a Bet on China? Try ICBC

By Anonymous

How much gloomier can things get in China? Economic growth is slowing, while concern is spreading that the country is losing in the trade spat with the U.S. The Shanghai market hasn’t been this low since the crash of 2015-16.

Any bullish call now on Chinese stocks looks pretty contrarian—particularly one recommending long-unloved Chinese banks.

Yet the time could be ripe to look again at the country’s biggest state-owned lenders. Their Hong Kong-listed stocks have had a dismal year. The country’s largest bank, Industrial & Commercial Bank of China , has been the biggest loser, dropping 10.3%. It now trades at just over 0.7 times its expected book value over the next 12 months, according to FactSet: The only time it has ever traded lower since it floated over a decade ago was during China’s stock market crash in early 2016. Both Bank of Communications and Bank of China now trade at little more than half their expected book value, also close to their lowest-ever levels.

Such figures suggest things cannot get much worse. Moreover, there are glimmers of hope they could get better. Net interest margins across China’s banking sector edged up in the second quarter, according to data from the banking regulator, helping overall net profits to rise by 6.9%. The big banks’ nonperforming loan ratios actually ticked down over the last quarter.

There are plenty of reasons to be skeptical about the banks’ bad-loan data, such as their habit of rolling over loans to zombie companies. But whether or not you believe the starting point, the recent improvement in NPL ratios is logical. Beijing’s efforts to root out excessive production led to consolidation across several industries. In turn, that has helped give some of the country’s biggest state-owned companies greater pricing power and improved profits, making it less likely they will default on loans from big banks like ICBC.

The increasing reliance on state-owned companies may not be what China needs over the long run, but short-term it should help the big banks. China’s current growth slowdown could favor the large banks in other ways. Small and medium-size banks are likely to bear the brunt of the adjustment: It is their bad-loan ratios that have been rising recently. Big banks could benefit from a flight to quality from depositors, even if over the longer term they face growing competition from new rivals such as the Alibaba-affiliated Alipay.

It is unlikely that China is about to solve all the issues within its banking sector, or that the country’s growth is about to come roaring back. Buying into big Chinese banks now is instead a tactical bet that by the end of this year their shares will have ticked up, partly because they have been oversold and partly because news could improve. Given that Chinese banks’ share prices tend to move roughly in tandem, the best bet could prove to be the one most beaten down in recent times: hence ICBC is this column’s stock pick.

Write to Andrew Peaple at [email protected]