BANKING – Qatar’s AgBank Selldown: Winter For Bank Shares?
Bottom line: Shares of China’s big 4 banks could see some upside in the next year, as they work with Beijing to keep their bad loans and slowing profit growth within government-set limits.
A major sell-down by one of Agricultural Bank of China’s (HKEx: 1288; Shanghai: 601288) largest foreign shareholders looks a bit ominous for the lender, coming just after all of the nation’s big 4 banks reported rapidly declining profit growth and swelling bad loans. That raises the bigger question of whether we could see a broader exodus from Chinese banking shares by investors in the months ahead, and whether the stocks are looking at a longer term downturn while they work out the billions of dollars in non-performing loans on their books.
The outlook for the stocks certainly looks bleak at first glance. But in this instance I might take a contrarian stance and say the stocks might actually be poised for a rebound over the next year despite the gloom. That’s because the downturn they’re now facing has been talked about for so long now that it’s not really news anymore.
Instead, the important element to watch will be just how bad the downturn gets in terms of slowing profit growth and also in terms of non-performing loans. I suspect that profit growth for most or all of the big 4 banks will remain positive throughout this clean-up, though it could approach the flat level or perhaps sink into slight contraction for 1 or 2 of the lenders. Likewise, bad loans won’t rise to very high levels, perhaps topping out at 2 percent of all banks’ overall loan portfolios.
Some readers may be asking why I’m so confident of these predictions. The answer is simple: Beijing leaders have probably already decided the answers to both questions, and are likely to take steps and implement policies to make sure the numbers stay within government-set tolerance limits, both in terms of bad loans and profit growth. That’s how planned economies work, and the banks in many ways still function like they’re living in such an environment.
All that said, let’s look at the recent big sell-down in AgBank shares, which came from Qatar Investment Authority, one of its biggest foreign stakeholders. The Qatar wealth fund held 25.5 percent of AgBank’s Hong Kong-listed H-shares when it began reducing its stake in a rapid series of sales last week. When the dust had settled, it had sold off about 1.6 billion shares, bringing its stake down to about 17 percent. (company announcement)
It sold most of the shares in the HK$3.20 to HK$3.50 range, meaning it raised about $700 million. That price range compared with an AgBank Friday closing price of HK$3.60 before the sales were announced, and thus the shares could come under some short-term selling pressure. But such discounts are relatively common when an investor sells such a big stake, and in this case the downward pressure will probably be relatively short-lived.
Qatar’s sale came the same week that China’s top 4 lenders all reported some of their worst profit growth in years, with earnings up in the mid single-digit range for all of them. (English article) Equally worrisome, 4 of the 5 top banks reported their biggest increase in bad loans in 2 years, the result of a binge in dubious lending in 2009 and 2010 as part of Beijing’s massive economic stimulus plan at the height of the global financial crisis.
All of the gloom has taken a toll on the big 4 banks’ Hong Kong-listed shares. Shares of AgBank, ICBC (HKEx: 1398; Shanghai: 601398) and China Construction Bank (HKEx: 939; Shanghai: 601939) are all down 8-9 percent this year, though Bank of China’s (HKEx: 3988; Shanghai: 601398) shares are unchanged. One report points out that at their current levels, the shares are now the cheapest among Asian banking stocks in terms of forward valuations. That fact, combined with some of the factors I’ve mentioned above, means we could see some upside over the next year as the lenders continue to work with Beijing to resolve their bad loans and slowing profit situations.
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