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Chinese banks rise at a pace not seen since 2015-traders hunt persistent value laggards and SOE bets

In anticipation of lenders' profit growth accelerating and government-led initiatives to increase valuations and raise efficiency at state-owned enterprises (SOEs), investors are buying Chinese banking stocks at a rate not seen since the 2015 market boom.

Chinese banks rise at a pace not seen since 2015-traders hunt persistent value laggards and SOE bets

The fourth-largest lender in the nation reached the exchange-imposed daily limit for the first time since July 7, 2015, when shares of Bank of China (BOC) that are traded on the Shanghai Stock Exchange increased by 10%. A smaller bank called Bank of Xian and China Citic Bank both experienced a similar day-to-day increase. The biggest lenders in the nation, Industrial and Commercial Bank of China, China Construction Bank, and Agricultural Bank of China, all increased by at least 5.2%.

Such a broad-based rebound in banks shows they have become the new darlings of investors looking for new bets after their reopening trades faded. Banks have lagged the market over the past few years due to concerns about their asset quality.

Because of the industry's average 36% discount to book value and government calls for SOEs to be revalued, expectations have been growing that more banks will reduce deposit rates this year to prevent a decline in net interest margins, or the difference between lending and deposit rates.

"There’s more downside room for the deposit rates," according to Xiao Feifei, an analyst at Citic Securities in Beijing. "We expect both revenue and profit growth to accelerate throughout the year, and the sector has entered a stage of active allocations."

As the pressure on net interest margins grows and controls over deposit costs take precedence among lenders, more banks will join Bohai Bank and Zheshang Bank in lowering deposit rates this month in an effort to boost profitability, predicts China Merchants Securities.

Following three reductions in prime loan rates, the benchmark borrowing costs set by major commercial lenders, listed banks' net interest margins, which make up the majority of the industry's earnings, declined by 16 basis points from the end of 2022 to 1.84 percent in the first quarter of this year, according to the brokerage.

The fact that all of the key participants in the banking sector are supported by the government has added to the trust in the sector's stocks. The Shanghai Stock Exchange will hold a special meeting this week for the "discovery of SOE investment values and promotion of valuation return," according to the China Securities Journal. This meeting was called in response to the head of the stock market regulator's call for a new methodology for valuing such stocks.

According to a research report published by Saxo Markets on Tuesday, "investor sentiment towards SOEs has been relatively buoyed as the Chinese authorities told investors to ‘discover value’ in SOEs."

After statistics revealed that home sales were sluggish and the manufacturing industry risked recession, traders looked for inexpensive and safe bets despite a shaky recovery in China's economy, which strengthened the rationale for following the rise. The only industry to trade below water is the 24 banks that are listed on the Shanghai exchange, where they trade on average at 0.64 times book value. The data reveals that the industry has the highest dividend yield overall, at 4.7%.

In contrast to earnings, sentiment and value growth have been the key drivers of the run-up in banks. According to Guotai Junan Securities, listed banks' first-quarter profits increased 2.4% from a year earlier, dropping from the full-year growth rate of 7.6% in 2022.

According to a Monday exchange statement, BOC warned investors of potential risks after its stock gained more than 20% over the previous three trading days and said there had been no significant change in business operations.

According to data source Shanghai DZH, its shares have increased 44% in Shanghai this year, while a barometer of mainland China-listed banking companies has increased 11% during the same period. The industry standard CSI 300 Index has increased by 4%.

the forecasts of China Galaxy Securities, the enthusiasm for banks will continue to grow as they stand to gain from official support, substantial dividend payments, and revaluation. Smaller institutions, like Bank of Hangzhou and Bank of Jiangsu, are also a plus, achieving a more than 20% growth in earnings in the first quarter to beyond consensus expectations, it added.

According to Zhang Yiwei, an analyst at the Beijing brokerage, "the banking sector benefits from … perception of valuations with Chinese characteristics and some banks’ better-than-expected first-quarter results."

"That has left the door open for revaluing banks."


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