Banks eye glad tidings in new year as reforms take effect

Even A shares may rise, but fresh curbs could hurt smaller lenders in 2018

The new year 2018 is expected to see banks listed on the A-share market post improved performance, said analysts. Even their shares may rise in the bargain, they said.

They attributed their optimism to the ongoing economic restructuring, which will likely be further optimized this year, helping interest margins to grow steadily.

But smaller banks may face greater pressure, they said.

The banking sector is going to further diverge in the next few years, amid continuous deleveraging, strong regulation and focus shifting to consumer finance and small and medium enterprises or SMEs, said analysts.

Deleveraging and strengthened regulation may make smaller banks face greater pressure, and the banking sector is likely to diverge in the next few years, according to Orient Securities.

A guidance released in November by a number of authorities, including the banking regulator and the securities regulator in China, said that the authorities hope to remove "rigid payments", or bailouts for asset management products, which have been widely observed in the past years.

The guidance said the authorities hope to remove rigid repayment for asset management products by mid-2019, which means asset managers will not be allowed to employ their own funds to make payments for investment products that have sustained losses.

For banks, this would mean that they can no longer use their own capital to make payments to investors.

Curbs on rigid repayments would make smaller banks lacking in reputation and solid financial foundation face more pressure, as consumer finance clients are likely to shift to large banks with established brands, according to a research note from Haitong Securities.

On the other hand, large banks with established brands are likely to have better valuations in 2018.

"Asset quality in the banking sector will further improve in 2018, alongside widening profit margin, which will help valuations grow in 2018," said a research note from Ping An Securities.

According to Ping An Securities' research data, A-share banks' P/B ratio, or price-to-book ratio, an indicator of whether a stock is undervalued, was between 0.8 and 1.03 in 2017.

"P/B ratio is likely to improve, and banks with good fundamentals are likely to have high premium valuations," said the note.

Wendy Liu, head of China equity research at Nomura, said that overall, A-share banks look deeply undervalued now compared with their global peers.

In the next few years, valuations of large banks with good performance are likely to grow further, said Liu.

Large banks' A shares rose more than 20 percent in 2017. Shanghai-listed ICBC's shares rose from 4.43 yuan at the beginning of 2017 to 6.11 yuan at year-end, while China Construction Bank rose from 5.49 yuan to 7.54 yuan.

Risk management capacity and investment research capacities are key competencies for lenders in China amid challenges brought by a changing regulatory environment, according to a report by the China Banking Association.

More than 52 percent of some 1,920 financiers from 166 banks polled in China said they identified improving risk management capacities as a priority when making development strategies for the next few years, said the report.