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Bank shares lead market fightback

By Yang Zhen (China Daily)
Updated: 2009-03-27 07:44

People wait inside an ICBC branch in Beijing. [Agencies]

A surge in the share prices of mainland banks fuelled a rally in the Hong Kong and Shanghai stock markets yesterday.

Analysts said Industrial and Commercial Bank of China's (ICBC) encouraging results and a show of confidence in the bank by US investment bank Goldman Sachs gave the banking sector a boost.

Related readings:  ICBC full-year net profit increases 36%  Hong Kong stocks soar 3.57% on Thursday  Chinese shares gain 3% as overseas markets rebound

A total of 1.38 billion ICBC Hong Kong-listed H shares changed hands, pushing its price up by a whopping 14.8 percent, the biggest one-day gain since Oct 28, 2008. ICBC shares closed at HK$4.11 apiece. The bank shares' turnover yesterday on the Hong Kong bourse was the highest since Sept 19, 2008.

The share prices of other mainland banks, including China Construction Bank and Bank of China, also climbed 7.74 percent and 7.85 percent, respectively, in Hong Kong.

The benchmark Hang Seng Index ended 3.57 percent, or 486.87 points, higher at 14108.98, having touched its highest level since mid-January.

In Shanghai, ICBC A shares surged as high as 6.10 percent before closing 5.84 percent higher at 3.99 yuan, while the Diversified Bank Index, which covers the shares of the 12 listed banks on the Shanghai bourse, rose 4.97 percent to 1773.84 points.

The benchmark Shanghai Composite Index closed 3.06 percent, or 70.15 points, higher at 2361.70, a record high in five weeks.

Haunted by persistent speculation that Goldman Sachs would sell its $8.5 billion holding, ICBC was the worst performer among six Chinese banks listed in Hong Kong, falling a total of 12 percent from the beginning of the year. On Tuesday, the Wall Street Journal reported that Goldman was considering the sale of all or part of its 4.9 percent stake, valued at $7.5 billion then, in the Chinese bank to raise money to repay a US government investment in the investment bank.

Michael Evans, Goldman Sachs's vice-chairman, said at an ICBC press conference in Hong Kong on Wednesday that the US firm is "not under pressure to raise capital" and is "in no rush to sell any ICBC shares".

In recent months, several foreign banks have sold stakes in Chinese banks to raise cash amid the global financial crisis. The banks include Bank of America, which sold part of its stake in CCB, and Royal Bank of Scotland and UBS AG, which both sold their entire stakes in BOC.

"Goldman Sachs' decision to extend a lockup on most of its holdings in ICBC definitely boosted investor confidence in the Chinese bank in Hong Kong," said Chen Shuixiang, analyst from China Jianyin Investment Securities.

Chen acknowledged that ICBC's strong profit growth last year helped its early rally in Shanghai yesterday, but he also pointed out that China's slowing economy, along with narrowing net interest rate margins, would dampen ICBC's profit outlook for this year.

The bank posted a 36-percent growth in full year net profit on Wednesday, but an increase in provisions for its overseas investment losses slowed profit growth in the fourth quarter.

Chen predicted that the lender's net interest margin would contract further by 30 to 40 basis points this year.

"It would be lucky if ICBC can maintain a positive profit growth in 2009. Most mainland banks are facing similar scenarios as the impact of the global financial crisis is far from over," Chen said.

ICBC was in a much better situation compared to its rival BOC, which posted a 59 percent decline in fourth quarter net profit last year due to higher US sub-prime mortgage related losses.

BOC's net interest margin slid 13 basis points to 2.63 percent in 2008, down from 2.76 percent in the previous year.

ICBC's better net interest margin, compared to that of BOC, came as a result of its lower loan-to-deposit ratio, Minzu Securities analyst Zhang Jing said.

"Its loan-to-deposit ratio helped to shield ICBC from the impact of interest rate deductions from the central bank," Zhang added. ICBC's loan-to-deposit ratio was 56.4 percent, compared to BOC's 64.6 percent.

Zhang too was not so optimistic about ICBC's profit growth this year. She estimated ICBC would only be able to see a 5 to 6 percent profit growth this year.

"Rapid lending growth is not enough to compensate for the contraction in net interest margins and the asset quality in Chinese banks may also deteriorate due to a weakened economy in China," Zhang said.

Most analysts gave China's bank shares a "neutral" rating, indicating their lack of confidence in Chinese banks' profitability in 2009.

Agencies contributed to the story