Chinese banks can still shake off market disapproval

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Chinese banks can still shake off market disapproval
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Despite rising profits, they are weighed down by their bad debt pile and the success of tech companies.

Chinese banks have been disappointing customers for years. traders. They generated more than 80% of the trillion yuan (130 billion euros) in loans issued in July, with the largest of them posting decent earnings growth in the first half. However, they are hurt by the rise of more attractive and faster-growing tech companies, along with a relentless pile of bad debt.

An analysis of Refinitiv’s indices shows that Chinese entities underperform on most key metrics. The average Chinese firm trades at roughly half its book value, compared to 1.4 times for US institutions and nearly 3 times for India. Their annualized average total return, taking dividends and appreciation into account, is around 15% so far in 2021, compared to 45% for US banks.

Chinese banks pay high dividend yields, averaging over 6%; the problem is the performance of stocks. There are reasons for this. The financial system, which depends on a political party, is required to rescue the industrial zombies and to prop up the markets. The system has about € 1.3 trillion of bad debt, so investors are rightly concerned about the dilution that the inevitable recapitalization of banks will cause. In addition, the heads of state banks do not want to appear too profitable, so they often hide the benefits through excessive risk buffers and other tricks.

There is some good news. Commercial banks have won their long battle against fintech giants like Ant Group. These are being more strictly regulated and they are also reluctantly releasing borrower data and credit rating algorithms to state-controlled entities. Authorities may also reduce technology service fees that may be charged by companies. fintech by finding borrowers.

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Recent attacks by President Xi Jinping on the private sector have caused the traders flee to state-owned companies, including large banks. The Refinitiv index of major Chinese banks listed in Hong Kong has gained more than 5% since July, while the broader benchmarks have plunged. China Merchants Bank, one of the most skilled banks in the country, has risen 38% so far this year.

A 50% discount on the book value implies that a great risk is discounted. Real estate loans represent between 20% and 40% of the portfolios of major Chinese banks, according to an analysis by Rhodium Group, and the smallest are especially vulnerable. However, before this happens, these stocks may have better days ahead.