Chinese municipal banks serving richer cities most expensive among peers

Banks with businesses focused on China's richer cities have higher share prices than their peers as investors seek high-quality stocks amid overall weakness in the market.

Shenzhen-based China Merchants Bank Co. Ltd., a joint-stock commercial lender, was the most expensive Chinese banking stock as of April 3 with a multiple of 0.89 times, according to S&P Global Market Intelligence data.

Bank of Chengdu Co. Ltd., Bank of Ningbo Co. Ltd., Bank of Hangzhou Co. Ltd. Bank of Nanjing Co. Ltd. and Bank of Jiangsu Co. Ltd. were the other five of the six most expensive banking stocks in China, with price-to-tangible-book-value multiples between 0.65 times and 0.86 times, the data showed.

Shenzhen, Chengdu, Ningbo, Hangzhou and Nanjing are among the country's top 12 municipalities by GDP, ranging from 1.64 trillion yuan to 3.46 trillion yuan in 2023, while the eastern coastal province of Jiangsu ranked second on China's provincial GDP league table, according to the online platform of state media China Central Television (CCTV).

Sluggish markets

Weakness in the real estate sector, which accounts for around a quarter of the country's GDP, has weighed on Chinese stocks. The CSI 300 Index, a key benchmark for shares listed in mainland China, slumped to a five-year low early February, while the Hang Seng Index in Hong Kong hit a 15-month low of 14,794 on Jan. 22.

China's banking sector valuation, measured by the price-to-book multiple, is at around the 32nd percentile of the range of the past five years, Beijing-based Dongxing Securities Co. Ltd. said in an April 16 note.

China's GDP growth target is around 5% for 2024, following expansion of 5.2% in 2023. The People's Bank of China maintained an easing bias and cut the five-year loan prime rate, generally considered as the benchmark for mortgages, to an all time low of 3.95% in February.

State-owned banks

State-owned Industrial and Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd., commonly considered the big four, were trading at a price multiple between 0.38 times and 0.46 times, the S&P Global Market Intelligence data showed. Global peers such as JPMorgan Chase & Co. and Bank of America Corp. both offered a price multiple, adjusted by mark-to-market and credit, of roughly 2.3 times while Citigroup Inc. offers 0.66 times.

State-owned banks, and major joint-stock lenders operate nationwide, while city commercial banks and rural commercial banks mainly serve local borrowers in municipalities and rural communities.

The aggregate assets of China's banking sector increased 11% year over year to 417 trillion yuan as of the end of 2023. Large commercial banks held 42.5% of aggregate assets, while joint-stock lenders held a 17.0% share, according to the National Financial Regulatory Administration (NFRA).

"We prefer quality state-own banks for steady dividend and better earnings visibility than retail heavy banks as we have yet to see turning point in consumer sentiment and property market recovery," said Iris Tan, senior equity analyst at Morningstar.

Chongqing Rural Commercial Bank Co. Ltd.Shengjing Bank Co. Ltd., located in the northern city of Shengyang and once controlled by the bankrupt real estate giant China Evergrande Group, was the least expensive banking stock with a price-to-tangible-book-value multiple as low as 0.11 times, according to Market Intelligence data. It was followed by China Bohai Bank Co. Ltd., Guangzhou Rural Commercial Bank Co. Ltd. and Chongqing Rural Commercial Bank Co. Ltd.

The median price-to-tangible-book-value multiple of the 26-bank sample compiled by S&P Global Market Intelligence was 0.43 times.

As of April 17, US$1 was equivalent to 7.24 Chinese yuan.