These Stocks are Now Cheap

These Stocks are Now Cheap

Cash registers are ringing at all of China's banks, signaling yet another huge profit surge. Profits from China's listed banks soared by 46 percent during the first half of the year. Combined net income from16 listed banks totaled $50.5 billion. It looks a lot like Chinese bankers are getting very good at capitalism. bankers? Don't ask. Oddly enough, China's bank stocks have been weak performers lately. Even the latest profit figures didn't touch off a rally. That's a mystery worth looking into here. Just how much money did Chinese banks make in terms of the nation's economy? The answer will surprise you. The combined profit of China's top lenders amounted to almost half the total income reaped by all companies on the nation's stock exchanges. To be exact, 16 banks took in a whopping 46 percent of the money earned by 1829 firms listed on the mainland. The performance of the big banks is due mostly to China's lending boom. Stimulus-driven lending last year totaled an eye-popping $1.41 trillion worth of loans. This year Beijing is reining in credit slightly. The lending target for 2010 is 7.5 trillion yuan (or $1.1 trillion). economy stagnates. American banks are still shell-shocked from their near-death experiences. Banks here are afraid to lend after years of reckless behavior. Not so in China. The Big Winners The bulk of profits among Chinese lenders are concentrated among the big four banks. Industrial and Commercial Bank (HKG: 1398) is the world's biggest bank by market value. ICBC enjoyed a 27 percent jump in profit as its interest income surged. First half profits totaled $20.9 billion. Despite its growth, the bank has a P/E multiple of only 11.47. With a dividend yield of 3.37 percent, ICBC's valuation looks especially cheap. Bank of China (HKG: 3988) enjoyed a 27 percent rise in profits. First half earnings rose to $7.6 billion. Earnings growth at the bank slowed considerably during the second quarter as lending was reined in. BOC has a P/E multiple of only 9.58 and a hefty 4.04 percent dividend yield. China Construction Bank (HKG: 0939) is the nation's third largest lender. First half profit at CCB rose 27 percent to $10.4 billion. Credit card fees, accounted for much of the rise. Hong Kong-traded shares of the bank have a P/E multiple of only 10.41 with a solid 3.57 percent dividend yield. The biggest gainer was Agricultural Bank of China (or AgBank). Less than two months ago AgBank set a world record with its $22 billion IPO. Now the bank leads the big four with a 40 percent profit increase. AgBank (HKG: 1288) racked up $6.7 billion in profits for the first half of the year. That is the bank's best six-month result ever. Together, the big four took in 26 percent of income for the sector. Why So Cheap? Chinese bank shares are selling at a discount because of several nagging doubts. There are fears that banks will suffer an implosion because of the real estate bubble
Investors worry that loans to local governments may go sour because many provinces created dubious companies to take their debts off the books
Some worry that banks won't have adequate capital to face a crisis Beijing has been listening to investors' concerns and acting. Banks have been subjected to two rounds of tough stress tests. In the latest round the banks had to show they could survive a 60 percent drop in property values. But China's lenders are much more cautious than American bankers. Down payments on property start between 15 and 20 percent. Buyer equity must be even greater on second homes. Third-home purchases are treated as pure speculation. Banks have come under heavy pressure to refuse mortgages for third home buyers. Banks are also busy raising new money. With bond and share offerings, ICBC, BOC, and CCB are looking to raise $33.8 billion to shore up their capital reserves. Beijing raised bank reserve ratios three times this year. Despite the abundant caution, investors are even more cautious. P/E multiples in a range of 10 or less suggest that investors are unsure about future earnings. By contrast, the Hang Seng Index trades at 13.4 times future earnings. Bloomberg estimates that ICBC, Construction Bank and Bank of China trade at only 1.9 times book value. But the banks are projecting 20 percent earnings growth over the next two years. They also predict more loan assets, bigger margins and even more fee income. Western investors have been frightened about Chinese banks for decades. That's one reason they're traded in Hong Kong. But China's banking system has come a long way over the years. Billions in non-performing loans have been removed from the books. Huge profits have been created by stimulus lending. Ultimately it's a question of investor confidence. should try to measure up to. a financial media organization with offices in the United States, Hong Kong and Mainland China. GPA is written by Jim Trippon in conjunction with George Wolff, Sunny Wang, Todd Shriber, Kelley Damiani and J. Daryl Thompson.