Lenders get shot in the arm

Central Huijin increases stakes in major banks to give boost to capital market

Central Huijin Investment Ltd, an arm of sovereign wealth fund China Investment Corp, has pledged to continue to shore up the capital market by buying stakes of four major State-owned lenders.

It has been purchasing shares of the Big Four banks in the secondary market since Wednesday, and will continue doing so, according to a statement published on its official website on Wednesday.

The four lenders are Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Agricultural Bank of China Ltd, and Bank of China Ltd.

Central Huijin's statement means the major shareholder in China's main State-owned banks has extended a year-long purchase program that lapsed on Wednesday.

"It's a very clear signal that the government is confident of the banks' operation and profitability in the future, and won't hesitate to stabilize the capital market and overall economy by supporting one of the most important sectors," said Luo Yi, an analyst at China Merchants Securities.

He said the price-earnings ratio of 7.06 and price-to-book ratio of 1.41 both suggest market valuation of banks have hit historical lows, and authorities see them as a safe investment opportunity.

In the third quarter, Central Huijin bought more than 6.26 million shares of ICBC and 18.8 million shares of BOC, marking the fourth straight quarter of banking-share purchases, according to statements released by the two lenders earlier this week.

Encouraged by the purchases, news of which was released on Monday, the benchmark Shanghai Composite Index surged by 40.8 points on Tuesday.

Central Huijin bought 7 million shares of ICBC and 762,600 shares of BOC from April to June.

According to the cash dividend allocation plans of the Big Four, Central Huijin could get more than 100 billion yuan ($15.9 billion) in the third quarter, said analysts, which may provide capital support for future purchases.

China's major banks are likely to register relatively stable profit growth for the third quarter compared with their smaller rivals, with a net income growth of 11 percent, down from 13 percent in the second quarter, said May Yan, director and banking analyst of Barclays Capital Asia Ltd.

Lower profit growth has hurt the capital-market performance of commercial lenders due to shrinking net interest margins and rising credit costs, and growing concerns over asset quality as defaults have risen during the economic slowdown.

By the end of September, ICBC has lost about 151 billion yuan in the A-share market, while some other major lenders lost 20 billion to 60 billion yuan.

And the stock prices of several listed banks have fallen below their net assets per share as of Wednesday.

Historically, banking stocks have seen a rebound each time Central Huijin staged a new round of purchases, said Luo. "And as the monetary stance continues to loosen, we don't need to be so pessimistic about banking stocks," he said.

One year after Central Huijin increased the shareholding in September 2008, banking stock prices went up 69.22 percent.

But Yuan Lin, an analyst at BOC International, said uncertainty over banking stock is actually rising as China's economy continues tumbling and it seems that the government won't adopt a large-scale stimulus.

"In the medium and long term, banks' shares lack impetus to drive up the market evaluation," Yuan said. "If the government announces more aggressive stimulus measures, in the short term there might be a rebound, but a very short and mild one."

The benchmark Shanghai Composite Index dropped by 0.81 percent to 2102.87 on Thursday. The index has fallen by about 6 percent since the beginning of the year.

Central Huijin announced a new round of banking stock purchases in the fourth quarter of last year, saying it would continue to buy banking shares in the following 12 months.

In October 2011, it had bought shares in the Big Four banks after the Shanghai index closed at its lowest level in more than two years.