CHINA’S banks are poised to rally next year as bad loans stabilize and they see renewed profit growth after years of declines, according to China Merchants Securities Co. and China International Capital Corp. (CICC).

    Shares of 16 large lenders listed in Shanghai and Shenzhen may climb at least 25 percent next year, with the price-to-book value ratio exceeding 1 times from the current 0.8, said Ma Kunpeng, a Shanghai-based analyst at Merchants Securities. Shares of Hong Kong-listed mainland banks have room for a 45 percent gain, according to CICC analysts led by Anson Huang.

    Mainland banks have underperformed the benchmark Hang Seng Index in Hong Kong for five of the past six years as global investors grew concerned that souring loans from an almost decade-long credit binge could trigger a financial crisis. The analysis from CICC and Merchants Securities suggests banks may be on a stronger footing than many have feared.

    In an extreme scenario, the bad loan ratio at Chinese banks could climb to 21 percent, leading to a capital shortfall of 13.6 trillion yuan (US$2 trillion), Fitch Ratings said in July. U.S. hedge fund manager Kyle Bass in January flagged US$3.5 trillion in bank losses.

    Credit Suisse Group analysts said yesterday they prefer China banks among Asia-Pacific peers for the next six to nine months as the government ensures economic growth stays around the current pace and lending margins remain largely stable.

    Investors should hold Chinese banks at least until June, when they’re expected to pay a 5.5 percent dividend yield, Credit Suisse analysts including Sanjay Jain wrote in a note.

    CICC expects the listed banks to post combined profit growth of 7 percent in 2017, up from 3 percent this year, as the economic outlook improves, corporate earnings recover and a contraction of net interest margins eases. The implied nonperforming loan ratio at Chinese banks has dropped to 10.7 percent from 11.9 percent in the first half, the analysts said.

    Merchants Securities’ Ma cited a slower bad loan formation rate, a commodity rally and progress in supply-side economic reforms as drivers for improvements in lenders’ asset quality.

    He expects profit before provisions at the 16 listed banks will rise 10 percent to 2.72 trillion yuan in 2017. Smaller city banks that listed this year may trade at 2.5-3 times estimated book value, with an ability to report annual profit growth of about 20 percent for the next 10 years. (SD-Agencies)