Monday 10 November 2008

Banks seen as good buys by mid-2009

Profits will still grow, KPMG says

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Guanyu said...

Banks seen as good buys by mid-2009

Profits will still grow, KPMG says

Jane Cai
10 November 2008

A return to robust economic growth on the mainland may still be three years off, but early-bird investors in the country’s bank stocks could begin returning to the market by the middle of next year, a senior executive of KPMG China said.

“I think June next year would be a good time to consider buying bank shares for their long-term value, though it may take longer for the economy to pick up speed,” said Simon Gleave, the firm’s partner in charge of financial services.

Economic growth decelerated to 9 per cent year on year in the third quarter, the slowest expansion since 2002, as exporters began to feel the impactof the global financial turmoil.

Economists expect gross domestic product to lose further steam and grow as slowly as 7.2 per cent next year as a result of weakening exports, shrinking industrial profits and dampened consumer confidence.

“China has never had a substantial slowdown in the economy before. This will be a real test of its banking sector,” said Mr. Gleave.

While third-quarter results showed that profit growth remained strong, the test of profitability would come this quarter as bad loans began to expand, he said.

Fourteen publicly traded mainland banks reported an average increase in first-half net profit of 67 per cent year on year, reaching a peak after rapid growth in the past five years - thanks to annual GDP growth of over 10 per cent and lucrative interest spreads in the form of the gap between the deposit and lending rates set by the central bank.

For the big four state-owned banks, city commercial banks and joint-stock banks, net profit rose 51 per cent over the year to September, KPMG said in an annual report on the banking sector, which will be released this week.

“Looking into the next year, [non-performing loan] risks will mainly come from sectors including plastics, cars, household appliances and computer manufacturing,” Mr. Gleave said ahead of the report’s release.

The export-oriented manufacturing sector would probably be hit the hardest, he said, as external demand would diminish owing to the looming recession in major economies.

Domestic consumption is also expected to weaken, as substantial income increases were unlikely and consumer confidence was not likely to improve amid pessimistic expectations about what was happening in both the real economy and asset markets.

Commercial property would be another concern. “I’m afraid there won’t be much demand for offices and shopping malls in second-tier cities,” said Mr. Gleave.

“I don’t think the central government will directly support developers. It may help big and quality developers by granting them government project contracts. But it will not save the sector directly and support all the companies.”

He said banks would adopt a conservative approach to overseas mergers and acquisitions and in forming conglomerates with insurers domestically, reflecting the central government’s resolve to be cautious in expanding the sector as a lesson learnt from the current financial crisis.

Unlike many analysts who forecast that bank net earnings are likely to contract next year, Mr. Gleave predicted they would still grow, albeit at a slower pace, as the nation’s aggressively expansionary fiscal policy would play a big role in preventing a sharp slowdown in the economy.

The lending business, which accounts for about 85 per cent of bank incomes, would remain profitable, as interest rates were set by the government, he said, although fee and commission income could slump amid the downturn in the asset market.