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A Year After Market Crash, Chinese Bank Stocks Still Draw Temasek, Big Foreign Investors

Unfazed by an equity market collapse a year ago that left a lasting mark on China, some big overseas institutional investors in the country's bank stocks, led by Singaporean state firm Temasek Holdings (Pte.) Ltd., have since raised their stakes in a vote of confidence in a sector at the center of a cooling economy.

The 20 largest foreign institutional investors in Chinese bank stocks, traded at home or in Hong Kong, had a combined 80.44 billion shares as of May 31, about 12% more than positions kept by then-top holders at the end of the 2015 first half, in the run-up to a broad market meltdown, according to SNL Financial data. The analysis is based on most-recent company disclosures made before each cutoff date.

Chinese banks can still be attractive for investors remaining optimistic about the country's future.
Among firms that made the top 20 both times, seven bought more shares, outnumbered by 10 that cut back. Two companies, including Norway's government pension fund manager, Norges Bank Investment Management, made the list after the equity collapse, while one kept the same number of holdings.

In the bull camp, Temasek stands out the most, boosting its positions by 58% in number to overtake BlackRock Inc. as the top investor in Chinese banks. The Singaporean institution accounted for 28% of Chinese bank stakes held by the 20 biggest investors as of May 31.

Vanguard Group Inc. and State Street Corp., ranked third and fourth, increased their holdings by 8.38% and 10.28%, respectively.

Chinese Banks after 2015 market crash

Chinese Banks before 2015 market crash

Chinese stocks had been all the rage until mid-2015, with the Shanghai Composite Index surging 60% through June 12 from Dec. 31, 2014, fueled by cheap money created by monetary easing aimed at halting an economic slowdown. The peak was then followed by a dramatic, across-the-board collapse of the market, prompting Chinese authorities to take a long list of steps to stave off a crisis.

Although the dust has settled, Chinese banks and the country's equity market are still far off their highs, with confidence in the strength of the world's second-largest economy fading after its GDP expanded at the slowest pace in 25 years in 2015. The SNL China Bank Index, which tracks shares in SNL-covered credit institutions based in China, was down more than 30% as of June 21 from a June 8, 2015, high. The gauge is at about 98% of book value, compared to 133.30% at the year-ago peak.

Stock performance of top chinese banks

Chinese banks can still be attractive for investors remaining optimistic about the country's future.

The mood for China may be turning bearish, but for any investors seeking to keep a foot in the nation, bank stocks are a sensible bet, Leung said.
"We see banks as being a good proxy to growth economies, where capital markets may be less developed or accessible to growth companies than in mature economies," Stephen Forshaw, a spokesman at Temasek, told S&P Global Market Intelligence.

During a July 2015 presentation on Temasek's annual performance, at the height of market unrest in China, Wu Yibing, a joint head of the portfolio strategy and risk group at the firm, said in the context of the nation's developing capital markets, volatility is not necessarily a bad thing and instead can provide "a good opportunity" for the company to invest.

Access to China's financial markets is restricted for foreigners, although the government has been substantially increasing investment quotas for countries including Singapore under special programs. Chinese stocks listed in Hong Kong are not subject to any such limit.

Temasek began investing in China with bank stocks in 2005, and in the following decade, the company set up offices in Beijing and Shanghai to look deeper into the Chinese economy, Wu said.

Chinese banks' earnings tend to be more stable than fortunes at other types of financial firms, as they rely largely on their basic lending business funded by deposits, with more than 60% of their investment assets in government bonds, according to Andy Leung, a banking analyst at KGI Securities.

Further, most Chinese banks have strong buffers against bad debt and are maintaining attractive double-digit ROE, said Ian Lam, an analyst atHong Kong-based investment firm HSZ Group. Lenders in China, most importantly, enjoy all-but guaranteed state protection against any crisis.

Such stability means bank stocks in China can be less volatile than the broader market, Leung said.

Some big firms' take on China and its banks, however, does not represent general sentiment among investors; if anything, many are wary about signs of trouble, such as bad debt that is at the highest level in more than 10 years, just counting reported nonperforming loans.

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"Foreign investors are not very confident in Chinese banks. They are concerned about NPLs that don't show up on balance sheets," Leung said.

Chinese bank holdings of the top 20 investors are mostly concentrated on big companies.

China's four largest lenders, Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. andBank of China Ltd., all managed to increase net profit, if marginally, in 2015, although asset write-downs grew along with swelling bad debt.

But their profit outlook is not so bright. Net profit will likely fall at each of the four banks in 2016, according to analyst estimates compiled by S&P Capital IQ. The last time full-year profit fell at ICBC was 2004, while for China Construction Bank, an earnings decline in 2016 would be the first retreat since 2002 and for Bank of China, the first since 2003. Agricultural Bank of China last posted an annual profit fall in 2007.

Prospects are much direr for smaller banks, so they pose greater risks for investors. When foreign stock buyers evaluate them, the reliability of their financial data is a key consideration, Leung said.

Temasek, as bullish as it appears to be about China, disclosed on June 20 that its Fullerton Financial Holdings Pte. Ltd. unit sold 550 million Hong Kong-traded shares in China Construction Bank to cut its stake by about 0.22 percentage point. The company noted that the transaction was part of regular investment operations, and it remains positive about the Chinese economy and the bank.

BlackRock, which slipped to second place from first among the 20 biggest investors in Chinese banks, reduced its holdings by 3.69% after the market crash. The company declined to comment on its investment decisions.

The mood for China may be turning bearish, but for any investors seeking to keep a foot in the nation, bank stocks are a sensible bet, Leung said.

"If an institutional fund is to buy Chinese financial plays, banking stocks are a safer choice," he said.