Chinese stocks—measured by the Shanghai Composite—have been off to the races in recent months. Investors are starting to expect more stimulus measures from the central bank and government, and there has been an opening of China’s capital markets, encouraging investment sentiment.
While prices for many Chinese stocks are moving higher, there remains a segment of the Chinese stocks with very depressed valuations: the largest Chinese banks. Four of the largest banks have price-to-earnings (P/E) ratios below 5.5x. These banks all just recently released their year-end earnings reports for 2014. What might be surprising to some is that the reports came out better than many analysts had expected. These banks reported an average increase in net profits of more than 6.7% in 2014 compared to the prior year.
While growth in profits was encouraging, Chinese banks kept dividend payments relatively stable in order to help meet stricter capital adequacy ratios (CAR). China’s banking regulators require that the largest banks must have met a Tier 1 capital ratio of 7.9% by the end of 2014 and 9.5% by the end of 2018 to make progress toward complying with Basel III requirements. In order to do so, the Chinese banks have been conservative in growing their dividends and are shoring up capital by issuing preferred shares that can serve as additional Tier 1 capital.
Below we detail some highlights from each bank’s earnings:
• China Construction Bank (CCB): CCB reported 2014 net profit after taxes of RMB 228 billion, higher 6% year-over-year (YOY). Dividend per share (DPS) was left flat at RMB 0.301.
• Industrial and Commercial Bank of China (ICBC): Net profit for the year reached RMB 276.3 billion, up 5.1% from the previous year. The bank proposed a dividend payment amounting to RMB 91.02 billion from RMB 91.96 billion last year.
• Bank of China (BOC): The bank achieved an after-tax profit of RMB 177 billion for the year, a YOY increase of 8%. It announced plans to pay RMB 0.19 DPS, down from RMB 0.196 last year, in part due to higher capital adequacy ratios.
• Agricultural Bank of China (ABC): Net profit after tax increased 8% to RMB 179 billion between 2013 and 2014. The board indicated that cash dividends to common shareholders would be higher by 2.83%, for a total of RMB 59 billion.
While these earnings reports came in largely without major conflict, Chinese financials are selling at an aggregate 41% discount to their 10-year median P/E ratios, and these four large Chinese banks are at even greater discounts.
• Chinese Banks Have an Asset Base That Is 35% Larger: The total market capitalization of the four major Chinese banks is USD 876 billion, while the four largest U.S. banks amount to USD 826 billion. While their market capitalizations are comparable, total assets of the four major Chinese banks add up to USD 11.05 trillion, while the total assets of the four major U.S. companies sum to USD 8.21 trillion.