Bank Watch: Global bank investors look east

Investors see faster growth for banks in China than for those in Europe and the U.S.

As U.S. and European banks wind up another mixed earnings season, investors are looking east for more sure footed growth among global lenders.

Mixed growth in U.S. and Europe

For the world’s giant banks, the third quarter has turned out as mixed as any during a low-rate environment that is only beginning to disperse, as costly conduct issues persist. Whilst shareholders have been more exacting about the sustainability of apparent growth, there have been no ‘car crashes’ of the kind that marred earlier 2017 quarters for the likes of HSBC, Deutsche and others. And progress amongst dominant lenders can’t fairly be described as shabby overall.

Signs of health

For the most part, moderate declines by shares of some U.S. and European banks after earnings were due to lukewarm growth. For instance, neither JPMorgan nor Citigroup showed much sign that earnings momentum would go up a gear anytime soon. Elsewhere though, both Bank of America and Morgan Stanley pulled away from the pack as BofA joined JPM in an aggressive play for loan markets dominated by a Wells Fargo and MS posted the only rise in Q3 trading in the bulge bracket. Wells, distracted by the fallout from its sales scandal did provide the quarter’s outright decline in earnings quality. But the overall impression of progress was underpinned by RBS, an erstwhile laggard, reporting a third straight quarter of rising profits.

Banks rise in the east

That said, a peek outside the transatlantic world view quickly reveals bigger chunks of surefooted growth to the east. Chiefly, China’s large banks largely kept pace with rivals overseas. Among China’s Big 5—AgBank, Bank of Communications, CCB, ICBC, and Bank of China Ltd—four reported higher quarterly profits and easing pressure in bad loans. Of course a corporate debt to GDP ratio that is now approaching 200% remains the most glaring risk to an investment in such banks—aside from state interference. But net assets amongst China’s major banks are up least 100% since 2010 with no implosion of non-performing loans in sight. It is Beijing’s efforts to limit economic exposure to long-standing risks that has underpinned earnings. The very largest lenders in the world’s No. 2 economy benefit mechanically when liquidity tightens for smaller competitors and others in the shadow sector.

Lucky 8

This is a key factor underpinning investor sentiment on leading Chinese banks. 8 of the 10 banks currently ranked most highly by European investors are Chinese, according to a City Index analysis summarised below. We did a multifactor ranking of banks with a $50bn market value or higher. Our factors included holdings by large investors, earnings quality, intrinsic value, share price momentum, and analyst rating changes. Out of a list of 47, the only top 10 North American lender was Scotiabank. It is leading Canadian lenders as their domestic economy grows at its fastest pace for years. Contrast that with UK-based HSBC, in many ways Europe’s best bank recovery story, scraping in at 50. Barclays was predictably last on a cross Atlantic view, sealing its reputation as the least-liked major bank stock in Europe this year after growth retreated almost across the board in Q3.

Russia rebound

To be sure, recovery plays account for a large swathe of what currently looks attractive to investors in large banks. This helps explain why Sberbank, the biggest universal lender in Russia, tops our ranking. Record profits of $3.14bn in its most recent quarter and a valuation depleted by Russia’s currency crisis have encouraged yield-hunters to discount country risk. It’s a reminder that as barriers to investment around the world fall, there are fewer reasons to settle for tortuous equity growth in Europe and the U.S. In turn, as appetite for bank equities heads overseas, the hurdle for a stronger re-rating of lenders’ shares in Europe and the States will be higher.


Multifactor Rank: 100=best

Sberbank Rossii PAO


Bank of China Ltd


China Merchants Bank Co Ltd


Agricultural Bank of China Ltd


Industrial and Commercial Bank of China Ltd


China Construction Bank Corp


BOC Hong Kong Holdings Ltd


Bank of Communications Co Ltd


Bank of Nova Scotia


Industrial Bank Co Ltd


Toronto-Dominion Bank


Itau Unibanco Holding SA


Shanghai Pudong Development Bank Co Ltd


BNP Paribas SA


Banco Occidental de Descuento Banco Universal CA


Mitsubishi UFJ Financial Group Inc


HDFC Bank Ltd


Banco Bradesco SA


Sumitomo Mitsui Financial Group Inc


Banco Santander SA


China Minsheng Banking Corp Ltd


Royal Bank of Canada


Banco Nacional de Credito CA Banco Universal


PNC Financial Services Group Inc


Banco de Venezuela SA Banco Universal


Citigroup Inc


HSBC Holdings PLC


Credit Agricole SA


JPMorgan Chase & Co


Virgin Money Holdings (UK) PLC


National Australia Bank Ltd


ING Groep NV


Bank of Ireland Group plc


Mercantil Servicios Financieros CA


Royal Bank of Scotland Group PLC


Bank of America Corp


Banco Provincial SA Banco Universal


Banco Bilbao Vizcaya Argentaria SA


U.S. Bancorp


Standard Chartered PLC


Lloyds Banking Group PLC


Banco del Caribe CA Banco Universal


Intesa Sanpaolo SpA


Japan Post Bank Co Ltd


Rodovid Bank PAT


Bank of Montreal


Postal Savings Bank of China Co Ltd


Australia and New Zealand Banking Group Ltd


Wells Fargo & Co


Barclays PLC


Commonwealth Bank of Australia


Westpac Banking Corp


Data source: Thomson Reuters and City Index

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