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.

Bank

Multifactor Rank: 100=best

Sberbank Rossii PAO

100

Bank of China Ltd

99

China Merchants Bank Co Ltd

97

Agricultural Bank of China Ltd

95

Industrial and Commercial Bank of China Ltd

93

China Construction Bank Corp

91

BOC Hong Kong Holdings Ltd

89

Bank of Communications Co Ltd

87

Bank of Nova Scotia

85

Industrial Bank Co Ltd

83

Toronto-Dominion Bank

81

Itau Unibanco Holding SA

79

Shanghai Pudong Development Bank Co Ltd

77

BNP Paribas SA

75

Banco Occidental de Descuento Banco Universal CA

74

Mitsubishi UFJ Financial Group Inc

72

HDFC Bank Ltd

70

Banco Bradesco SA

68

Sumitomo Mitsui Financial Group Inc

66

Banco Santander SA

64

China Minsheng Banking Corp Ltd

62

Royal Bank of Canada

60

Banco Nacional de Credito CA Banco Universal

58

PNC Financial Services Group Inc

56

Banco de Venezuela SA Banco Universal

54

Citigroup Inc

52

HSBC Holdings PLC

50

Credit Agricole SA

49

JPMorgan Chase & Co

47

Virgin Money Holdings (UK) PLC

45

National Australia Bank Ltd

43

ING Groep NV

41

Bank of Ireland Group plc

39

Mercantil Servicios Financieros CA

37

Royal Bank of Scotland Group PLC

35

Bank of America Corp

33

Banco Provincial SA Banco Universal

31

Banco Bilbao Vizcaya Argentaria SA

29

U.S. Bancorp

27

Standard Chartered PLC

25

Lloyds Banking Group PLC

24

Banco del Caribe CA Banco Universal

22

Intesa Sanpaolo SpA

20

Japan Post Bank Co Ltd

18

Rodovid Bank PAT

16

Bank of Montreal

14

Postal Savings Bank of China Co Ltd

12

Australia and New Zealand Banking Group Ltd

10

Wells Fargo & Co

8

Barclays PLC

6

Commonwealth Bank of Australia

4

Westpac Banking Corp

2

Data source: Thomson Reuters and City Index


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