World’s Biggest Bank May be Undervalued due to Shadow Banking Crackdown


Analysts say that the world’s biggest bank in terms of assets may now be undervalued despite a near doubling of its share price in under two years, due to Beijing’s crackdown on shadow banking which may have improved asset quality.

The central government’s ongoing crackdown on China’s shadow banking sector in tandem with its deleveraging drive appears to have improved the health of large-scale lenders, by improving the asset quality of leading state-owned enterprises, which has in turn enabled the banks to cut down their provisions against dud loans.

Analysts now point out that these improvements to the health of major Chinese banks such as the Industrial and Commercial Bank of China – the world’s biggest bank in terms of assets, may not yet be reflected in their share prices.

“Chinese banks’ valuations are definitely trending higher,” said Richard Cao, an analyst with Guotai Junan Securities Co., in Shenzhen to Bloomberg.

“Asset quality has been very stable and their profit prospects are so much better than last year.”

“If you look at the earnings this year, even though much of the earnings improvement is from less bad-debt reserves, it is a sign of quality,” said Hao Hong, chief strategist and head of research, Bocom International Holdings.

“The outlook is improved because the SOEs’ balance sheet has improved.”

While ICBC shares have seen a 73% rebound after bottoming out in February, the bank continues to underperform other leading global lenders.

According to Bloomberg ICBC continues to trade at 0.92 of its estimated book value for the year, as compared to an average of 1.28 for 50 international banks, including HSBC, Royal Bank of Canada and Wells Fargo & Co.

The Chinese central banks’ recent decision to reduce the reserve requirement ratio for lenders that meet financial inclusion benchmarks is also boosting the prospects of major Chinese banks such as ICBC.

The decision is expected to undermine competition from the shadow banking sector by given neglected borrowers betters access to funds from conventional lenders like ICBC, whose shares have leaped 11% since its announcement on 30 September.