After Goldman Sachs downgraded top lenders, including the Agricultural Bank of China (AgBank), Hong Kong-listed Chinese banking shares fell on Wednesday.
The Hang Seng Mainland Banks Index (.HSMBI) fell 3.6% to reach four-month lows, its lowest day in eight months.
In a Wednesday report, Goldman lowered Agbank from “Neutral” to “Sell” and ICBC and Industrial Bank (601166. SS) from “Buy” to “Sell.”
The Wall Street Bank said investors are concerned about Chinese banks’ exposure to local government debt, earnings risks from such debt, and bank performance differences.
As the government slashes interest rates to boost post-COVID recovery, margins are already at historic lows.
Hong Kong Agbank shares tumbled about 3%, the greatest one-day decline in eight weeks. China’s largest lender, ICBC, fell about 2% in Hong Kong.
An index tracking China-listed banks (.CSI399986) fell 0.5%, in line with the market.
Some investors thought Goldman’s prognosis was overreacted.
“Nothing new” about Chinese banks’ local government debt exposure. “This issue has been around since 2018,” said Mark Dong, general manager of Hong Kong-based Minority Asset Management, which holds China banking equities.
Debt woes
LGFVs, created by Chinese local governments, finance infrastructure, and economic growth. According to IMF estimates, LGFV loans have reached $9 trillion, creating a serious systemic danger to the world’s second-largest economy.
Goldman Sachs expects China’s six major banks to take on more local government debt to lessen risks for smaller lenders, potentially reducing profitability.
Goldman anticipates dividend yields of Chinese banks it covers to drop two percentage points to 4-6% this year.
“Dividend payout targets could come under increasing pressure, on weaker earnings growth” and hefty capital adequacy requirements, the bank added.
The bank reduced pre-provision operating profit expectations for large Chinese banks by 5–6% this year and next.
GAM Investments investment director Jian Shi Cortesi said local government debt exposure does not influence banks’ revenues.
“I don’t expect that, if the local government debt goes into trouble, it will be the banks that shoulder that cost,” she said, expecting the central government to cover some of the expenditures.
“We wouldn’t say we avoid Chinese banks because of the local government debt issues,” she said, adding that Chinese banks have adequate capital and loan loss provisions. Many significant lenders trade at 3-4 times profits.
