Understanding China’s credit system
Figure 1: China’s benchmark lending rates do not reflect changes in its economy well
Figure 2: Despite numerous efforts from the PBOC, borrowing costs in China have not declined
The new loan prime rate should better reflect current economic conditions
Overall impact should be positive in the long-term
Table 1: China’s Big Four banks are still trading at steep discounts to their estimated intrinsic value
| 2021E ROE (%) | Cost of Equity (%) | Fair PB Ratio | 2020 Target Price (HKD) | Current Price (HKD) | Upside Potential (%) | Dividend Yield (%) | |
| Industrial and Commercial Bank of China | 12.2 | 12.7 | 0.95 | 7.20 | 5.40 | 33.3 | 5.34 |
| China Construction Bank | 12.4 | 12.5 | 1.00 | 9.00 | 6.18 | 45.6 | 5.80 |
| Bank Of China | 10.8 | 12.8 | 0.80 | 4.80 | 3.17 | 51.4 | 6.70 |
| Agricultural Bank Of China | 11.9 | 13.0 | 0.90 | 4.90 | 3.17 | 54.6 | 6.39 |
| Average | 11.8 | 12.8 | 0.91 | - | - | 46.0 | 6.10 |
| Source: Bloomberg, iFAST estimations | |||||||
Table 2: China’s financial sector is expected to record positive earnings growth going forward
| 2018 | 2019E | 2020E | 2021E | |
| Forward PE Ratio | 7.30 | 6.68 | 6.35 | 5.86 |
| Expected Earnings Growth (%) | -3.91 | 9.20 | 5.18 | 8.46 |
| Forward EPS (HKD) | 2,262 | 2,470 | 2,598 | 2,818 |
Source: Bloomberg, iFAST compilations The H-Financials index is used as a proxy for the earnings outlook of
China’s financial sector |
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Figure 3: Over the long run, share prices are driven by earnings
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