CHINESE banks, the cheapest among major emerging markets' lenders, may drop lower as overseas banks and funds trim stakes to meet capital rules and curb risks amid concerns that the nation's record credit boom will unravel.
The country's five biggest banks trade at an average 7.7 times forecast earnings, according to data compiled by Bloomberg news. That compares with 8.09 for Brazil's largest banks, 8.11 for Russia and 14.8 for India. Standard Chartered Plc and Qatar's sovereign fund are among investors that will be allowed to sell their holdings in the banks starting tomorrow.
The three biggest Chinese banks posted their worst quarterly stock performance in two and a half years on concern that local governments may default on loans. The lenders' credit outlook may sour in the absence of a government plan to deal with the issue, Moody's Investors Service said this month, while regulators globally are demanding banks increase buffers.
"You will certainly see share sales by some of these cornerstone investors," said Sandy Mehta, chief executive officer for Hong Kong-based Value Investment Principals Ltd. "The US and European financial companies obviously need capital for themselves. And there are more distressed opportunities in financial sectors" elsewhere, he said.
A 12-month lockup period on 22 percent of Agricultural Bank of China Ltd's Hong Kong-listed shares, valued at about HK$27 billion (US$3.5 billion) and held by Qatar Investment Authority, will expire tomorrow, the Beijing-based bank's filings show.
Restrictions on 4 percent held by Standard Chartered also end that day, a year after China's third-largest lender by market value made its trading debut.
Limits on most of Bank of America's 10.2 percent stake in China Construction Bank Corp, worth US$20 billion, will be lifted on August 29, according to the Chinese bank, which is the world's second-largest lender by market value.
"We remain a significant shareholder in China Construction Bank and we intend to continue the important long-term strategic alliance with CCB originally entered into in 2005," said Bank of America spokesman Jerry Dubrowski.
A spokesman for Qatar's sovereign fund declined to comment, and said he can't be identified due to company policy.
Deutsche Bank AG, which owns 20 percent of Huaxia Bank Co, a stake worth US$2.35 billion, according to data compiled by Bloomberg, was freed to sell about 8.6 percent of the Chinese lender this year and can divest another 3.9 percent from October.
"Deutsche Bank is fully committed to the development of its business in China and partnership with Huaxia Bank," Michael West, the German bank's Hong Kong spokesman, said in an e-mail without elaborating. Deutsche Bank will be free to sell its remaining Huaxia shares from April 2016, the Beijing-based lender's filings show.
Foreign investors including Bank of America, New York-based Goldman Sachs Group Inc and Royal Bank of Scotland Group Plc in Edinburgh have trimmed more than US$22 billion of holdings in Chinese lenders since the start of 2009, according to data compiled by Bloomberg.
Most recently, Singapore's Temasek Holdings Pte raised US$3.63 billion selling almost a tenth of its stake in Construction Bank and about half of its shares in Bank of China Ltd on July 5. That was hours after Moody's said the credit outlook for Chinese lenders may sour, and sparked a more than 3 percent drop in the two lenders' Hong Kong shares the next day.
Temasek's stakes
"Investors' sentiments have turned more negative this month because of the issue of the local government debt," said Stanley Li, an analyst at Mirae Asset Securities (HK) Ltd in Hong Kong. "There's also evidence suggesting that some local governments could have solvency problems. Together with the Temasek sell-down news, sentiment on the Chinese banking sector as a whole has become more gloomy."