Here's what you need to know.
According to Bernstein Research, in November, the Chinese banks' performance was in line with the broad market, represented by the MSCI Asia-Pacific ex-Japan Index. During the month the small banks outperformed their large cap peers (+3.6% vs. +1.9%) reversing the recent trend of outperformance among the large banks.
Here's more from Bernstein:
Small banks' performance showed wide disparity as Minsheng saw the best performance (+7.8%) among the H-share listed Chinese banks while CITIC and CQCB underperformed the market by 1-3%. The remaining banks broadly performed in line with the market.
The central bank retained its accommodative monetary stance in November. It injected RMB 179 billionof liquidity into the banking system via open market operations during the month, more than offsetting the liquidity withdrawal from prior month.
Reinforcing this was another RMB 100billion of deposits the central bank injected into the banking system via MoF deposit auctions.
- Overnight SHIBOR rates eased in response to the liquidity injections, falling from 3.04% to 2.25% during the month.
On the FX front, the RMB appreciated against the US$, rising by 0.2% in November but was flat against the Euro. November marked the 4th consecutive month of RMB appreciation against the US$ as it has climbed by 2.2% over that period.
On a YoY basis, the RMB is up 2.5% against the U.S. dollar and 4.5% against the Euro.
- The appreciating RMB has driven demand for FX loans in China in recent months. FX loans as a % of total loans issued has risen to 20% in October (the last data point available), one of the highest levels ever recorded.
The equity markets in China showed further weakness in November and continued to underperform the Hang Seng and regional MSCI Asia-Pacific ex-Japan Indices.
The Shanghai and Shenzhen Compositeswere down 4-11% for the month while the Hang Seng Index continued to benefit from QE3 inflows and was up 1.3%.
The broad market rally we saw in the previous two months (Hang Seng Index rose 3.8% in October and 7.0% in September) had subsided as sentiments were dented by investors seeing no support from China.
- This November performance highlights a continuation of a year-long trend of weakness in the Mainland equity markets. During the month, the Shanghai Composite closed below the critical 2000 level for the first time since January 2009.
It appears that the once-a-decade leadership transition in the middle of the month failed to lift sentiment on the Mainland stock markets.
Outlook – Despite the fact that small banks have outperformed the large banks for the second consecutive month (the small banks topped the large banks by 3.4% over these two months), we continue to prefer the large banks due to a difference in the underlying fundamentals of these two groups.
We expect investors to reward the larger banks for the stronger NIMs and the better credit quality metrics we expect the large banks to report over the coming 12 months.
- We prefer CCB, ICBC and BOC (rated Outperform) to China Merchants Bank (rated Underperform).
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