Chinese banks have been frowned upon by investors this year. They have been under pressure from the Chinese government to minimize profits, provide low-interest rates, and are under more significant threat of soaring loans. However, Shanghai-based fund manager bet big on Chinese bank shares despite its current reputation.
Founder and fund manager at Shanghai Minority Asset Management Co. Zhou Liang purchased Chinese bank shares. He claimed that the prices already reflected a worst-case scenario due to deteriorating profits and non-performing loans. Nevertheless, he claimed that the market has been putting too much pessimism in China's bank industry.
Zhou, whose firm overseas is worth 10 billion yuan, outperformed the CSI 300 index by more than 150 percentage points in the last five years. According to the financial data provider East Money Information Co., they believe that many investors misunderstand the workings of the bank sector.
Zhou also claimed that investors looked too much into non-performing loans, lower asset quality, and deteriorating profit sustainability of banks due to the pandemic. He said that large joint-stock banks continue to be a sound investment since they do not have problems in terms of asset quality despite a number of few toxic assets. He further added that the return on equity of these banks are relatively high, while their operating costs are lower compared to US entities. The lower operating expenses were due to the cheaper provision of rental and labor in the country.
According to the People's Bank of China, the loan prime rate that indicates the price that lenders charge corporates on household loans remained unchanged since June. The de facto benchmark laid out by 18 banks, on the other hand, has been steadily declining since August of 2019.
It was also revealed that China leans on its massive banks in times of crisis to help the economy recover or prevent its worst slump. The Chinese government has been asking them to keep profit margins below ten percent while pushing its financial industry to waive 1.5 trillion yuan in profits for 2020. These are results of lower lending rates, deduction of fees, and the allowance of deferred loan repayments as mandated by the government. These policies would compel the banks to grant more unsecured loans to Chinese small businesses. Zhou then claimed that the system also headwinds the price.
Zhou claimed that in the past few years, bank policies on real estate have been severely unfriendly, but it does not prevent nor limit the bank from founding out strategies to continue profitability. At present, China's financial stocks are being traded at their lowest price compared to MSCI China in more than a decade. Hence, MSCI China is the second worst-performer on the country's benchmark.
Regardless, Zhou's flagship fund made an accumulated return of investments of more than 340 percent since 2013. It has been in all-in mode on China's mainland-listed blue-chip stocks that comprises of banks, property developers, baijiu makers, and insurers, including leading manufacturers. The fund, however, lost 5.7 percent in net asset value this year.
