Chinese banks:Implications of Huijin selling ICBC and CCB's A-shares

Huijin’s divestment to affect market sentiments in the near term

    The Shanghai Composite Index fell by 6.5% today after HKEX disclosed that Central Huijin Investment (Huijin) sold ICBC and CCB shares worth of Rmb1.63bn and Rmb1.91bn respectively on 26 May 2015. Huijin is the major shareholders of the big four banks, and this is the first divestment. Since 2008, Huijin had brought the secondary A-shares of the big four banks in five rounds and its actions were largely seen as a symbolic support to both the market and the banking sector. As such, we expect Huijin’s divestment to affect market sentiments in the near term, despite it should have a neutral impact to the banking sector’s fundamental.

    Motivated by the policy to lower the State’s stake in SOE

    We believe the actions by Huijin are motivated by the opportunity to sell their bank investments into the strength of the A-share market, and supporting the State’s policy to lower the government’s ownership of state-owned enterprises (SOE) through hybrid share-ownership reform. Since 2008, Huijin had brought 855m A-shares of ICBC and 561m A-shares of CCB in the secondary market and in this divestment, Huijin sold 35% (or 300m) and 50% (or 280m) of the shares previously purchased. Year-to-date, ICBC and CCB’s A-shares have appreciated and fallen by 4.7% and 5.5% respectively, which have significantly underperformed the SHCOMP Index (up 42.8%).

    Buy dips and maintaining our preference for the H-share banks

    We continue to prefer the H-share banks which are trading on a 5% discount against their dually listed A-shares, with the H-shares of CCB and BOC as our top picks. While we think Huijin might continue to divest, it is highly unlikely to sell shares at below 1x 2015E P/B. Huijin owns a stake of 34.7% of ICBC, 64.3% of BOC and 40.3% of ABC in the form of A-shares. For CCB, Huijin owns 57.1% stake in CCB, with a split of 57.03% in H-shares and 0.08% in A-shares.

    Valuation and risks

    On our estimates, the H-share listed banks are trading on 1.1x 2015E P/B, with 2015E P/E of 7.2x, whereas the A-share listed banks are trading on 1.2x 2015E P/B, with a P/E of 7.7x. The key downside risk includes divestment by major and strategic shareholders, slower than expected economy leading to falling NIM and continued asset quality deterioration and tighter bank regulations resulting in weaker profitability.