Chinese banks : now the least expensive in the region

Chinese banks . now the least expensive in the region On our P/B versus ROE valuation model, Korean banks have tended to trade on the biggest discount (a 20-40% discount for most of the past six years) among the banks in the region. They were inexpensive so often that investors called them the "value trap".

But over the past two months, the discount on Korean banks has narrowed significantly from 40% to 27%, thanks largely to strong price gains. We do note that the absolute P/B for Korean banks has risen from a low of 0.63x on 30 November to 0.82x currently, while the trailing ROE is 12%. Figure 1 highlights that 0.63x book on 30 November 2008 was the lowest P/B, except for 0.55x book in 2001.

In contrast to Korean banks, Chinese banks. discount has risen from just 11% on 30 November to 35% currently. So, for the first time in six years, Chinese banks are now trading on the biggest discount in the region.

The absolute P/B for Chinese banks is 1.48x (versus 0.82x for Korean banks), but Chinese banks. trailing ROE is 19.9%. We highlight that 1.48x book is the lowest absolute P/B since the Chinese banks listed in mid-2005.

At a 35% discount to the region, we estimate that the sector is now priced for ROE to fall to 15% (versus Credit Suisse.s bottom-up estimate of 18%).

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