Banks: China too cheap to ignore, avoid India
Financials
David Scott sees global banks as still offering substantial value, with China the standout deep-value opportunity. Chinese banks trade at distressed-looking valuations despite resilient loan growth, profitability and well-covered dividends; David argues they are “too cheap to ignore”, with buybacks also looking increasingly likely given the large discounts to book value. China Merchants Bank is his preferred name given superior fundamentals and a valuation now around peer levels. By contrast, he expects Indian banks such as HDFC and Kotak to continue underperforming as intense competition for deposits, staff and lending compresses margins and efficiency. He remains positive on Banorte (a cheap play on Mexico’s growth) and Lion Finance (which is up another 155% since he last recommended it), while highlighting Commercial International Bank as a new Egyptian idea.
Big cap GEM Bank investment recommendations for 2024
Financials
Victor Galliano favours four longs and one short as his conviction calls for the year ahead. 1) Bank Mandiri (Indonesia) continues to generate improving returns and has strong capital ratios, credit quality and liquidity metrics. 2) KB Financial (South Korea) is a deep value pick. 3) China Merchants Bank is a contrarian pick, which looks well positioned to confront concerns re. Chinese NPLs and also on very attractive valuations. 4) Banco do Brasil screens well re. valuations and returns; its growth potential also looks particularly appealing. 5) Victor’s key sell is Kotak Mahindra Bank (India) as it is richly valued, exposed to low prospective earnings growth and has low credit quality coverage.
Chinese Banks: Focusing on the credit quality challenge
Financials
Victor Galliano conducts a credit quality review of eleven Chinese banks in the light of the Evergrande and real estate sector headwinds - he also assesses the banks’ profitability ratios and their capacity to absorb increasing credit losses. Victor considers the best placed banks to be China Merchants Bank and PSBC; the most exposed to further credit quality deterioration are China Minsheng Bank and China CITIC Bank.
