China banks are now valued like US peers at depths of 2008 crash

Pessimism about China’s banking sector has reached an unprecedented level, even approaching the depths where US lenders traded during the 2008 financial crisis.
The four biggest lenders, including Industrial & Commercial Bank of China Ltd, are priced at near record low valuations of about 0.4 of their book value in Hong Kong after a sector index weakened to an 11-year low. That depressed level roughly matches where investors priced JPMorgan Chase & Co. and Bank of America Corp among others during the depths of the 2008 crash.
They are far from the same perils that hit US lenders at the height of the financial crisis. But the banks’ recent swoon reflects both a broad market selloff and growing concerns about bad debt as lenders have been called on to backstop the flagging economy. Bank earnings have been steady so far, fuelled by a jump in new loans, but they face growing risks from the nation’s Covid-Zero lockdowns and a property crisis that shows no signs of easing.
“While we haven’t yet witnessed any signs of a structural deterioration in the domestic economy, it’s likely to remain under pressure in the next few years amid a global recession,” said Shen Meng, a director at Beijing-based investment bank Chanson & Co. “Banks would be more stressed if they can’t recover the loans by then.”
On top of that, the tightly controlled Chinese state-owned lenders have been perennial underperformers, and now are weighed down further as President Xi Jinping pushes for more “common prosperity”. The world’s second-largest economy is expected to grow just 3.3% in 2022, below government guidance of about 5.5%.
At the direction of Beijing, lenders including ICBC and China Construction Bank Corp have aggressively expanded credit this year to private enterprises and areas such as infrastructure. The biggest state banks have also beefed up support for the property sector, planning to to extend at least $85-billion in net financing in the final four months of the year.
Xiao Yuanqi, a vice chairman at China Banking and Insurance Regulatory Commission, said earlier this month that their exposure to the real estate sector is at a “reasonable” level of 26% of their overall loan book, with the majority in high quality home mortgages.
But the risk lies in whether the property sector’s woes will spread more broadly in the economy, which could cause loan losses to grow further. The property sector drives about 28% of China’s gross domestic product.
“That ...