Bloomberg News

ICBC Puts Drop to 19-Month Low on China Optimism: Options

August 05, 2012

Options traders have cut bearish Industrial & Commercial Bank of China (601398) Ltd. wagers to the lowest in 19 months on speculation earnings at the world’s most profitable lender will increase as the Chinese government acts to boost growth.

The ratio of outstanding puts to sell the Beijing-based bank versus calls to buy dropped to 1.12-to-1 on Aug. 3 and touched 1.08 on July 27, the lowest level since December 2010, according to data compiled by Bloomberg. Shares of ICBC advanced 3.7 percent last month, snapping a two-month decline, and closed at HK$4.50 on Aug. 3. The lender reports earnings Aug. 30.

Investors are betting ICBC, as the world’s biggest lender by market value is known, will continue to rise after the government pledged to adjust policies to ensure stable economic growth. Chinese banks are trading at attractive levels and ICBC has the third-lowest valuation on the Hang Seng Index, Daphne Roth, Singapore-based head of Asia equity research at ABN Amro Private Banking, where she helps oversee about $207 billion, said on Aug. 2.

“It would be a good time to buy bank shares,” Roth said. “Second-half economic growth could be better than the first as the interest rate cuts and fiscal stimulus flow through the economy. We should see loan growth given that there is pent-up demand for housing among first-time home buyers in China.”

Lowest Value

The People’s Bank of China has cut the reserve requirement for mainland lenders three times since November and lowered borrowing costs twice this year. Premier Wen Jiabao is trying to bolster economic growth, which decelerated to the slowest pace in three years in the second quarter, while keeping a lid on property prices.

China’s biggest lenders have the lowest valuations in the 49-member Hang Seng Index (HSI), according to data compiled by Bloomberg. ICBC shares are trading at 5.7 times estimated annual earnings, below the average of 15 times for companies on Hong Kong’s benchmark index, the data show.

“We expect a short-term rebound in Chinese banks’ share prices following the significant underperformance,” Nomura Holdings Inc. analysts Lucy Feng and Donger Wang wrote in a note to clients on Aug. 2. “Chinese banks should still be able deliver around 10 percent year-on-year net profit growth in the second quarter, while other sectors have been announcing profit warnings.”

Bulls Rise

ICBC reported a 26 percent increase in full-year net income to 208.3 billion yuan ($33 billion) in 2011, according to data compiled by Bloomberg. That compares with 169.3 billion yuan for China Construction Bank Corp. (939), the nation’s second-largest lender, and 121.9 billion yuan for Agricultural Bank of China Ltd. (601288), the third-biggest.

Options traders have boosted ownership of bullish contracts. Open interest for calls jumped 58 percent since June 29 to 333,938 on Aug. 3, data compiled by Bloomberg show. That compares with a 2.7 percent drop for puts to 373,898 in the same period.

Wang Zhenning, a Beijing-based spokesman for ICBC, declined to comment on the company’s earnings or the options trading.

Concerns about falling net interest margins, the difference between what banks pay for deposits and what they earn from loans and other assets, have dragged down the valuations of Chinese lenders, according to an Aug. 2 report by Nomura. The PBOC cut the one-year lending rate by 6 basis points more than that for deposits when it last reduced rates on July 5.

Chinese banks’ average net interest margins may fall to 2.65 percent this year from 2.76 percent in 2011 as lending rates decline, according to the Nomura report.

Boost Fees

Lenders could cushion against lower margins by boosting loan volumes and fee-based income, Binay Chandgothia, a Hong Kong-based portfolio manager at Principal Global Investors, which manages $250 billion globally, said in an e-mail on Aug. 2.

New loans by Chinese banks have shown signs of revival, rising 45 percent from a year earlier to 919.80 billion yuan in June, after rising 44 percent the previous month, according to data released by the central bank on July 12.

“Given the recent loan numbers, prospects of better Chinese growth into the second half have improved,” Principal Global’s Chandgothia said.

China should cut lenders’ reserve-requirement ratio at an “appropriate time” and “suitably” lower benchmark interest rates in light of economic and inflationary trends, according to a commentary published in China Finance magazine Aug. 2.

Housing Stabilizing

China’s housing market has started to stabilize, with home prices rising for a second month in June, SouFun Holdings Ltd. (SFUN:US), the country’s biggest real estate website owner, said on Aug. 1. The nation’s manufacturing and services industries expanded at a slower pace in July, separate government reports last week showed. The International Monetary Fund said in July that China’s economic growth will slow to 8 percent this year from 8.9 percent in 2011.

“Its hard to say the Chinese economy has bottomed,” Yoji Takeda, who helps oversee $1.1 billion at RBC Global Asset Management in Hong Kong, said by phone on Aug. 1. “It will take a while before we could see a clearer picture. They’ll probably have to continue with a steady pace of policy easing.”

China has been increasing planned spending on railways and other infrastructure projects, and urging private investments in utilities and healthcare industry as the government seeks to boost domestic consumption to counter softening export demand.

Volatility Indexes

The PBOC said it will keep pursuing a “prudent” monetary policy and the nation’s economy will maintain stable growth even amid the risk the global recovery will falter. China will conduct policy fine-tuning at an appropriate time and consumer inflation may rebound after August, the central bank said in a quarterly monetary-policy report on its website Aug. 2.

The HSI Volatility Index (VHSI), which tracks the cost of HangSeng options, slipped 5 percent last week to 19.47. Europe’s VStoxx Index fell 6 percent to 23.8, and the Chicago Board Options Exchange Volatility Index, known as the VIX, lost 6.4 percent to 15.6 in the U.S.

Implied volatility, the key gauge of options prices, for one-month contracts closest to the ICBC share price dropped 28 percent since the June 8 high to 23.91 on Aug. 3, according to data compiled by Bloomberg. December HK$6.75 calls, with an exercise price 50 percent above the last close, had the biggest ownership among all bullish wagers on the stock, the data show.

“As the stimulus that’s been put through since last November starts to feed through the economy, growth should pick up,” Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., said in a phone interview on July 31. AMP has almost $100 billion in assets.“Credit and money supply figures certainly look a bit more stabilized. That will benefit the banks.”

To contact the reporter on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net


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