The credit events surrounding Country Garden and Zhongrong International Trust have reignited investors’ concerns over the asset quality of Chinese banks, Citigroup said in a research note.
Given the protracted downturn of China’s real estate sector, the country is expected to see more credit defaults, though a “Lehman Moment” scenario is unlikely to take place, it said.
Due to the rising risk that Chinese banks might be asked to perform “national service”, the banking shares are expected to underperform brokerages in the near term, it said.
That said, due to the undemanding valuations of banks, the negative news has likely already been priced in and with support from high dividend yields, larger banks are expected to deliver decent absolute returns, it added..
Citigroup preferred regional banks such as Bank of Ningbo primarily due to their limited exposures to risky developers, risky LGFVs, and mortgages.