China banks eclipse US rivals

China banks eclipse US rivals

By Patrick Jenkins in London

Published: January 10 2010 22:32 | Last updated: January 10 2010 22:32

Chinese banks have cemented their position as the most highly valued financial institutions, taking four of the top five slots in a ranking of banks’ share prices as a multiple of their book values.

China Merchants Bank, China Citic, ICBC and China Construction Bank lead the table, followed by Itaú Unibanco of Brazil, all with a price-to-book multiple of more than three.

Over the past six years, the average price-to-book value of the biggest 50 banks has halved from two to one.

This means that investors believe the average bank is worth no more than the value of its balance sheet. Most western banks are trading at well below their book value.

But investors are attaching a growing premium to emerging markets banks, led by China Merchants, the most highly rated of the biggest 50 banks by market capitalisation, on a multiple of 4.3, according to Bloomberg data.

At the start of the last decade, the US dominated the rankings. The top five were Bank of New York Mellon , Lloyds of the UK, Morgan Stanley, Citigroup and Wells Fargo.

Only last year US Bancorp topped the table and Wells Fargo was in the top 10.

The changes, which have seen the top-rated Chinese banks double in valuation over the past year as western rivals have been derated, reflect growing confidence in emerging markets, particularly China and Brazil.

They indicate concerns about the profitability of western institutions stemming from toxic assets and the drive to force banks to increase capital and liquid funds.

Even western investment banks that have thrived over the past year have been left behind in the price-to-book league table. Goldman Sachs is ranked 22nd and JPMorgan 31st.

“Western markets generally are experiencing their worst prospects for 20 years, and that’s in the valuations,” Robert Law, banks analyst at Nomura, said.

“China in particular is a region that is perceived as less vulnerable to global downturn.”

Although Chinese bank valuations were hit by investor nervousness in 2008, the limited fallout they suffered – combined with positively received government stimulus measures – have allowed them to bounce back.

Some fringe developed economies with a reputation for tough regulatory controls and limited direct or indirect exposure to the subprime problem at the root of the crisis have benefited.

Canadian and Australian banks in particular climbed the price-to-book rankings.

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