CIMB has upgraded Chinese banks to overweight, arguing they are undervalued and a good way to play a cyclical recovery.

The upgrade for the banks, coupled with a downgrade for property to underweight, came as the broker said that a re-rating of Chinese stocks was well under way.  The MSCI China and the Hang Seng Index are up 34% and 24%, respectively, this year.

CIMB expects the MSCI China to reach 100.5 points by the end of 2018, up from 79 points currently, thanks to stable growth and upside from structural improvements in the economy like industry consolidation. The Hang Seng is expected to climb to 33,600 points compared to current levels around 27,200 points.

CIMB is bullish on offshore Chinese stocks over the medium term because of recovering earnings, corporate deleveraging, industry consolidation, reasonable valuations, and the prospect of more foreign inflows.

Here’s why CIMB is bullish on bank stocks:

1) the better macroeconomic factors normally benefit banks’ business, credit demand, etc.;

2) the resilient economy trend also points to potential NIM expansion as overall interest rate should remain at relatively high levels amid such momentum;

3) the cyclical sectors’ (commodities, etc.) recovery should also ease NPL pressure as those sectors are major NPL contributors. Structurally, the stabilising leverage ratio in China, especially the corporate leverage ratio, should trigger a re-rating of Chinese banks.

Top bank stock picks are China Construction Bank (939.HK) – which is rated add with a price target of HKD7.60 – and Industrial & Commercial Bank of China (1398.HK), which rated add with a price target of HKD6.30.

By Robert Guy
Barron’s

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