China bank shares pull down Hong Kong HSI, property lifts Shanghai

Losses in the sector dragged down Hong Kong's Hang Seng index, which closed flat on the day. For the week, it posted a 1.9 percent gain largely due to a bounce on Tuesday that lifted the index to its highest close since May 15.

On the mainland, gains in the property sector fueled a late rally helping the Shanghai Composite finish up 1 percent and the large-cap focused CSI300 up 1.7 percent. For the week, the Shanghai index was off 0.1 pct and the CSI300 inched up 0.4 pct.

China's 'Big Four' banks all fell, with China Construction Bank the weakest, down 2.7 percent. Agricultural Bank of China lost 2.5 percent while ICBC, the world's largest bank by market value, was the best performer, dropping 0.7 percent.

I think the net interest rate margin will hurt the earnings prospects for the mainland banking shares, said Patrick Yiu, managing director, Cash Asset Management Ltd.

The momentum for banking shares is not very good because there is still a chance for China to cut interest rates once more in the second half, said Yiu.

Underscoring the heavy influence of Chinese banks on the Hong Kong market, weakness in their shares offset gains in insurers, property firms and consumption companies.

Chinese property shares rose on expectations that decreased borrowing costs would boost transactions as mortgage rates drop while insurers rallied on expectations their bond portfolios would benefit from lower interest rates.

The Shanghai property sub-index jumped 3.5 percent helping Hong Kong property shares to a 1.3 percent gain.

DOUBTS ABOUT A GROWTH BOOST

Late on Thursday, China cut its benchmark one-year lending rate by 31 basis points to 6 percent and gave banks more leeway to set lending rates. Analysts said the move was aimed at stimulating borrowing by creating a more competitive landscape.

However, market players remain doubtful that the rate cut will boost the economy.

Weakening demand from the West is hitting exports, while the key property sector remains pinched by the government's tightening and domestic consumption is not showing signs of picking up the slack.

Businesses only borrow money when they are confident that they can put that money back to work in the real economy and earn a return and not only because borrowing costs are lower, said Andrew Sullivan, principal sales trader at Piper Jaffray in Hong Kong.

Right now growth is clearly slowing. The way the market is trading, we could very well see another leg down, said Sullivan.

China will have difficulty meeting its 10 percent trade growth target this year, Vice Premier Wang Qishan said in comments published late on Thursday.

Next week China will announce its second quarter growth rate, which analysts expect to have dropped for a sixth successive period.

BANKS UNDER PRESSURE

The People's Bank of China has also lowered the lending rate floor while maintaining the deposit rate ceiling - a move that will put pressure on banks' net interest margins.

Analysts at Deutsche Bank estimate that the move, along with the two rates cuts made this year, could potentially lower listed banks' net interest margin by 10.4 basis points and pre-tax profits by as much as 6.1 percent.

Tracy Yu, banking analyst at Deutsche, recommends investors remain cautious on the sector.

The worry that China's steps to boost growth might come at the expense of bank profits has kept investors away from the sector despite valuations near record lows.

ICBC shares in Hong Kong trade at 5.2 times forward 12-month earnings, half their median valuation since listing and below levels seen in the aftermath of the Lehman Brothers bankruptcy in 2008, according to Thomson Reuters StarMine.