Four Chinese banks led their Asia-Pacific peers in having the highest implied upside to share price targets among the largest Asia-Pacific lenders as of July 4, with China Construction Bank Corp. retaining its top spot.
China Construction Bank's potential upside to its share price — the percentage difference between the current stock price and analysts' consensus targets — was 19.1% as of July 4, down compared to April 19 but still the highest among the region's largest banks, S&P Global Market Intelligence data showed. The potential upside to the share prices of the three other Chinese lenders on top of the list — China Merchants Bank Co. Ltd., Postal Savings Bank of China Co. Ltd. and Agricultural Bank of China Ltd. — were 17.1%, 15.3% and 14.2%, respectively.
A higher upside means that analysts estimate the stock has more value than what is currently reflected in the market price. There is no certainty that the stocks will reach the price targets set by analysts.
Buy strength
China Construction Bank's buy strength, representing the proportion of buy and overweight analyst recommendations to total recommendations, came in at 94.7%, against a median of 69.4% for 20 of the region's biggest banks. China Merchants Bank's buy strength was 89.7%, Postal Savings Bank of China's was 70% and Agricultural Bank of China's was 66.7%.
Based on operating earnings yield, China Construction Bank is undervalued, Ford Equity Research analysts said in a July 5 report.
"We project that [China Construction Bank] will perform in line with the market over the next six to 12 months," Ford analysts said, adding that the projection is based on their analysis of the bank's earnings strength, relative valuation and recent price movement.
China Construction Bank's one-year total return was 28.6%, Market Intelligence data shows.
In addition to the Chinese banks, Indian lendes State Bank of India, HDFC Bank Ltd. and ICICI Bank Ltd. had sizable potential upside to price targets, ranging between 6.8% and 8.5%, as of July 4, indicating that analysts see further growth potential for the stocks. State Bank of India's buy strength was 74.4%, while it was more than 90% for HDFC Bank and ICICI Bank.
Indian banks have benefited from the country's strong economic growth, higher lending growth and improvements in asset quality, posting record profits in the fiscal year ended March 31. India's GDP is likely to grow 7.2% in the fiscal year that started April 1, according to the Reserve Bank of India, allowing the South Asian nation to remain the fastest-growing major economy in the world.
– Access the underlying data for major Asia-Pacific banks with the highest implied upside to share price targets.
– Access indexes, including regional bank indexes, on S&P Capital IQ Pro.
Potential downside
The biggest banks in Australia and Japan had implied downsides to share price targets as of July 4, indicating the stocks might be overpriced.
Commonwealth Bank of Australia's implied downside of 27.9% was the steepest in the sample, followed by National Australia Bank Ltd.'s 11.5% and Westpac Banking Corp.'s 9.6%. The fourth big Australian bank, ANZ Group Holdings Ltd., had an implied downside of 2.9% to share price target, with a buy strength of 21.4% as of July 4, the data showed.
While all the three Japanese megabanks had implied downsides, their buy strengths and one-year total returns were fairly high compared to the big Australian banks. Mitsubishi UFJ Financial Group Inc.'s buy strength was 91.7% and its one-year total return was 69.3%; Mizuho Financial Group Inc.'s buy strength was 45.5% and its total return was 62.2%; and, Sumitomo Mitsui Financial Group Inc.'s buy strength was 63.6% and its total return of 80.8%, according to Market Intelligence data.
Overall, the group's median implied upside was 3.7%, buy strength was 69.4% and total return was 31.7%.
