Goldman Sachs is advising investors to favor Chinese banking stocks over brokerages, adopting a contrarian stance even as top securities firms report massive profit growth.
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Goldman Sachs Prefers China Banks Over Brokers Despite 90% Profit Surge
Goldman Sachs is advising investors to favor Chinese banking stocks over brokerages, adopting a contrarian stance even as top securities firms report massive profit growth.
Goldman Sachs is reiterating its preference for Chinese banking stocks over brokerages, citing more sustainable earnings and attractive valuations, even as firms like CICC report preliminary first-quarter net profit growth of up to 90 percent.
"In the financial sector, we still prefer Chinese bank stocks over brokerage stocks," a Goldman Sachs research report stated on April 23, attributing the view to the sustainability of earnings improvement and relative valuation.
The call comes as China International Capital Corp. (CICC) announced preliminary first-quarter net profit growth of 65 to 90 percent year-over-year, with CITIC Securities posting a 57 percent gain. In contrast, Goldman forecasts the average pre-provision operating profit (PPOP) for mainland banks it covers will grow a more modest 8 percent in the first quarter, a significant recovery from the 3 percent decline recorded in the same period of 2025.
The report suggests a potential rotation within China's financial sector, questioning the durability of the brokerage rally fueled by a rebound in Hong Kong's IPO market. Goldman argues that banks, trading at lower multiples like 0.6 times price-to-book for their H-shares versus 1.0 times for brokers, present a more compelling long-term value proposition.
Banks Offer Steady Growth at Lower Valuations
Goldman's preference is rooted in what it sees as a stark valuation gap. The firm notes that the H-shares of three major brokerage houses—CICC, CITIC Securities, and GF Securities—trade at an average price-to-earnings ratio of 12 times and a price-to-book ratio of 1.0 times, which is above their historical median.
In contrast, the mainland banks covered by the firm trade at more attractive levels. Their A-shares are valued at 4.8 times PPOP, while their H-shares trade at just 4.0 times PPOP. The price-to-book ratios stand at 0.7 times and 0.6 times, respectively. Goldman's analysis suggests that the market has not fully priced in the earnings recovery story for the banking sector.
Key Lenders in Focus
Within the banking sector, Goldman continues to favor Construction Bank (0939.HK) and Bank of China (3988.HK) for their stable and high-quality earnings growth. The firm is also closely watching the performance of Agricultural Bank of China (1288.HK), particularly after its management provided a relatively optimistic outlook for the first quarter.
For investors seeking higher growth, the report highlights China Merchants Bank (3968.HK). Goldman believes the probability of CMB increasing its provisions is low, given management's emphasis on its balance sheet stability. This should, in theory, allow its profit growth to outpace the larger state-owned banks. The firm forecasts an 8 percent net profit increase for China Merchants Bank in the first quarter and 7 percent for the full year, compared to an average of just 3 percent for the "Big Four" state-owned banks.
This article is for informational purposes only and does not constitute investment advice.
