Here's why ICBC outperformed CCB

Find out the 2 factors that led to ICBC's outperformance.

According to Bernstein Research, ICBC's shares outperformed those of CCB by 9% in the final 4 months on 2012. This is a very large discrepancy between these two banks as they have traded inline with each other over the previous 18+ months.

• The share prices of the two banks fell by 20-22% in full-year 2011 and then by another 3% each in the first 7 months of 2012. Since August however, ICBC shares have risen by 37% while CCB's have lagged behind, increasing by just 27%. As a result of ICBC's recent performance, the relative valuation of CCB has fallen to 1-standard deviation below historical average on both a P/B and P/E basis.
• - ICBC is currently trading at an 11% valuation premium to CCB using the banks' P/B multiples. Traditionally, ICBC's valuation premium over CCB is typically anywhere from 0-13%.

Here's more from Bernstein:

ICBC outperformed CCB despite the fact that CCB enjoyed more positive consensus EPS revisions for both 2013E and 2104E during the period of outperformance. 

• CCB's 2013E consensus EPS estimates increased by 4.1% over this period while ICBC's increased by just 0.6%. At the same time the changes to the banks' 2014E EPS estimates were not as wdie but CCB still enjoyed better revisions than ICBC (+0.5% vs. -1.0%).

We believe the relative outperformance of ICBC (vs. CCB) was driven by two factors:

• First, ICBC beat consensus earnings expectations by 4% in Q3 '12 vs. the 1% beat by CCB. While ICBC's beat topped CCB's, this was not reflected into expectations of future earnings power as ICBC's 2013/14E EPS forecast has not moved while CCB's has seen positive earnings revisions. 
• Second, based on our discussions with clients it appears that a number of overseas investors increased exposure to the Chinese banks in the run-up to their Q3 earnings season by investing in ICBC. In a recent marketing trip a number of generalists informed us that they use ICBC (the largest bank in  China and the undeniable "national champion") as an important proxy to gain exposure to the Chinese  banks. As a result, we believe that ICBC is currently overbought relative to CCB.

We expect the valuation differential between CCB and ICBC will revert back to normal levels as it has done several times in the past. We believe investors will increasingly focus on the valuation gap between  the two banks when the recent rally in Chinese bank equities begins to wane (January is on pace to be the 5th consecutive positive month for the share prices of the Chinese banks).