Chinese banks’ valuations are close to their lowest on record as the nation’s interbank funding crisis exacerbated investors’ concern that earnings growth will stall and defaults may surge as the economy slows.

Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, ended Hong Kong trading last week at 5.3 times estimated earnings, data compiled by Bloomberg show. The Beijing-based bank may report profit of $41 billion for 2013, according to the average of 17 analysts’ estimates. Wells Fargo & Co., with net income forecast at $20 billion, trades at 11 times earnings.

Investors’ disenchantment with Chinese banks reflects concern that a crackdown on shadow banking and measures to direct new credit away from repaying old loans and toward boosting economic productivity will undermine earnings and trigger a surge of bad loans. President Xi Jinping also signaled last week that China’s new leaders will tolerate slower growth.

“The golden era of banking is over,” said Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong who recommends clients buy shares of ICBC and divest mid-sized Chinese lenders. “Investors have to recognize that more market discipline is going to be imposed upon the banks.”

Shares of ICBC and its three largest local competitors ― China Construction Bank, Agricultural Bank of China Ltd. and Bank of China Ltd. ― fell by an average 12 percent in Hong Kong last month, erasing the year’s gains and underperforming the 7.1 percent decline in the benchmark Hang Seng Index.

The shares dropped by an average 9 percent in Shanghai, where the broader market of Chinese stocks also declined, with the CSI 300 Index losing 16 percent on the month and entering a bear market June 24. 

(Bloomberg)