On the morning of August 27th, bank stocks rose against the market trend, with Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank all hitting new historical highs. Postal Savings Bank of China and Bank of Communications also touched new phased highs. The China Securities Bank Index initially rose by nearly 0.8% after the market opened, but then the increase receded, closing up by 0.27%.

By the close, 20 stocks in the entire A-share banking sector were in the green, with the four major banks leading the gains: Bank of China, Industrial and Commercial Bank of China, China Construction Bank, and Agricultural Bank of China, respectively closing up by 1.77%, 1.56%, 1.46%, and 1.22%, with share prices reported at 5.17 yuan per share, 6.53 yuan per share, 8.36 yuan per share, and 4.98 yuan per share. Bank of Communications also saw a full-day increase of over 1%, and Postal Savings Bank of China closed up by 0.78%, with share prices reported at 8.03 yuan per share and 5.18 yuan per share, respectively.

In contrast to the overall market's low-level fluctuation throughout the day, the performance of bank stocks was particularly eye-catching. By the close, the Shanghai Composite Index fell by 0.24%, the Shenzhen Component Index fell by 1.11%, and the ChiNext Index fell by 0.94%, with more than 4,100 stocks across the market declining.

The "Defying the Heavens" Bank Stocks

Looking back, the "defying the heavens" trend of bank stocks has been ongoing for some time. The China Securities Bank Index has been fluctuating upwards from a low of 5,106.7 points in December of the previous year to 6,500.60 points in May, and then it formed a "W" pattern from the high point. As the market continued to adjust downward, since August, bank stocks have once again become the "darling" of various funds. The China Securities Bank Index has risen by more than 7% since August 7th, while the Shanghai Composite Index has fallen by 0.56% during the same period. It was also in this independent trend that the Industrial and Commercial Bank of China's total market value topped the A-share market as the new "market value leader," with the latest market value reaching 2.33 trillion yuan.

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So far this year, the entire banking sector has led the 31 first-level industries of Shenwan with a gain of over 20%, and it is far ahead. Against the backdrop of the continuous decline in deposit interest rates, the saying "buying deposits is not as good as buying bank stocks" has been further verified.

Among individual stocks, Bank of Communications and Nanjing Bank have seen gains of over 46% this year, while Agricultural Bank of China, Industrial and Commercial Bank of China, and Chengdu Bank have also seen gains of over 40%. The median annual increase for the 42 bank stocks is around 20%, with only Minsheng Bank, Lanzhou Bank, and Zhengzhou Bank experiencing a decline in share prices this year.

Comprehensive institutional analysis indicates that the lingering risk-aversion sentiment, high dividends, low valuations, and stable performance remain the main factors attracting funds to bank stocks, and the warming expectations of a loose monetary policy have also provided some support. Lin Yingqi, a banking analyst at CICC, believes that the excess returns of banks are the result of both the fundamentals and the capital market. Dai Zhifeng, the head of the research institute at Zhongtai Securities, stated that the dominant factor in bank stock prices this year is the capital market, with the fundamentals being secondary.

"Despite the pressure on the operating environment, banks have achieved stable profits and dividends by reducing liability costs, as well as investment income and provisions. Under the guidance of 'guarding against systemic financial risks,' policies are also more supportive of stabilizing bank interest spreads, asset quality, and profitability. In addition, the inflow of funds from index funds and insurance has also promoted a rebalancing of the bank sector's allocation," Lin Yingqi pointed out in a report a week ago. Looking forward to the next 3 to 6 months, the current price-to-book ratio of state-owned large banks is around 0.6 times, and there is still a 15% to 30% gap from the phased target valuation of 0.7 to 0.8 times. The dividend yield of banks, which is currently around 5%, may decline to around 4%.

In terms of valuation, despite the continuous rise, the situation where bank stocks are fully below book value has not been broken. The highest price-to-book ratio of China Merchants Bank is only 0.88 times, and among state-owned large banks, only the Agricultural Bank of China has a price-to-book ratio above 0.7 times. As share prices rise, the dividend yield of most listed bank stocks has fallen to some extent, but the current median is still around 5%, which still has a significant premium compared to the risk-free rate of return.It is worth noting that the mid-term dividends that have attracted much attention from the market have been put on the agenda by more and more banks, and some banks have already clarified the dividend plan. On August 15, Ping An Bank announced its first mid-term dividend, intending to distribute 2.46 yuan (including tax) for every 10 shares, with a total cash dividend of 4.774 billion yuan, accounting for 18.4% of the net profit attributable to the bank's shareholders in the consolidated financial statements; the next day, Shanghai Rural Commercial Bank also launched a mid-term dividend plan in its semi-annual report, intending to distribute 2.305 billion yuan (including tax), with a mid-term cash dividend ratio of 33.07%; Nanjing Bank also confirmed that it will implement a mid-term profit distribution plan in due course this year. Earlier, the six major state-owned banks, ICBC, ABC, BOC, CCB, BOCOM, and Postal Savings Bank, as well as a number of small and medium-sized banks, officially announced their mid-term dividend intentions. From a fundamental perspective, among the more than ten listed banks that have disclosed their 2024 semi-annual reports, only Pudong Development Bank and Ping An Bank, two joint-stock banks, had negative year-on-year revenue growth, while their net profit attributable to their parent companies all achieved year-on-year positive growth, and the overall asset quality was further improved. Supported by non-interest income such as bond investment, regional banks are still the most resilient. The year-on-year growth rates of net profit attributable to shareholders of Hangzhou Bank, Changshu Bank and Qilu Bank reached 20.06%, 19.58% and 16.97% respectively, while the growth rates of net profit attributable to shareholders of Sunong Bank, Ruifeng Bank and Jiangsu Bank also reached 15.81%, 15.48% and 10.05% respectively. Beware of excessive pursuit Which funds are increasing their allocations to bank stocks? According to comprehensive institutional analysis, the continued shortage of assets and the downward trend in deposit interest rates have led to index funds, insurance funds, northbound funds, etc., which are important sources of increased holdings of A-share bank stocks. Behind the frequent volume protection of broad-based ETFs, there is no lack of the power of the "national team". A statistical data from Zhongtai Securities at the beginning of this month showed that the scale of passive funds and northbound funds inflows in the second quarter was large, which was the main driving force for the rise of bank stocks. Dai Zhifeng believes that insurance and wealth management are expected to remain the most important cornerstones of bank stock stability. Active funds did not increase their holdings of bank stocks significantly in the second quarter, but they did not reduce their holdings either. Overall, marginal inflows of various funds and small outflows of institutional funds have driven bank stocks to the top of the list. Data from China Securities shows that from the perspective of the scale of ETF funds and the proportion of bank stocks, at the end of the second quarter, the market value of bank stocks held by passive funds reached the highest value since 2019, of which the scale of increased holdings in the second quarter was about 11.5 billion yuan, a decrease of 33.6 billion yuan from the first quarter. From the perspective of heavily held stocks, the market value of bank stocks held by passive funds and the proportion of the total market value of bank tradable shares also reached the highest value since 2019. In the second quarter, the market value of bank stocks held by northbound funds and the proportion of the total market value of bank tradable shares continued to rise, but the rate of increase declined. However, from a fundamental perspective, some bank executives who have held mid-year performance meetings revealed that although the pressure on interest rate spreads has eased, it still exists, and bad risks such as real estate will be further exposed. Although it has gradually become a consensus that the banking industry's profits have entered a stage of slow growth, as stock prices continue to rise, considering that the semi-annual report is about to be disclosed, there are voices in the market that warn against the risk of excessive pursuit of high prices. Lin Yingqi also said that from a 6-12 month time dimension, it is necessary to pay attention to the impact of the downward trend in credit growth, the disposal of existing real estate debts, and the debt repayment tendency of residents on the fundamentals. Ni Jun, chief analyst of banks at GF Securities, also pointed out that considering the gradual weakening of fundamentals and changes in the A-share environment, the relative attractiveness of high dividends will gradually decline, and investors are advised to allocate long-term assets to leading stocks in various sectors with better asset quality.