In Depth: Why China’s Banks Are Stock Market Darlings — for Now
By Zhu Liangtao, Fan Qianchan and Wu Xiaomeng


nvestors in China’s mainland stock market made a beeline for bank stocks last year, making the sector the market’s top performer despite the country’s sluggish economy, a slowdown in loan growth, and concerns about a deterioration in asset quality.
The reason? Dividends. Banks doled out cash payments to shareholders like confetti. And with their valuations hovering at close to record lows, the yields were among the most attractive in the market and double or triple those on Chinese government bonds (CGBs).
The characteristics of bank stocks — low volatility and high dividends — make them similar to corporate bonds and so they have become particularly attractive to large institutional investors, a macro analyst specializing in asset allocation at a major brokerage firm told Caixin.
Insurance and bank wealth management funds need to diversify out of government bonds to spread their risk, he said. “So, these types of funds are targeting the high dividends and high payouts of bank stocks.”
Now, analysts are debating whether the deeper problems afflicting the sector — tepid profit growth, rising nonperforming loans, falling net interest margins (NIMs), and deteriorating asset quality — will come to the fore and stall the rally in 2025.
Bull run
China’s banks were stock market laggards for several years. Unlike go-go stocks in hot sectors like technology and semiconductors, lenders were seen as boring and low-growth, and investors were worried about their underlying financial health.
Investors shrugged off those concerns in 2024 and the banking sector had a stellar year. It surged 34.4% last year, the top performer among the 31 first-tier industries in the widely recognized Shenwan industry classification system set up by the research arm of Shenwan Hongyuan Securities Co. Ltd.
Leading the pack was Bank of Shanghai Co. Ltd. (601229.SH -0.22%), which soared 69%, while Shanghai Rural Commercial Bank Co. Ltd. (601825.SH +0.61%), Bank of Chengdu Co. Ltd. (601838.SH +0.96%), and Shanghai Pudong Development Bank Co. Ltd. (600000.SH +0.78%) all jumped over 60%. Bank of Lanzhou Co. Ltd. (001227.SZ +0.43%) was the only lender to see its stock price decline, by 1.3%.
The “Big Six” state-owned commercial lenders did particularly well. China Construction Bank Corp. (601939.SH -0.36%) and Industrial and Commercial Bank of China Ltd. (601398.SH +0.15%) rose to 9.02 yuan and 7.04 yuan, respectively, on Dec. 25, record highs for both stocks.
The surge in share prices might seem irrational given the unimpressive operating performance and fundamentals of the banks themselves.
In the first nine months of 2024, the combined revenue of the 42 mainland-listed banks fell by 1.05% year-on-year, and net profit attributable to their parent companies grew by just 1.43%. Net interest income, which contributes to the bulk of banks’ profits, fell at 30 of the 42 banks, while their combined NIM, a key indicator of profitability, stood at 1.57%, 19 basis points lower than a year earlier.
Loan growth has also been muted. Central bank data show that in 2024, yuan-denominated loans increased by 18.1 trillion yuan ($2.5 trillion), 4.7 trillion yuan less than in 2023 and marking the first annual decline in 13 years.
But investors overlooked the gloomy fundamentals in their search for safe, high-yielding assets at attractive prices.
Hungry for income
Yields on CGBs, which are classed as risk-free assets, plummeted last year as the People’s Bank of China (PBOC) focused on pumping liquidity into the financial system and cutting interest rates to stimulate lending. The yield on the benchmark 10-year CGB declined 88 basis points over the course of 2024, falling to below 1.7% by the end of the year. Yields on other maturities also fell.
As yields dropped, income-hungry investors searched for other low-risk assets offering good returns in an environment of sluggish economic growth. They homed in on bank stocks because of their quasi-fixed-income characteristics — stable dividend-paying ability and high yields.
From 2019 to 2023, the banking sector’s average dividend yield was 4.9%, the second-highest among 22 industries, according to research from Zheshang Securities Co. Ltd. In 2023, the average rose to 6%, some 0.3 percentage points higher than in 2022, according to the research.
As of Dec. 31, the mainland-listed shares of China Minsheng Banking Corp. Ltd. (600016.SH -1.20%), Ping An Bank Co. Ltd. (000001.SZ +0.18%), and Xiamen Bank Co. Ltd. (601187.SH +0.93%) were all yielding between 8.1% and 8.4%, while those of the “Big Six” state-owned banks ranged from 6.4% to 7.2%.
Listed banks increased their payout ratios in 2023, a significant factor in boosting their share prices in 2024, Zheshang Securities analysts wrote in a recent report. Banks have relatively good operational stability, which suggests that during periods of slowing growth, their shares should perform relatively well, they wrote.
The overall dividend payout ratio for listed banks in 2023 was 29.3%, 0.8 percentage points higher than in 2022 and the second-highest ratio in the past decade, surpassed only by 2014, they wrote. The ratio represents how much of a company’s net income is paid to shareholders.
Cash dividends and the payout ratio are expected to increase again for 2024 and 2025 partly because the government has been urging all listed companies not only to increase dividends but to pay them more frequently to help boost share prices. In April, the State Council released nine guidelines to promote the development of the stock market that included measures to encourage dividend payments.
The question for investors now is whether the bank stock rally can continue into 2025.
Zheshang Securities outlined several scenarios that could potentially end the bull run: an upturn in the economic cycle, a rise in risk-free interest rates, an increased appetite for risk among investors, exposure of systemic risks, and the end of high dividend yields.
One key factor will be how macroeconomic policy plays out.
“The Central Economic Work Conference set the tone for implementing a moderately loose monetary policy in 2025, which is a very loose level,” said the head of the financial market department at a joint-stock bank. “If there are no other assets available to match the amount of liquidity injection, investors will be chasing after assets that provide a high degree of certainty, like CGBs and high-dividend bank stocks,” he said.
The government is widely expected to increase the fiscal deficit in absolute terms and as a percentage of GDP to support the economy, which will lead to an increase in the issuance of CGBs. The increase in supply could depress bond prices and lead to an increase in yields. But if investors continue to favor safe-haven, low-risk assets, demand for CGBs will increase proportionately to the rise in supply and bond yields may not rise, which would be favorable for bank stocks.
Insurance funds increased their asset allocation to bank stocks because of the high dividends and that pulled in a lot of trading-oriented capital, a bond fund manager with a Shanghai-based mutual fund firm told Caixin. The strategy is still popular “because in a prolonged low-interest-rate environment, this type of asset can at least provide stable returns and cash flow,” he said. “But now there’s just too much money chasing high-dividend assets.”
The current boom in demand for high-dividend stocks, driven by the decline in risk-free interest rates, is likely to peak in mid-January, and over the medium term, when asset allocation decisions and government stimulus policies are factored in, investors will need to shift their mindset toward economic recovery, Ni Jun, a banking analyst at GF Securities Co. Ltd., wrote in a recent report.
Despite last year’s bull run, concerns remain about the fundamentals of the banking sector, especially in the current environment of uneven economic growth.
“There’s pressure on credit issuance, and in a low-interest-rate environment, NIMs are also narrowing, which is putting considerable pressure on banks’ performance,” the head of the asset and liability department at a listed joint-stock bank told Caixin.
Right now, the industry is stuck in a “grin and bear it” situation, he said.
Although the government has exhorted lenders to boost credit and the PBOC has cut interest rates several times, the appetite for borrowing among businesses and consumers has been weak, prompting many banks to turn to shady practices to help meet their targets. “Everyone is struggling to find good clients to extend loans to,” he said.
Rate cuts and pressure to raise savings rates to attract deposits have pushed the overall NIM for the industry below the warning threshold of 1.8%, a rate set by the Self-Regulatory Pricing Mechanism for Market Interest Rates, a government-backed industry group, to ensure banks can maintain reasonable profitability.
Credit risk also remains a concern. Although the debt resolution and support policies released by the government in 2024 helped defuse some of the risks associated with real estate and the implicit debt of local governments, the transmission of these risks across the industrial chain cannot be overlooked.
And while measures to stabilize the real estate market and swap hidden local government debt into bonds are expected to shore up the quality of banks’ credit assets, other threats are emerging, notably in the retail and consumer sectors. The hospitality and dining sectors in particular have been slow to recover from the pandemic, and companies’ ability to repay their debts is constrained by sluggish spending as households worry about unemployment and the prospects for higher wages.
Despite the surge in bank shares over the past year, investors remain wary. The price-to-book ratios of the 42 mainland-listed banks are still below 1, which means their share prices are trading at a discount to their book value or net asset value per share. This isn’t unusual — listed banks in other countries also have ratios below 1, partly because investors worry about hidden risk exposures, such as trading activities that could lead to large-scale losses — but the size of the discount is hovering at a historic low.
On Dec. 31, the average price-to-book ratio for the banking sector stood at just 0.61. The highest was China Merchants Bank Co. Ltd. (600036.SH +1.08%) with a ratio of 0.98, while China Minsheng Banking had the lowest at 0.33. Most other banks were around 0.5.
Figures from S&P Global Market Intelligence put the median price-to-book value of 27 mainland- or Hong Kong-listed banks with assets of more than 1 trillion yuan at 0.44 as of August 2024, with China Merchants Bank at 0.83 and Shengjing Bank Co. Ltd. the lowest at 0.08. The “Big Four” state-owned commercial banks — Industrial and Commercial Bank, Agricultural Bank of China Ltd., China Construction Bank and Bank of China Ltd. — had ratios ranging from 0.4 to 0.44.
Qing Na contributed to this story.
Contact editor Nerys Avery (nerysavery@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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