ICBC overwhelms Moutai, the "Four Big Banks" soar, is it a new era for bank stocks?

On July 15th, bank stocks collectively rose again during the trading session, with Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and Agricultural Bank of China all hitting new historical highs.

By the close of trading, China Construction Bank rose nearly 3%, Agricultural Bank of China and Postal Savings Bank of China rose over 2%, Industrial and Commercial Bank of China rose nearly 2%, while Bank of China, Bank of Beijing, Bank of Communications, and China CITIC Bank all rose by over 1%. Industrial and Commercial Bank of China reached a new market value of 2.21 trillion yuan after hitting a new high, surpassing Guizhou Maotai's market value by nearly 360 billion yuan, firmly holding the position of the highest market value in A-share market.

Bank stocks have performed well so far this year. According to Wind data, among the 31 sectors tracked by the Shenwan industry classification, only 8 sectors have seen gains since the beginning of the year, with the banking sector ranking first with a 18.88% increase. Out of the 42 A-share listed banks, 38 have seen gains this year, with 11 banks seeing gains of over 30%. Nanjing Bank and Chengdu Bank have seen gains of over 40%.

From the perspective of the logic behind the rise in bank stocks, the secondary market has experienced significant volatility this year. Against the backdrop of a lack of high-yield assets in the capital market, bank stocks, with their high dividend yields and low valuations, have defensive characteristics that have attracted market attention.

Bank stocks are typical "low valuation, high dividend" securities, with high cash dividend yields and stable dividends. Data shows that the median dividend yield of the 42 A-share listed banks in the past 12 months exceeds 5%.

The continuous rise in bank stocks further demonstrates the market's support for the "high dividend" policy of bank stocks. In the past two weeks, bank stocks have entered a period of intensive dividend distribution. In July alone, 20 listed banks including Bank of Communications, Postal Savings Bank of China, China Construction Bank, and China Merchants Bank distributed cash dividends totaling over 460 billion yuan. In terms of dividend amount, Industrial and Commercial Bank of China ranked first with a total dividend amount of 109.203 billion yuan, and the six large state-owned banks will distribute a total dividend amount of up to 413.341 billion yuan.

In addition to the stimulus of high dividends, the long-standing undervaluation of bank stocks has also played a role in driving this round of gains.

In the stock market, bank stocks have always been a controversial presence. Despite facing challenges such as declining net interest margins and rising non-performing loan ratios in recent years, the profitability of the banking industry remains significant compared to other industries. The 2023 annual report shows that the 42 listed banks have a combined net profit of over 2 trillion yuan, accounting for nearly 40% of the net profit of all listed companies in the Shanghai and Shenzhen A-share markets, with a total market value of the banking sector exceeding 10.9 trillion yuan, accounting for 13.5% of the Shanghai and Shenzhen A-share markets.

However, the issue of banks trading below book value has become a norm. Currently, all bank stocks are trading below book value, with China Merchants Bank's price-to-book ratio at 0.93 times, while the six major banks have price-to-book ratios generally ranging from 0.6 to 0.7 times. As of the close on July 15th, the price-to-earnings ratio of the CSI Bank Index was 5.7 times. Meanwhile, the price-to-earnings ratios of the Shanghai and Shenzhen indexes were 13.3 times and 20.7 times respectively, with the average price-to-earnings ratio of bank stocks significantly lower than the average level of the A-share market, indicating limited downside valuation potential On the fundamental side, bank stocks still face significant challenges, with the further compression of net interest margins as interest rates decline. In 2023, the average net interest margin of 42 listed banks was 1.78%, a decrease of 0.21 percentage points from 2022. In the first quarter of this year, the net interest margin further declined to 1.64%.

However, some analysts believe that the more the economy bottoms out, the more potential marginal catalysis brought by proactive policies is worth looking forward to. With the expectation of a slowing down of the decline in bank net interest margins and the fundamentals approaching the bottom, bank stocks are expected to continue to rise.

Not long ago, China Merchants Bank held its 2023 annual shareholders' meeting. The bank's president, Wang Liang, judged that the net interest margin of banks may further decline this year, with the level for the whole year possibly at a relatively low point, but there is not much room for further decline. If the net interest margin continues to decline, banks may lack a reasonable profit level, which could ultimately affect their financing support for the real economy.

Regarding the future trend of bank stocks, most institutions hold an optimistic attitude, believing that in the context of asset shortage, the value of banks as fixed-income asset allocations still exists. They maintain an "overweight" investment rating for the industry as a whole and recommend laying out high-quality bank stocks along the paths of low valuation, high dividends, and risk mitigation.

Although the strong performance of bank stocks has attracted widespread market attention, the differentiation among banks is still quite evident.

Reviewing the first half of the year, comparing banks with a high safety margin of "low non-performing loans + low attention + high provisions" to the high dividend state-owned five major banks, it can be seen that affected by factors such as equity market fluctuations and the "asset shortage" in the bond market, banks with high certainty of "low non-performing loans + low attention + high provisions" > high dividend major banks > other banks.

Southwest Securities stated that in the short term, one can speculate on index weightings or component adjustments. In the medium to long term, the improvement of the banking industry's fundamentals depends on internal economic repair. As the foundation supporting economic development continues to strengthen, for banks, credit demand will achieve a better balance through "balanced lending" and "preventing fund idling," reaching a better balance between quantity and price, that is, balanced credit growth, stable with a downward trend in interest rates, and banks maintaining a "reasonable interest margin"; the bad debts in key areas such as real estate, wholesale and retail, and personal loans, which were affected earlier, are gradually being cleared; the risk appetite of enterprises and residents is further increasing, driving other non-interest income to continue to rise.

Author: Damao Finance, Source: Damao Finance, Original Title: "ICBC Overwhelms Moutai, Four Major Banks 'Soar into the Sky,' Is It a New Era for Bank Stocks?"