In the bustling world of finance, the recent surge in bank stocks has caught the attention of investors, particularly in the wake of the flourishing DeepSeek marketTraditionally considered steady performers, bank stocks have begun to flex their muscle since the start of the year.

This week marked a significant turning point with the Agricultural Bank of China (ABC) reaching unprecedented heights in its A-share market, peaking at an impressive 7 yuan per share on February 14. In Hong Kong, the Bank of Communications also hit a historical high on the same day, showcasing a buoyant market sentiment.

Long-term funds, especially those represented by insurance capital, have quietly established a presence within this rising tideExperts highlight that high-dividend stocks such as those in the banking sector are an essential component of “patient capital” investment strategies.

Given the prevailing low interest rate environment, banks have emerged as attractive optionsSince the beginning of the week, a slew of banks has reported notable increases in share prices: Qingdao Bank saw a rise of 6.12% over five days, with China Construction Bank, Industrial Bank, and CMB following suit with gains of 5.54%, 5.17%, and 4.55%, respectivelyParticularly remarkable is ABC, which consistently set new records, reaching a peak of 7 yuan per share on February 14 before closing at 6.99 yuan.

The positivity extended to the Hong Kong market, where the Bank of Communications also achieved a record high of 6.57 HKD per share, closing at 6.52 HKDThe H-shares of major state-owned banks, including ABC, Bank of China, and Agricultural Bank of China, have similarly risen to new heights, with ABC’s H-shares experiencing a cumulative increase of 12.76% this year alone.

The rally in bank stocks is not a new phenomenon; it began around the start of last year, gaining traction while the overall market battled to maintain the 3000-point levelThe banking sector subtly reached new milestones, with the banking index recording a remarkable 36.53% increase over the past year.

The primary driver behind the recent bank stock performance has been the attractive dividend yield, supplemented by a loosening of property policies and optimistic expectations about the banking sector’s net interest margins stabilizing

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Hu Yu, chief economist at Xinding Fund, emphasizes two key dimensions in evaluating the rise of bank stocks.

He points out, “Firstly, policy encourages long-term capital investment in equity assets, particularly favoring high-dividend stocks like those in the banking sectorSecondly, as long-term interest rates decline in China, the value of equity assets will be reassessed, and quality bank stocks with high dividend yields and margin advantages are particularly appealing for patient capital.”

Insurance capital, represented by investment giants such as Ping An and New China Life, has been notably aggressive in building positions in H-shares of banksFor instance, Ping An has repeatedly increased its holdings in ABC, with notable purchases planned for several months in 2024, resulting in an ownership stake exceeding 17% as of January.

Currently, the dividend yield for the six largest state-owned banks remains above 8%, substantially higher than that of their A-share counterparts, making them irresistible choices for insurance funds operating in a low-interest-rate environmentAs significant payers of dividends within the A-share market, bank stocks prioritize shareholder returns, with data from Wind showing that Chinese A-share listed banks distributed a cumulative cash dividend of 613.3 billion yuan last year.

As share prices for these banks rise, their valuations are experiencing a steady recoveryPresently, the price-to-book ratio (PB) for the 42 listed A-share banks is approximately 0.61 times, a notable increase from the 0.52 times reported at the beginning of 2024.

An essential pillar sustaining the rise in bank stocks is their consistently growing performanceMost recently, 16 A-share listed banks have issued performance forecasts for 2024, with collective revenue projected at 1.2801 trillion yuan, reflecting a year-on-year growth of 2.3%. These banks are expected to achieve a total net profit of 477.1 billion yuan, signifying a growth of 5.47% compared to the previous year.

A majority of these banks reported positive revenue growth, with 13 out of 16 showing year-over-year increases

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Notably, banks based in the prosperous Jiangsu and Zhejiang regions have outperformed the market averages, with Nanjing Bank's revenue soaring by 11.32% and Hangzhou Bank enjoying an impressive growth of 9.61%. Other banks like Jiangsu Bank, Qingdao Bank, and Ningbo Bank all reported revenue increases exceeding 8%.

Analysts from Dongxing Securities noted that the non-interest income from banks is expected to contribute significantly to their financial performanceAs long-term bond market yields dropped in the fourth quarter of 2024, it is anticipated that non-interest revenues will also show substantial growthAdditionally, several regional banks experienced better-than-expected demand and expansion in their loan portfolios, compensating for previous pricing pressures.

When examining net profits, all but one of the listed banks indicated positive growth, with eight banks reporting growth rates exceeding 10%. Noteworthy performances included Shanghai Pudong Development Bank, Qingdao Bank, and Hangzhou Bank, achieving net profit increases of 23.31%, 20.16%, and 18.07%, respectivelyOther banks such as Jiangsu Bank and Suzhou Bank also experienced solid growth trajectories.

Looking ahead, the asset quality and size of credit issuance appear to be improving in 2024. Nonetheless, the trend of decreasing interest margins remains a challenge for many banks, as they have increasingly focused on promoting short-duration deposit productsThis strategy, involving interest rate inversions—where 1-year deposit rates exceed those for 2 or 3 years—aims to reduce the average duration of deposits and lower capital costs.

As analysts project the performance of bank stocks for 2025, Zheng Qingming from Shenwan Hongyuan expresses optimismHe categorizes bank shares as a combination of low volatility dividends during counter-cyclical phases and higher absolute returns in expansionary phasesWith improved economic prospects and supportive policies encouraging the influx of long-term capital, banks are likely to exhibit resilience and adaptability.

Consensus among analysts at Dongxing Securities highlights that with increasing participation from long-term capital and index-based investments enhancing the appeal of bank stocks, the configurations are likely to improve as interest rates continue to trend downward

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