AGRICULTURAL BANK OF CHINA(SH:601288) Zhi Tong Cai Jing·2025-11-05 13:20Core Viewpoint - UBS maintains a positive outlook on defensive stocks due to the ongoing weak macroeconomic environment in China, expecting a continued recovery in revenue and net profit growth for state-owned banks, as well as regional banks outperforming their peers [1][2] Group 1: Banking Sector Outlook - The banking sector's fundamental outlook is improving, with signs of stabilization in net interest margins and overall asset quality remaining stable despite pressures on manufacturing and retail loan books [2] - Large state-owned and joint-stock banks are experiencing a sustained recovery in net profit growth, with UBS predicting this positive trend will continue into Q4 2025 [2] Group 2: Fund Flows and Market Dynamics - Fund flows are a key driver for bank stocks, with potential rotation towards defensive stocks as investors react to market conditions [3][4] - In early 2025, H-shares of Chinese banks listed in Hong Kong performed strongly, driven by increased allocations from insurance funds [3] - A significant outflow from bank stocks occurred in Q3 2025, with prices declining by 10%-15% due to a rapid rise in high-beta sectors, but a rebound was noted in October amid rising trade uncertainties [3] Group 3: Investor Sentiment and Key Stocks - Investors anticipate factors that could drive funds into the banking sector, including profit-taking from high-beta sectors and increased allocations from insurance funds around the "New Year" sales period in January 2026 [4] - Among large state-owned banks, Agricultural Bank of China is the most closely watched stock, with a year-to-date total return of 55.5% for A-shares and 41.1% for H-shares, significantly outperforming the MSCI China Banking Index [6] - Agricultural Bank's strong performance is attributed to increased holdings by Ping An Group, continuous buying by quantitative funds, and better-than-peer financial results [6] - Investors are also focused on China Merchants Bank, although expectations for short-term profit growth or dividend increases are low, while Ningbo Bank is viewed as having upside potential due to improving fundamentals and reasonable valuations [6] Group 4: Concerns in the Market - There is growing concern over declining real estate prices, particularly in first-tier cities, which could lead to potential defaults affecting mortgage and SME loans [5] - Current mortgage loan-to-value ratios are reported at around 50% for most national banks, with some joint-stock banks exceeding 70% [5] - The demand for consumer loans has not shown signs of recovery, and asset quality continues to weaken, raising investor concerns [5]