Group 1 - The banking sector continues to show strength, with major banks like Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China, and others reaching historical highs on July 10 [1] - The Bank AH Preferred ETF (517900) has seen a net inflow of 610 million yuan since the beginning of the year, with a share increase of 474%, leading among bank ETFs [3] - The total dividend payout for the 2024 fiscal year from major banks is expected to exceed 620 billion yuan, with significant contributions from the four major banks [4][5] Group 2 - Southbound funds have been actively purchasing bank stocks, with a net buy of 9.256 billion HKD on July 9, indicating strong demand [7][8] - The net buying amounts from southbound funds over the past month, three months, and year are 26.3 billion yuan, 75.5 billion yuan, and 211.5 billion yuan respectively, leading among all sectors [9] - Analysts suggest that the current banking stock market reflects a trend of value reassessment, with expectations of stable fundamentals supporting continued institutional investment [9] Group 3 - The Bank AH Index, which includes both A-shares and H-shares, has shown a cumulative increase of 101.8% since its inception, outperforming other indices [11][13] - The H-shares of 14 banks have higher dividend yields compared to their A-share counterparts, indicating a "higher yield, lower valuation" phenomenon [10][11] - The banking sector is characterized by a "weak cycle" in both fundamentals and investment, with stable dividend yields providing attractive investment opportunities [4][6]

Core Insights - The banking sector is currently undergoing a trend of value reassessment, driven by expectations of fundamental stability, with banks' earnings resilience consistently exceeding expectations due to regulatory support and the establishment of risk bottom lines in key areas such as local government financing and real estate [4][8] - The current market rally is fundamentally a reflection of the stability of the banking sector rather than a reliance on macroeconomic recovery, marking a systematic value reassessment and correction of historically unreasonable low valuations [8][23] Summary by Sections Fundamental Outlook: Maintaining Earnings Stability - The net interest margin (NIM) is expected to stabilize as regulatory policies aim to maintain it by reducing banks' funding costs to offset the impact of loan interest rate cuts, with NIM currently at a low point [9][26] - Since 2022, multiple rounds of deposit rate cuts have been implemented, and as a significant amount of fixed-term deposits mature in 2025, the repricing of deposit costs will accelerate [9][26] - The overall non-performing loan (NPL) ratio of listed banks is expected to remain stable, supported by rapid asset expansion and write-offs, with a stable provision coverage ratio across most banks [9][37] Capital Market Dynamics: Increased Institutional Investment - Various capital entities, including state-owned enterprises and insurance companies, have been increasing their holdings in bank stocks, driven by the value reassessment of undervalued banks amid an asset scarcity environment [10][45] - The shift in investment strategy among active funds towards bank stocks is anticipated due to their significant index weight and long-standing underallocation, with a focus on quality banks with strong fundamentals [10][45] Investment Recommendations - The report recommends focusing on high-quality city commercial banks and dividend-paying banks, highlighting the investment value of state-owned banks listed in Hong Kong due to their lower valuations [11][10] - Specific banks recommended include Hangzhou Bank, Chengdu Bank, Jiangsu Bank, Qilu Bank, and Qingdao Bank, with a focus on their regional economic performance, asset quality, and growth rates [11][10]

Core Viewpoint - Recent strong performance of bank stocks is primarily driven by new public fund management regulations that encourage increased allocation to bank stocks, which are inherently attractive due to low valuations and high dividend yields [1][2][4]. Group 1: Public Fund Management Regulations - The China Securities Regulatory Commission (CSRC) introduced new public fund management measures on May 7, 2025, emphasizing long-term performance in fund manager assessments, with at least 50% weight on investment returns for executives and 80% for fund managers [4]. - The new performance evaluation method ties fund managers' compensation closely to their performance relative to benchmarks, such as the CSI 300 Index, which has a significant weight in bank stocks [4]. - Currently, public funds have a low allocation to bank stocks, with less than 4% in 2024, while bank stocks represent over 13% of the CSI 300 Index, indicating a need for increased investment in bank stocks to align with benchmarks [4]. Group 2: Valuation and Dividend Yield - Bank stocks are considered severely undervalued, often trading below book value, with price-to-earnings ratios around six to seven times, while many offer dividend yields exceeding 4%, making them attractive compared to the current one-year deposit rate below 2% [6][7]. - A hypothetical scenario suggests that to reduce a 4% dividend yield to 2%, bank stock prices would need to double, highlighting their stability and appeal in a low-interest-rate environment [7]. Group 3: Market Trends and Supportive Factors - Bank stocks have experienced a bull market over the past two years, with this trend continuing [8]. - In times of market intervention, large banks are prioritized for support due to their role in stabilizing indices, as seen during the market rescue around the 2024 Spring Festival [10]. - Ongoing initiatives, such as the orderly progress of "debt reduction" and government support for state-owned banks to bolster core capital, are favorable for the banking sector [10].

Core Viewpoint - The A-share financial sector has shown significant growth, with the banking index reaching new highs, driven by various factors including low valuations and expected future performance improvements [1][2][3]. Group 1: Market Performance - On May 14, the A-share financial sector collectively surged, with the Shanghai Composite Index hitting a new high since April 8, marking a 3.99% increase in the non-bank financial index and a 0.82% rise in the banking index, which closed at 4227.96 points, the highest since February 2021 [1]. - The total market capitalization of A-share banks surpassed 10 trillion yuan, reaching 100270.09 billion yuan, with notable banks like Industrial and Commercial Bank of China nearing a market cap of 20000 billion yuan [1]. Group 2: Factors Driving Growth - The banking sector has seen a substantial increase, with the banking index rising over 34% in 2024, making it the top performer among major sectors, and an 8% increase year-to-date, ranking fifth [2]. - The China Securities Regulatory Commission has introduced an action plan to promote high-quality development of public funds, encouraging a shift from focusing on scale to prioritizing returns, which may further enhance the valuation of bank stocks [2]. Group 3: Valuation and Future Performance - The banking sector is characterized by low valuations, with an average price-to-book ratio (PB) of only 0.62, indicating strong long-term investment potential [2]. - Future performance expectations are positive, with projections for stable revenue and net profit growth by 2025, driven by improved credit structures and reduced risk in retail banking [3]. Group 4: Institutional Investment - Despite the banking sector's high market capitalization, institutional investment remains relatively low, with public funds holding bank stocks valued at 1.85 trillion yuan, significantly less than the electronic sector [4]. - As of the first quarter of 2025, the proportion of active equity funds invested in bank stocks was only 3.75%, indicating a continued underweight position compared to other sectors [4]. Group 5: Financial Metrics - The banking sector is recognized for its low valuation and high dividend yield, with a rolling price-to-earnings ratio below 6.5 and a dividend yield of 6.4%, ranking second among major sectors [5]. - The asset quality of the banking sector is improving, with non-performing loans decreasing to 3.28 trillion yuan and a non-performing loan ratio of 1.50% as of the end of Q4 2024 [6]. - The net interest margin for the banking sector was 1.52% at the end of Q4 2024, with expectations for stabilization following a period of decline [7].