Title: Bank Stocks Outperform A-Share Market: UBS Provides Insight
Since the beginning of the year, bank stocks in China have shown a strong performance, significantly outperforming the broader A-share market. What are the reasons behind this trend, and can it be sustained? In a recent online media briefing, Yan Meizhi, Head of Greater China Financial Industry Research at UBS, provided some insights.
Background
According to a report by China News Service on September 2, bank stocks have been on a tear in 2024, with share prices soaring ahead of the A-share market. This trend has raised questions among investors about the underlying factors driving the surge and whether it is a sustainable phenomenon.
Strong Performance and High Dividends
Yan Meizhi pointed out that while the banking sector’s fundamentals have been stabilizing, with provisions for bad loans decreasing year-on-year and net profits remaining steady, the rise in bank stock prices is largely attributed to investor interest in high dividend yields.
In A-shares, listed bank stocks offer a dividend yield of about 5%; in港股, bank stocks provide a dividend yield of around 7% or more, particularly for large banks, Yan explained. The high dividend yields have attracted some investors to the banking sector, which is known for its relatively stable and predictable profit levels.
Increased Investor Allocation
The increased allocation of bank stocks by investors has contributed to the rise in share prices. Historically, the banking sector has been underweighted, meaning that even a modest increase in investor exposure can lead to significant price gains.
Bank stocks have been outperforming the market due to the increased allocation of ‘patient capital’ from ETFs and insurance companies, said Meng Lei, a China equity strategist at UBS Securities. He estimated that the size of insurance capital flowing into the stock market this year could reach between 400 billion and 500 billion yuan, with half going to A-shares and the other half to港股.
Market Dynamics
Meng Lei noted that the patient capital has been drawn to high-dividend stocks due to the low returns on bonds. He pointed out that the current holding of high-dividend stocks by public funds is at the historical average and still significantly lower than the peak seen in 2018.
In the absence of significant macroeconomic changes, high-dividend stocks can still be considered a core part of the portfolio, Meng added.
Future Outlook
Looking ahead, Yan Meizhi believes that without a substantial improvement in fundamentals, bank stock prices will likely fluctuate around the current levels. The gains in bank stocks so far this year have been significant, with increases of around 20%, a level only seen in 2014 and 2017.
Conclusion
The strong performance of bank stocks in the A-share market this year can be attributed to a combination of stabilizing fundamentals, high dividend yields, and increased investor allocation. While the trend has raised optimism among investors, the sustainability of the price gains remains to be seen, especially given the current market dynamics and macroeconomic environment.
As the year progresses, investors will be closely watching the banking sector to see if the strong performance continues or if it was just a temporary surge driven by short-term factors. With the support of ‘patient capital’ and stable profit levels, bank stocks may continue to be an attractive investment option in the near term. However, as always, market conditions can change, and investors should remain cautious.
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