JPMorgan remains bullish on Chinese bank stocks: "The high dividend story is far from over!"

After a one-month interval, J.P. Morgan has once again released a research report expressing a firm bullish stance on Chinese bank stocks, suggesting that the “high dividend narrative” is far from over.

According to a report on August 19 by Jiemian, J.P. Morgan analyst Katherine Lei stated in a report that, thanks to stable net interest margin, growing fee income, and high dividend returns, it is expected that the A-share banking sector may rise by up to 15% in the second half of the year, while H-share banking stocks are expected to climb by 8%.

On September 19, according to ZF Trading Desk, J.P. Morgan released its latest research report stating that under the current interest rate environment, Chinese bank stocks, with their stable dividend yields and solid performance, still possess significant investment value. The “high dividend narrative” for China’s banking sector is far from over.

The report states that the CSI 300 bank stocks’ 4.3% dividend yield significantly outperforms the 10-year government bond yield of 1.8%, as well as the 1.25% bank deposit rate and the 1.9% wealth management product yield, and emphasizes that even under the pressure of rising trade frictions, Chinese bank stocks can still provide approximately 4% to 4.5% dividend yield.

J.P. Morgan believes that banking sector revenue and profit growth will improve on a quarter-over-quarter basis in the second half, mainly due to improved net interest margins and a moderate recovery in fee and commission income. The bank expects the rate cut cycle to be near its end, with stabilizing net interest margins providing important support for bank performance.

Meanwhile, Morgan Stanley estimates that in the next three years, capital inflows into the stock market may reach 14 trillion yuan, equivalent to 15% of A-share circulating market capitalization, with high-dividend sectors set to be the main beneficiaries.

“High Dividend Narrative” Continues to Brew

In the August research report, analyst Katherine Lei pointed out that ample liquidity and a weak macro environment will continue to favor flows into high-dividend stocks. The average dividend yield forecast for covered A-share bank stocks this year is about 4.3%, which is particularly attractive in the current low-yield environment.

J.P. Morgan’s latest report emphasizes that the dividends theme is far from over, asserting that the CSI 300 Bank Index’s 4.3% dividend yield significantly exceeds the 10-year government bond yield (about 1.8%), 3-year bank deposit rate (1.25%), and wealth management product yield (1.9%), thus forming a clear yield advantage.

J.P. Morgan’s data shows that MSCI China bank stocks and CSI 300 bank stocks offer dividend yields of 5.4% and 4.3%, respectively, with dividend spreads relative to 10-year government bonds of 360 and 250 basis points.

J.P. Morgan emphasizes that even under the pressure of rising trade frictions, Chinese bank stocks can still provide around 4% to 4.5% dividend yield.

Their calculations show that under the extreme assumption of a 20% NPL ratio for manufacturing export-related loans, a 20% drop in transaction fee income, and a 20 basis point reduction of both LPR and time deposit rates, A-share and H-share bank stocks can still maintain dividend yields at 3.8% and 4.5%.

J.P. Morgan also points out that this dividend advantage benefits not only A-share investors but also that the increase in southbound fund holdings of H-share bank stocks has provided strong support for share prices. The data shows:

This year, the proportion of southbound funds has clearly increased. Ping An Group’s increased holdings in ICBC H-shares, Agricultural Bank H-shares, China Merchants Bank H-shares, and Postal Savings Bank H-shares contributed over 50% of southbound flows.

The bank indicates that if the dividend spread narrows to 200 basis points, J.P. Morgan estimates the average upside for A-share bank stocks remains at 27% and H-share bank stocks at 42%. This forecast is based on current government bond yields and bank stock valuations.

Fundamental Improvement Expectations Support Valuation Recovery

J.P. Morgan expects fundamentals for the banking sector to continue improving.

Second quarter results show that banking sector revenue, pre-tax profits, and net profits all turned positive, reaching growth rates of 2%, 3% and 3%, respectively, a significant improvement from the -3%, -3% and -2% in Q1. This improvement was mainly driven by non-interest net income, with fee income achieving 6% year-on-year growth in Q2 versus flat growth in Q1.

Regarding net interest margin, J.P. Morgan stated in last month’s report that the rate cut cycle is close to ending, expecting one or two more rate cuts in the second half or in 2026.

Their analysis believes that a 50 basis point mortgage rate cut, symmetrical LPR and deposit rate reductions, and a 75 basis point RRR (reserve requirement ratio) cut would be basically neutral for banks’ net interest margins.

State-owned banks outperformed joint-stock banks in revenue growth, achieving 5% while joint-stock bank revenue was flat. All six major state-owned banks achieved positive growth in Q2, with an average increase of 2%, but joint-stock banks showed notable divergence.

In terms of asset quality, J.P. Morgan points out that the overall banking sector’s NPL ratio and ratio of special-mention loans remained stable. Second quarter coverage of special-mention loans increased by 1 percentage point quarter-on-quarter, while the proportion of special-mention loans fell by 2 basis points, showing risk is controllable.

Policy Dividends Continue to Be Unleashed, 14 Trillion Yuan of Incremental Funds Expected

In its latest report, J.P. Morgan writes that since the end of 2023, Chinese regulators have launched the “China Value Enhancement” initiative, encouraging listed companies to improve investor returns through various policy measures.

J.P. Morgan finds that related policies cover aspects such as market cap management, share buybacks, cash dividends, and corporate governance, creating a favorable policy environment for high-dividend stocks like bank shares.

J.P. Morgan estimates that under policy guidance, about 14 trillion yuan of incremental funds will flow into the stock market over the next three years, equivalent to 15% of the A-share free float market capitalization.

This estimate is based on multiple factors:

A 5 percentage point shift from household deposits to stocks, a 5 percentage point increase in stock allocations from bank WMPs and insurance assets, and increased allocations from long-term funds (mainly insurance and social security funds).

Specifically, state-owned insurance companies will invest 18% of new premiums into A-shares, totaling 1.3 trillion yuan; public funds' holdings will grow at an annual pace of at least 10%, contributing 2.8 trillion yuan; household deposits and wealth management products transferring 5% each into stocks will contribute 8.1 trillion and 1.6 trillion yuan, respectively.

Notably, regarding the current round of stock market rally, J.P. Morgan’s analysis shows that the market rebound is mainly driven by asset rotation and excess liquidity. The margin trading balance / tradable market cap ratio is at 2.3%, below the 4% seen in 2015, which suggests that the current rise is sustainable.

~~~~~~~~~~~~~~~~~~~~~~~~

The above excellent content is from ZF Trading Desk.

For more detailed interpretation, including real-time commentary, frontline research and more, please join the [ZF Trading Desk Annual Membership]

Risk Warning and DisclaimerThe market has risks and investment must be cautious. This article does not constitute personal investment advice, and does not take into account the particular investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, views or conclusions in this article are suitable for their particular circumstances. Investment based on this is at your own risk.