Bank Stocks Boosted by Positive Policies

Multiple favorable policies are leading the way for bank stocks to regain their "bullish path." On October 14th, the A-share banking sector once again led the major sectors with a full-line rise in red, with all 42 bank stocks closing higher, and several urban and rural commercial bank stocks rising by more than 5%.

Over the weekend, the Ministry of Finance released a series of favorable policies, including setting a tone to support local governments in resolving government debt risks, issuing special national bonds to support state-owned large banks in replenishing capital, and supporting the promotion of a stable real estate market. Analysts believe that a series of incremental fiscal policies have provided strong support for improving asset quality expectations, which is beneficial for boosting the valuation of bank stocks. In addition, the new swap convenience tools recently created by the central bank have also played a role in boosting confidence in stable dividend-type assets.

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Bank stocks once again saw a full-line surge. In fact, after the initial rise and subsequent fall in early October, the banking sector has been trending towards stabilization, and stock prices have also begun to rebound.

On the morning of October 14th, the A-share banking sector led the market. By the end of the day, all 42 stocks in the sector had risen, with Chongqing Rural Commercial Bank, which had once reached its daily limit, closing up by 9.31%. Following closely were Qilu Bank and Chongqing Bank, which closed up by 7.31% and 7.08%, respectively. Additionally, 26 bank stocks such as Guiyang Bank, Ningbo Bank, Jiangsu Bank, and Shanghai Rural Commercial Bank all rose by more than 3%.

Unlike the previous rise in the banking sector earlier this year, which was mainly led by state-owned large bank stocks, yesterday's banking sector was mainly led by local rural and urban commercial bank stocks, followed by state-owned large bank stocks, with joint-stock bank stocks experiencing relatively lower gains. Among the state-owned large banks that had previously seen their stock prices reach new highs, China Construction Bank and Agricultural Bank of China closed up by 4.78% and 4.14%, respectively, while the gains of the other state-owned large banks ranged between 2.17% and 3.49%.

Looking at the cumulative gains of individual stocks, despite the rise and subsequent fall on October 8th causing some adjustments in the space, as of October 14th, more than 20 bank stocks still had year-to-date gains of over 30%, with 6 stocks having gains exceeding 50%, such as Shanghai Pudong Development Bank (62.86%), Chongqing Rural Commercial Bank (55.41%), and Shanghai Rural Commercial Bank (54.88%). The corresponding price-to-book ratios for these three stocks are 0.49 times, 0.56 times, and 0.67 times, respectively.

Multiple favorable policies boost valuations. Behind the full-line surge in bank stocks lies the support of a package of policies introduced by various national ministries and regulatory authorities in recent times.

On October 12th, the State Council Information Office held a press conference where a responsible person from the Ministry of Finance stated that a series of targeted incremental policy measures would be introduced in the near future. These include increasing efforts to support local governments in resolving debt risks, issuing special national bonds to support state-owned large commercial banks in replenishing core tier-one capital, and using a combination of local government special bonds, special funds, and tax policies to support and promote the stabilization of the real estate market.CITIC Securities analyst Xiao Feifei and her team analyzed in a research report that the counter-cyclical adjustment of fiscal policy has been intensified, alleviating the credit risks of the systemically important urban investment and real estate sectors within the banking system. This is conducive to enhancing the stability of banks' net assets and boosting the valuation of individual stocks in the banking sector. Overall, the Ministry of Finance's meeting has formed a substantial positive for bank stocks.

Changjiang Securities analyst Ma Xiangyun and his team issued a research report stating that fiscal policy supports debt resolution, which boosts bank valuations. The most important aspect of the aforementioned fiscal policies is to increase support for resolving local government debt risks. Compared to previous debt swaps, this has released the risk pressure on commercial banks. In addition, the policy of issuing special treasury bonds to support major banks in replenishing capital is beneficial for further enhancing the risk resistance of major banks and actively supporting the real economy under the pressure of industry profitability. On the one hand, from an investment perspective, stable operations and ample capital are crucial for stable dividends; on the other hand, as one of the important targets of dividend strategies, bank stocks also benefit from a series of policies recently introduced by the central bank, such as the "Securities, Fund, and Insurance Company Swap Facility (SFISF)" created by the central bank recently. As a "swap for swap" tool, the funds obtained by institutions can only be used for investment in the stock market.

GF Securities analyst Ni Geng and his team also believe that the central bank's swap facility is conducive to the value exploration of dividend-type assets. On the one hand, as a stock-bond exchange tool, "bond-like" assets are more in line with the preferences of this type of capital, and it is expected that institutions such as securities proprietary and insurance funds will become the main force. On the other hand, the main appeal of the SFISF tool is still to enhance the inherent stability of capital market financing and investment, and to support the healthy and stable development of the stock market. Therefore, institutions are more motivated to prioritize high market value, high dividend, state-owned enterprises, low valuation, and other stable characteristic quality assets.

Bank stocks still need to "break the net and become whole again."

In the past two years, under the guidance of dividend strategy investment style, high dividend, low valuation assets represented by the banking sector have been highly sought after by capital, and the stock prices of state-owned banks have also repeatedly hit historical highs.

However, after the previous rise, bank stocks have not yet escaped the embarrassment of breaking the net. Data shows that as of the close on October 14, among the banks listed on the A-share market, except for China Merchants Bank's price-to-book ratio maintained at 1.03 times, the remaining 41 banks are all in a state of breaking the net, among which Minsheng Bank and Guiyang Bank's price-to-book ratios are only 0.34 times and 0.39 times, respectively.

The long-term net-breaking of bank stocks also means that capital replenishment through means such as directed increases faces obstacles. At present, the net interest margin of commercial banks has further narrowed, and many banks have the intention to replenish capital. Promoting the smooth "blood transfusion" of capital is conducive to ensuring the sustainable operation of banks and supporting the ability of the real economy.

It is worth noting that recently, the regulatory authorities have also paid more attention to the phenomenon of listed company stock prices breaking the net. On September 24, the "Guidance for Listed Company Supervision No. 10 - Market Value Management (Draft for Comments)" drafted by the China Securities Regulatory Commission pointed out that "companies that have been breaking the net for a long time should formulate and disclose a listed company valuation improvement plan after being reviewed by the board of directors, including goals, deadlines, and specific measures"; at the same time, "companies that have been breaking the net for a long time should provide a special explanation on the implementation of the valuation improvement plan at the annual performance explanation meeting". The document also clarified that long-term net-breaking companies refer to listed companies whose closing prices for every trading day in the last 12 months are all lower than the net asset value per share for the most recent fiscal year audited.

CITIC Construction Investment Securities believes that, overall, the aforementioned regulations have put forward valuation improvement requirements for net-breaking stocks, which is conducive to the repricing of undervalued quality assets and also helps the market to accelerate the process of survival of the fittest.