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This article is written based on public information and is only for information exchange purposes. It does not constitute any investment advice

The Shanghai Composite Index fell below 2,900 points, and the entire market was in a state of panic. However, banks stood out and exploded against the trend, especially the Big Four banks, which have set new historical highs almost every day recently.

Looking at the long term, from the beginning of the year to date, the banking sector has soared 27%, making it the sector with the highest increase among the 31 industries of Shenwan. During the same period, the Wind All A Index has fallen 11%, which is equivalent to outperforming the market by 38 percentage points, making it a clear winner.

What does the banks’ counter-trend surge mean?

01

The mystery of leading the market

Some people say that the surge in bank stocks is the result of a market rescue. Judging from the data, this statement is not false.

According to the data disclosed by funds in the first quarter, Central Huijin increased its holdings of Huatai-PineBridge CSI 300 ETF, E Fund CSI 300 ETF, Huaxia SSE 50 ETF, Harvest CSI 300 ETF, and Huaxia CSI 300 ETF by 45.7 billion, 15.87 billion, 15.6 billion, and 16.99 billion shares, respectively. According to the average transaction price in the first quarter, Central Huijin increased its holdings of 300ETF and 50ETF by more than 310 billion yuan.

After the first quarter, as the market rebounded, Central Huijin slowed down its pace of increasing its ETF holdings in the second quarter, but it still held 30 billion yuan. Since July, the market has continued to fall, and Central Huijin has continued to increase its holdings. The sudden increase in intraday trading volume of the CSI 300 ETF can give us some clues.

Trading performance of CSI 300 ETF on July 24, source: Financial Terminal

The largest weighted stocks in the Shanghai Stock Exchange 50 and the CSI 300 are both banks, accounting for 19.88% and 13.14% respectively, and the top-ranked bank constituent stocks include the Big Four and China Merchants Bank. It can be seen that banks are the sector that benefited the most from the rescue.

Moreover, increasing holdings in banks has a demonstration effect and also serves as a guide for other major funds, which can easily form a powerful synergy and lead to a collective rise.

Logically speaking, the banks' counter-trend explosion is not due to improved fundamentals, but rather to the safe-haven effect brought about by the low market risk appetite.

The market keeps falling, and growth sectors such as food and beverage, biomedicine, and power equipment continue to fall, which has caused the market risk appetite to be unable to recover. From a fundamental perspective, after the macro-economy experienced an unexpected performance in the first quarter, it entered a downward channel in May and June. Corresponding to micro-enterprises, the performance of performance continued to decline, which is also an important factor for continued adjustment.

Many people believe that the low valuation of banks is also a factor in being selected by the main funds. Before the beginning of the year, the PB of the CSI Bank Index was only 0.52 times, which was at an extremely low level in history, only slightly higher than the 0.49 times set in November 2022. Now, the PB has rebounded to 0.59 times.

CSI Bank PB trend chart, source: Chocie

In the medium and long term, the PB valuation of banks has been declining, which is logically reasonable. As the macroeconomic growth rate moves downward, the performance of the banking industry will inevitably follow suit. In the first quarter of this year, the revenue of 42 listed banks fell by 1.7%, pre-provision profit fell by 3%, and net profit attributable to the parent company fell by 0.6%. This is the 10th quarter of continuous decline in revenue and profit (with a brief rebound in some quarters in the middle).

If you think about it carefully, bank valuations were often low in the past, and there were large areas of negative net assets. Why did they not gain the favor of major funds and promote valuation repair?

It can be seen that the low valuation of banks is not the core logic driving big funds to hold bank stocks (many industries have also fallen to historical lows and have not been favored by funds). The main reasons for the surge are the low market risk appetite triggering a safe-haven effect and the passive increase in bank holdings due to mysterious forces saving the market.

02

internalDifferentiation

The main funds are grouped together in banks, and the rise is not random. Since the beginning of the year, the top five growth rates are Nanjing Bank, Chengdu Bank, Bank of Communications, Agricultural Bank of China and Hangzhou Bank, all of which have increased by more than 35%, while Zhengzhou Bank and Lanzhou Bank have bucked the trend and fallen by more than 10%.

In fact, several excellent city commercial banks and rural commercial banks (Chongqing Rural Commercial Bank and Changshu Bank) have far outperformed the overall performance of the banking sector, and there is a certain logic behind this.

Most of these regional banks are located in China's more economically developed cities, and their credit business performance may be significantly better than the national market. In addition, these banks are not developing as fast as state-owned banks and joint-stock banks, and most of them are still in the stage of expanding and strengthening their asset scale. In the later stage, they can also rely on increasing the proportion of retail business to maintain performance growth.

Chengdu Bank is a typical example. Looking at the quality of earnings, Chengdu Bank's non-performing loan ratio in 2023 is 0.68%, down 0.86% from 2018. This is the lowest among all listed banks, even lower than China Merchants Bank (0.95%), which is known for its excellent asset quality.

While the bad debt ratio continues to decline, Chengdu Bank's bad debt provision coverage ratio continues to rise (Note: This is usually considered by the industry to be a manifestation of hidden profits). In the first quarter of 2024, the indicator was 503.8%, while it was only 155% in 2016.

Trend chart of bad debt provision coverage ratio of the five major banks, source: Wind

In addition to Chengdu Bank, the performance of city commercial banks such as Hangzhou Bank and Nanjing Bank has far exceeded the overall performance of the banking industry, and their stock price performance has also been significantly better than the industry average.

The rebound strength of China Merchants Bank and Ningbo, which were regarded as excellent growth stocks in the past, was moderate. This was mainly due to the transition of performance from high growth to low growth, or even negative growth, and the previous large premium valuation continued to narrow.

Today, the PB of China Merchants Bank and Ningbo Bank are 0.85 times and 0.77 times, respectively, while the PB of Chengdu Bank, which has better growth potential, is 0.83 times, and that of Hangzhou Bank is 0.79 times. They are all among the top 5 listed banks in terms of valuation, and the valuation levels given are relatively reasonable.

Of course, some city commercial banks among the 42 listed banks performed poorly, including Zhengzhou Bank, Lanzhou Bank and Xi'an Bank, whose stock prices continued to hit new lows.

Among them, since 2022, Zhengzhou Bank's net profit attributable to its parent company has continued to decline by double digits. The latest non-performing loan ratio is 1.87%, the highest among the 42 banks, and the non-performing loan provision ratio is only 193%, which is at the middle and lower levels of the industry. In addition, Zhengzhou Bank is also the only bank among the 42 banks that does not pay dividends, and it has been doing so for 4 years.

03

The more it grows, the more panic and itchier it gets

At a time when the macro economy is under pressure, the stock market is sluggish, but the bond market has experienced a unilateral bull market. Recently, even against the backdrop of the central bank's own short selling of treasury bonds, the prices of the main 10-year and 30-year treasury bond futures have continued to set new historical highs.

30-year Treasury bond futures main contract trend chart, source: Chocie

Both major financial markets are reflecting a realistic problem: investors are unwilling to take risks and prefer to pursue stable returns.

In fact, the more banks rise, the lower the risk appetite of the stock market. Then the growth sectors that are heavily invested by stock investors and fund investors may not be able to form a market force to stop the decline and stabilize, and the road to recovering the investment will be even more distant.

As of the first quarter of this year, the top three industries in which public funds (which are backed by investors and also represent the positions of stock investors to a certain extent) had heavy holdings were food and beverage, biomedicine, and power equipment, accounting for 13%, 11.7%, and 10.8% respectively.

Since February 18, 2021, the food and beverage sector has fallen by more than 55%, with a market value of 3.85 trillion yuan evaporated (2.7 trillion yuan evaporated for liquor). Since July 2021, the CSI Medical Index has fallen by 70%, falling back to 2014, with a market value of 3.76 trillion yuan evaporated. Since November 23, 2021, power equipment has fallen by 59%, with a market value of 4.5 trillion yuan evaporated (2.4 trillion yuan evaporated for batteries and 1.5 trillion yuan evaporated for photovoltaics).

The adjustment time of the above three growth sectors is so long and the adjustment range is so deep that it is far longer than the stock market crashes in 2015 and 2018. In addition, the three sectors have evaporated a huge amount of 12 trillion yuan, accounting for nearly 70% of the total shrinkage of the entire market size.

This caused a severe blow to investment confidence and also formed a negative cycle of redemption among investors.

According to statistics from Changjiang Securities, the scale of A-share active equity funds fell back to 3.22 trillion yuan at the end of the second quarter of this year, a net decrease of 310.2 billion yuan. Excluding the passive shrinkage caused by the decline, the net redemption of existing funds in the second quarter of this year was 263.4 billion yuan. This scale ranks third in single-quarter net redemption since 2005, second only to 805.1 billion yuan in the third quarter of 2015 and 279.7 billion yuan in the first quarter of 2024.

Active equity fund size trend (2004-2022), source: Changjiang Securities

In fact, in the first half of this year, the amount of active redemption by investors reached 519.9 billion yuan. Where did the redemption funds go?

In the first half of the year, stock ETFs increased by 359.1 billion yuan, but this was not due to the redemption of active equity funds by investors, but rather a large purchase by mysterious forces to save the market (340 billion yuan, basically matching). It can be seen that some investors have resolutely left the market after years of losses and stopped playing.

After leaving the market, some funds will inevitably flow to the fixed income market. In the first half of the year, the scale of money market funds increased by 1.9 trillion yuan, and the scale of bond funds increased by 1.57 trillion yuan. The migration of fund investors' funds also reflects an embarrassing reality: avoiding risks and seeking stability.

The counter-trend explosion of bank stocks is a way for large funds in the market to express risk aversion. However, most retail investors in the market may not be happy with such a group rise, because their positions are not in banks at all - in the first quarter of 2024, the bank positions of public funds accounted for 2.46%.

The more banks grow, the more panicked and itchy they become. Risk appetite cannot be boosted, and a significant market strengthening may still be a luxury in the short term.

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