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The dispute over fees among public funds has finally reached the channel end.

Recently, China Merchants Bank will implement a 10% discount on all public fund sales. This heroic move not only reflects the tragic situation of fund sales, but also means that it is imperative for banks to move away from traditional sales and move towards wealth management. At least for retail banks led by China Merchants Bank, there has been no new story for too long.

This is not the case for the entire banking sector. In 2024, the investment style of A-shares has changed dramatically. The banking sector, once ridiculed as "difficult to deal with", has transformed itself into the most dazzling player in the entire market. As of July 16, the banking sector ranked first among 31 industries with a cumulative increase of 18.6%.

As the dividend style becomes popular, the four major banks that benefited the most have regained their nostalgic madness, and their stock prices have continued to hit record highs. On the contrary, China Merchants Bank has been much bleaker. Although its stock price has risen this year, it is still far from the high point in 2021.

From the perspective of valuation, the PE of China Merchants Bank has dropped below 6 times. Compared with the banking sector as a whole, it has almost lost its valuation premium. It seems as if we have returned to the period before 2015.

The King of Retail

In the eyes of investors before 2015, China Merchants Bank was just an ordinary joint-stock bank. Most of the time, it rose and fell with the banking sector, and only performed well in the two epic bull markets in 2007 and 2015, but the excess returns were few and far between.

The turning point occurred around 2016. China Merchants Bank gradually stood out from the sector and stepped into the spotlight, becoming the "Bank Mao" that investors talked about with relish. The driving force behind this was not that the fundamentals of China Merchants Bank had undergone a drastic change. To sum up, it was more like "the heart of the benevolent was moved" - the market began to realize the value of China Merchants Bank's retail business.

Historically, corporate business has always been the mainstay of the banking industry. Although banks have little room for negotiation with large customers and the interest rate spread is low, they win by making small profits but quick turnover.

However, with the establishment of the ChiNext and the New Third Board, and the completion of a multi-level direct financing system, the industry's anxiety about financial disintermediation has deepened. In addition, after the interest rate marketization reform in 2013, the interest rate spread has narrowed and traditional interest rate spread income has declined. The industry is in urgent need of a way out.

In 2015, Wells Fargo, which mainly focuses on retail business overseas, surpassed ICBC in market value to become the world's largest bank, which pointed out the direction for the domestic banking industry. With the net interest margin advantage of high interest rates for small loans and considerable intermediary business income from cross-selling, Wells Fargo's profitability and stability are outstanding, so that it has long maintained a valuation level higher than the S&P banking industry.

Suddenly, there was a fever of learning about Wells Fargo in China. The introduction to the research report of China Merchants Research Institute on Wells Fargo reads:Refer to the good example of rich countries[1]。

All roads lead to Rome, but some people are born in Rome. SoftBank's Masayoshi Son has a well-known time machine theory: due to the different industrial development processes in developed and underdeveloped regions, industries that are mature in developed countries may still be in the embryonic stage or rapid growth stage in developing countries. Therefore, by first conducting business in the former market and bringing experience and products to the latter, taking advantage of the time difference in technology and concepts between the two sides, it is possible to seize market opportunities in underdeveloped regions.

Although this theory is mainly applied in the IT industry and was proposed relatively late, the senior executives of China Merchants Bank in the early years were well aware of it. As a joint-stock bank established at the forefront of reform and opening up, China Merchants Bank has been taking an international route since its inception, always keeping an open attitude towards the development trends and management concepts of overseas peers, and pioneering many domestic banking businesses.

As early as the beginning of the 21st century, Ma Weihua, then president of China Merchants Bank, and a group of senior executives of China Merchants Bank foresaw the difficulties of corporate business and started the first strategic transformation. At that time, Ma Weihua's words were widely circulated in the banking circle: "If you don't do corporate business, you will have no food to eat now; if you don't do retail business, you will have no food to eat in the future."

By the time its peers, who were slow to react, were forced to march towards "Rome" under pressure, China Merchants Bank had already grown into the "retail king" of the domestic banking industry, and had built an indestructible "fortress" in every sub-segment such as private banking and retail credit.

Of course, under the top-down mainstream investment framework, the banking industry with no story to speak of is still a gap, blocking a large number of domestic institutions pursuing efficiency from entering China Merchants Bank. It was not until the emergence of northbound funds, a "mentor", that China Merchants Bank began to show its prowess.

The market style of A-shares has always been dominated by incremental funds. Whether it is the ancient era of market manipulation or the rise of institutional investment after the millennium, they have all caused dramatic changes in market style. After 2016, northbound funds under the Shanghai-Hong Kong Stock Connect mechanism became the most important source of incremental funds and began to dominate the market style in stages.

Different from the track theory of domestic institutions, overseas fund managers have been disciplined by the "Nifty Fifty" and several core technology stocks for many years, and believe more in the alpha of individual stocks. In addition, with the example of Wells Fargo, although the overall profitability of banks is facing challenges, it does not prevent China Merchants Bank from becoming one of the favorite companies of northbound funds.

Since the launch of the Shanghai-Hong Kong Stock Connect, northbound funds have been flowing into China Merchants Bank, with the highest shareholding ratio (A shares) exceeding 8%. As of now, China Merchants Bank is still the bank stock with the highest northbound holding value, and ranks fourth among all its holdings.

Under the reform, it was not just China Merchants Bank that benefited. A number of blue chips that met the aesthetic standards of foreign investors strengthened in the pessimistic atmosphere of deleveraging and gradually evolved into various "Mao" stocks.

However, in the first two years, most fund managers did not react to the change in the "water temperature". Taking China Merchants Bank as an example, the funds they heavily invested in were still mainly passive products.

Only a few fund managers have caught up with the times. When Tan Li of Harvest Fund took over as fund manager in 2017, China Merchants Bank was among the major holdings of the products she took over. Yang Ming of Huaan Fund and Lao Jie'nan of China Universal Asset Management started to hold large positions in the first half of 2017. Zhu Shaoxing of China Asset Management has always had a layout in the banking sector, and China Merchants Bank officially appeared in its top ten holdings at the end of 2018.

Whether they were lucky enough to enjoy the trend due to their investment style, or they sensed the change in market direction in time and bet on the right direction with their strength, the market has rewarded their problem-solving ideas. In 2018, the new asset management regulations were issued. Driven by more surging incremental funds, the management scale of high-performing fund managers has risen to a new level, and at the same time, it has also pushed China Merchants Bank to a higher peak.

Oil on fire

After the millennium, China Merchants Bank vigorously developed its retail business. With China's accession to the WTO and economic growth, the personal wealth of the people has risen rapidly, and the demand for wealth management has surged. However, before 2018, this wealth was mostly blocked in deposits and wealth management products, and the proportion that actually belonged to asset management institutions was very small, with a scale of only tens of trillions.

The development direction of the financial market is also very clear, which is to hope that more funds can leave the indirect financing market and be allocated to the direct financing market. Among them, the policy with the greatest impact is undoubtedly the new asset management regulations - the safety line of rigid redemption is broken, and the connection between wealth and the direct financing market becomes closer.

Thanks to the development of Internet fund distribution platforms such as Ant and Tiantian Fund, public funds have become the main recipients of funds. Ding Chang, the author of "Buying Bank Stocks", made an interesting analogy: "There is a nest of birds, and we want them to fly out and soar into the blue sky. The first one to fly out must be the most courageous and have the highest risk appetite [2]."

As a result, the star funds with the sharpest historical net asset value curves naturally became the biggest beneficiaries. After 2018, the management scale of Zhu Shaoxing, Lao Jienan and others soared, and under path dependence, most of the new funds increased their holdings in companies they were familiar with, and retail banks represented by China Merchants Bank were naturally among them.

At the same time, there is a new growth logic - wealth management begins to carry the price-earnings ratio of China Merchants Bank. The so-called wealth management is to provide a series of financial services such as investment consulting, asset allocation, and risk management to individuals or families. The goal is to meet the financial needs of customers at different stages of their life cycle and help them achieve their financial goals, while the bank charges service fees. The wealth management business has broken away from the limitations of traditional on-balance sheet business that requires capital to drive scale and profit growth, thereby liberating the bank's valuation system.

In fact, the concept of wealth management is not new. It has been mentioned intermittently in research reports since 2008, but it was not until 2020, when the fund industry exploded, that this abstract concept finally landed in the financial report of China Merchants Bank. In the first half of 2020, China Merchants Bank's wealth management fee income reached 18.3 billion yuan, a year-on-year growth rate of 46%.

As a result, research reports with titles like "A promising future for wealth management" came in like snowflakes, and a reflexive self-reinforcing flywheel was formed: good market conditions attracted off-market funds to subscribe to funds, China Merchants Bank's wealth management business grew, expectations strengthened, funds increased their holdings in China Merchants Bank, stock prices and fund net value rose, and the market conditions were even better.

Around New Year's Day 2021, the inflow of off-market funds reached a climax, and the valuation of core assets was pushed to the bubble stage, and overseas funds added fuel to the fire at the right time. Li Lu, the fund manager of the Munger family, spent 4.3 billion Hong Kong dollars to buy Hong Kong-listed Postal Savings Bank through his Himalaya Capital. Once the news was disclosed, it set off the market.

Some fund managers who originally hardly bought or rarely participated in banks have also begun to look for opportunities in the systemically undervalued banking sector, but the pattern of investment growth has not been reversed. Most people still selectively ignore the relatively undervalued state-owned banks and favor retail banks with light assets and growth logic.

The specific choices are different because of the different investment frameworks. For example, Zhang Kun invested heavily in China Merchants Bank, a benchmark for wealth management, and held it for a long time. From 2021 to the first quarter of 2024, China Merchants Bank has always been one of Zhang Kun's top ten holdings. Other fund managers, such as Xie Zhiyu, have built positions in Ping An Bank and Industrial Bank, which also have excellent retail businesses.

The banking sector seems to be running steadily in the direction of differentiation predicted by Zhu Shaoxing - there is no future for corporate business, and only banks that embrace change can come out. But trees cannot grow to the sky, and valuations naturally cannot either. The cycle will always show its sharp fangs when people forget about it.

Waking up from a dream

Looking back, the peak and sharp drop of the CSI 300 Index in early 2021 was more like a warning, announcing that the market has officially entered the stage of stock game.

The new energy track, which was still at a low position at that time, began to stand up and take over the funds that fled from high positions. Although a few core assets represented by China Merchants Bank once again hit new highs in July, it was obvious that the batch of off-market funds with the highest risk preference could no longer continue, and the wealth release effect of the new asset management regulations came to an end.

After the bull market expectations were dashed, the long-term story of wealth management was briefly disillusioned. There is a famous saying in the technology and innovation circles: "We always overestimate the short-term benefits of a technology, but underestimate its long-term impact." This is also true in the industry.

The retail business that China Merchants Bank once prided itself on is no longer sweet. After the policy of "housing for living, not for speculation" was implemented, the demand for mortgage loans plummeted, and the COVID-19 pandemic further disturbed the income expectations of ordinary people, who no longer dared to spend money recklessly. Instead, Gu Chaoming's balance sheet recession theory became popular, and the growth rate of the bank's retail business even began to fall below that of its corporate business.

The two major pillars supporting investors' confidence collapsed at the same time. The Federal Reserve's interest rate hike in 2022 will drain the already fragile funding level. After April, the shareholding ratio of northbound funds in China Merchants Bank began to gradually decline.

Domestic investors also responded quickly, with Xie Zhiyu being particularly agile. In the first quarter of 2021, Ping An Bank and Industrial Bank just entered its top ten holdings, but just two quarters later, Xie Zhiyu began to sell off all his holdings. By the end of the year, the two bank stocks were already outside the top 70 in the holdings list.

Lao Jienan began to reduce his holdings in China Merchants Bank in the second half of 2022. Compared with the peak holdings in the third quarter of 2021, the second quarter report of 2024 showed that the number of shares held was only a quarter of that time. Tan Li began to significantly reduce her holdings in China Merchants Bank in 2023, and then gradually cleared her holdings in other banks.

Of course, as the share price of China Merchants Bank continued to fall, there were also new faces entering the market to buy at the bottom. In the past 22 years, after the valuation of China Merchants Bank fell to around the historical 50th percentile, deep value fund manager Jiang Cheng began to buy at the bottom of the bank for the first time. After that, while continuously increasing his holdings in China Merchants Bank, he also heavily invested in Industrial and Commercial Bank of China, one of the four major banks. In an online exchange at the end of the year, Jiang Cheng revealed,

Over the past 10 years, the ROE of the domestic banking industry has been declining continuously. Two points need to be clarified: first, what factors have led to the continued narrowing of the net interest margin; second, what factors have led to everyone's concerns about the non-performing loan rate.

Since the beginning of this year, we have deepened our research, so our concerns about these two points have been reduced. In addition, the industry valuation level has returned to a very low level, so we started buying [3].

However, it still could not stop the surge of disappointment. After Zhang Kun bought a large position in China Merchants Bank at its historical high, he held on until the fourth quarter of 2023 before reducing his position. In the latest second quarter report of the fund, Zhang Kun still reiterated that "due to pessimistic expectations, some high-quality companies are traded at valuations (price-earnings ratio, market value/free cash flow) levels that can be easily accounted for by privatization. We believe that the most important thing at this moment is patience, and the long-term return expectations of high-quality companies are very considerable [4]."

However, faced with China Merchants Bank, whose valuation has already fallen below the historical 25th percentile, Zhang Kun has been ruthless in reducing his holdings. He currently manages three products, and China Merchants Bank has withdrawn from the list of heavily-weighted stocks in two of them.

Along with the bursting of the valuation bubble of China Merchants Bank, the halo of the star fund manager also collapsed. When Zhang Kun bought into China Merchants Bank, a big V excitedly called himself "ikun". In the blink of an eye, Xiao Tiantian became Mrs. Niu, and the big V even started personal attacks[5].

But Zhang Kun is not the last bull in the retail banking sector. As of the end of 2014, Li Lu's Himalaya Capital is still among the major shareholders of Postal Savings Bank of China. This well-known investor, who has learned from Buffett and Munger, once made a lot of money in star companies such as Kweichow Moutai and Shanghai Airport through the seat of E Fund Hong Kong between 2014 and 2019, proving that Buffett's value investment is also applicable even in A-shares.

Everything is cyclical. After a long winter, A-shares and Hong Kong stocks will inevitably usher in a new bull market. It is just unknown whether Li Lu can replicate his legend this time, and whether the two old tickets of retail banking and wealth management can attract the next round of incremental funds.

References:

[1] Experts are fleeing bank stocks, Yuanchuan Investment Comment

[2] Macroeconomic Special Valuation Theory, Xiaoxian Chuan

[3] "Buddhist" Jiang Cheng's latest talk on banks, real estate, coal and small appliances: The small drawdown in the past few years is largely due to our strict valuation. ETFs are open all the time

[4] E Fund Blue Chip Select Hybrid Securities Investment Fund 2024 Second Quarter Report

[5] Under pessimistic expectations, Zhang Kun of E Fund sold China Merchants Bank. Bingge Law Firm

Editor: Shen Hui

Visual design: Shu Rui

Editor:Shen Hui