Few people expected that bank stocks would rise to this extent. Among the 31 industry sectors of Shenwan, the banking sector ranked first with a growth of more than 20%.ICBCOn August 20, it once again took the throne of the market capitalization leader. The miracle of "the four major banks bought at 6,000 points were untied at 2,900 points" occurred, allowing 20-year veteran stock investors to experience a unique experience of "making friends with time."

To some extent, A-shares have been extremely similar to U.S. stocks this year: the seven giants of A-shares, consisting of the Big Four Banks + Changdian + CNOOC + China Mobile, have supported half of the index performance, especially the Big Four Banks, which have seen the most growth and have reached historical highs amid wailing.

Even Yun Meng, a big V on Snowball, who used the strategy of "single-handedly hanging on banks + leveraging" to make the net value of his products plummet to 0.1, has recovered the net value to above 0.3 this year with an increase of more than 80% with the support of banks. Dong Baozhen, a well-known bank stock bull, publicly pointed out the driving force behind the four major banks:In the past 8-9 months, policy funds have almost doubled the share prices of PetroChina and the Big Four Banks, but public funds have remained indifferent to this trend.

This is an abnormal market situation because it goes against the feelings of the grassroots of banks and is beyond the analysis of the fundamentals by fund managers. It is too facile to attribute it to the market dividend style and policy funds to protect the market. After really digging out the various funds buried in the four major banks, we found the answer to why the four major banks were pushed to the altar in insurance funds.

The Last Bastion

Huaxi SecuritiesAn analysis of market investors in the second quarter found that the main participating institutions are public funds, private funds and insurance funds. However, in the current market context, the liability scale of the former two has shrunk significantly, and the scale of equity products has declined year after year after reaching a peak of 8.54 trillion yuan in 2021, while the latter has almost no new scale under strong supervision.

On the other side of the shrinkage of public and private offerings, the insurance fund liability side premium income continues to increase. According to data from the Financial Regulatory Bureau, as of the end of June 2024, the total original insurance premium income of the insurance industry this year reached 3.55 trillion yuan, a year-on-year increase of 4.9%, and the balance of insurance funds reached 31 trillion yuan, a year-on-year increase of 10.98%.

As the premium scale increases, insurance funds have sufficient ammunition to shoot into the A-share market. From a structural perspective, property insurance and life insurance invested 137 billion yuan and 1.9 trillion yuan in stocks at the end of the second quarter, up 6.69% and 4.16% year-on-year, respectively. Life insurance has become a scarce incremental fund for the stock market.

The reason why insurance funds have become incremental is largely due to the "quasi-guaranteed" attribute of life insurance. Take increasing life insurance products as an example. The guaranteed interest rate collapsed from 3.5% that was popular in WeChat Moments at the beginning of last year to 2.5% in the middle of this year. In the atmosphere created by the salesmen's hunger marketing, it often gives people an illusion that such products can continue to grow with stable compound interest in the next 20 or even 30 years.

In the context of the net value of asset management products, this kind of product that seems to have the attribute of hard redemption is very tempting:In the eyes of most investors, the scheduled interest rate represents the actual interest rate to some extent, and its scarcity is particularly highlighted when interest rates are falling.

In 2019, former central bank governor Zhou Xiaochuan said, "Ten years later, if you want to buy a financial product with an annualized yield of 3%, it may be like drawing lots for car license plates, relying entirely on luck!" Only five years have passed, and this statement has become a reality.

Thanks to their rare "quasi-guaranteed" attributes and higher interest rates, insurance products became popular and eventually turned into huge chips for insurance funds, which to a certain extent offset the impact of the shrinking scale of public and private equity. The place where insurance funds are bought naturally becomes the direction of the main market line.

Bank stocks, led by the Big Four, have become the target of concentrated long positions by insurance funds.

In the past three quarters, bank stocks have been the focus of insurance funds. As of the first quarter of 2024, bank holdings accounted for as high as 48.3% of insurance funds' heavy holdings, an increase of 0.8% from the beginning of the year. There have even been cases where some banks have been targeted by insurance funds.Wuxi BankIt has been taken over by Great Wall Life Insurance, and the last time an A-share bank was taken over by insurance funds was in 2015.

The reasons behind the amazing growth of the four major banks are gradually becoming clear, just as Zhang Qiyao, a strategist at Xingzheng Securities, said,The rise in bank stocks cannot be effectively explained from a fundamental perspective; funding is a more important driving factor. Insurance and ETFs are all centered around large-cap stocks, driving the large-cap stocks to become the real Beta of the market this year[2].

Behind the insurance funds' purchase of bank stocks, they have to face the interest rate loss.

Honey and Arsenic

Last year's popular 3% fixed-rate life insurance products may lock in a relatively fixed long-term interest rate for investors, but for life insurance companies, this means that they need to maintain a compound interest rate of more than 3% for a long time in the future, so that they can have corresponding repayment pressure when these products mature in batches and prevent the occurrence of interest rate spread losses. Otherwise, they will suffer huge losses or even go bankrupt.

There are precedents for the mismatch between the long-term fixed interest rate of such insurance products and the downward trend of market interest rates. In the 1990s, when deposit interest rates were high, a large number of insurance companies increased the expected rate of return of insurance products.

1995-1999,Ping An of ChinaIn an environment of relatively high market interest rates, related products with guaranteed returns of 5%-9% were sold, but when interest rates went down, no corresponding returns were obtained. Ultimately, the investment returns of insurance funds could not cover the expected returns of insurance products, resulting in huge interest rate spread losses.

According to the prospectus of Ping An of China, as of September 30, 2006, the total amount of reserves for high-priced interest rate policies was approximately RMB 99 billion, with an average liability cost of approximately 6.5%. It is expected that the reserves will peak around 2050, with the peak value of reserves being approximately RMB 170 billion[3].In other words, this part of the interest rate spread loss business has not been completely resolved to this day.

Therefore, for insurance funds, assets with long-term stable returns are more attractive to them. At a time when interest rates are falling and the equity market has fallen to the point where it is a bit funny to trade stocks full-time, the long-forgotten Big Four banks have become the main source of funds for their equity assets.

The stable dividend rate of banks is more reassuring for large funds. As one of the representatives of the high dividend sector, the average annual dividend rate of banks in the five years from 2019 to 2023 reached 4.90%, ranking second among Shenwan's first-level industries. As the yield of 10-year treasury bonds fell below 2.5%, the cost-effectiveness of the banking sector with stable high dividends also became apparent.

Especially when insurance funds are still burdened with funding cost pressure of 3% or even higher, the attractiveness of high dividend yields is invisibly enhanced.

Furthermore, the long-term indifference of public funds to banks, especially the Big Four, has provided insurance funds with a better chip structure. In the second quarter of 2024, the fund position of bank stocks was 2.64%, up 0.28% from the first quarter, but the overall banking sector was still underweight by funds by about 10.5 percentage points, which was a historically high level of underweight. [1]

Most of the allocations of public funds to the banking sector are concentrated inChina Merchants BankandChengdu BankThe combined concentration of the two banks reached 31%. Embarrassingly, China Merchants Bank, which was regarded as a bank with outstanding performance in the past, lagged behind the Big Four banks in terms of growth this year.

Image source: CICC Monetary and Financial Research

In addition, the banking sector has been undervalued for a long time. Even after a 20.22% increase this year, the price-to-book ratio of the banking index is still below 1, and the valuation percentile is within 10% of the historical level. Therefore, it is reasonable for insurance funds to regard bank stocks as their Noah's Ark.

After insurance funds became an important driving force behind the rise of bank stocks, the current market value of the six major banks is only more than 1 trillion yuan away from the total market value of the ChiNext, while the difference between the two was twice as much at the beginning of last year.

But the question is, how will this bank stock feast end?

Will history repeat itself?

In other words, the wealth of ordinary investors will only be transferred between the three. As the reputation of public funds has collapsed, the wealth of residents has also shown structural changes:Part of the funds were withdrawn from public funds and transferred to insurance products, eventually becoming the bullish force of insurance funds.

But the incremental factor driving the banking sector’s growth – insurance premiums – cannot increase indefinitely.

On the one hand, due to considerations of interest rate spread losses, the policy side has continuously restricted the guaranteed interest rates offered by insurance institutions. The guaranteed interest rate of 4.025% was maintained for 6 years, 3.5% was maintained for 4 years, and 3.0% was maintained for only 1 year. Now it has dropped to 2-2.5%. If it drops further, investors may not be interested in it.

On the other hand, for insurance funds themselves, stock gains and future dividends are an account they have to calculate. Take ICBC as an example. With a dividend rate of 6.41%, it has gained 42.26% this year. Institutions that go for the dividend rate have already accrued 6.6 years of dividends in just half a year. The cost-effectiveness does not seem to be that high after calculating the calculator.

It reminds me of the scene of public funds opening champagne at halftime around the Spring Festival in 2021. Three years later, the Wind Fund's heavily-weighted stock index fell by 50%, and the heavily-weighted stocks of public funds were almost halved. But before the collapse, core assets were also pushed up under people's optimistic expectations, and no one had imagined how public funds would withdraw.

Today, public funds are looking at insurance funds and the four major banks, which are constantly reaching new highs. Patient investors can spend more than six years waiting for the next batting zone of bank stocks, but ordinary investors in the capital market obviously do not have that much time and confidence.

We have heard too many stories of endings, but we still have to imagine, once growth slows down and the dividend yield becomes less cost-effective, how will insurance funds exit?

[1]CICC | Where are the bank positions and valuations? (2Q24) CICC Monetary and Financial Research

[2]【Xingzheng Strategy】Who is buying banks? Yaowang’s outlook

[3]Ping An of China IPO prospectus

Author: Wu Wentao

Editor: Shen Hui