On February 18, the banking sector in China witnessed a remarkable upward trend, echoing the positive performance from the previous weekAs the day progressed, major banks saw their stocks soar, with many achieving significant gainsBy the end of the trading session, more than half of the listed bank stocks had increased by over 1%, while the four largest state-owned banks continually broke their historical high prices throughout the morning.

Experts who were interviewed attributed the rise in bank stocks to a confluence of favorable policy decisions, a buoyant market atmosphere, and increased liquidityDespite this strong performance, they cautioned investors against blindly chasing higher prices, emphasizing that there remained a risk of short-term corrections in the market.

The strength of the banking sector was underscored by recent statistics that showed an overall increase of 1.12% in bank stocksA total of 40 bank shares recorded gains, with Qilu Bank leading the way at a remarkable growth of 3.28%. Additionally, several other banks, including Shanghai Pudong Development Bank, Postal Savings Bank of China, Bank of China, and Xiamen Bank, each saw their stock prices rise by more than 2%. Another sixteen banks, including Citic Bank, also reported increases topping over 1%.

The four major state-owned banks demonstrated particularly robust performance, with several stocks reaching new heightsAt the day's close on February 18, Industrial and Commercial Bank of China (ICBC) saw an increase of 1.87%, while China Construction Bank, Bank of China, and Agricultural Bank of China noted gains of 0.80%, 2.21%, and 0.95% respectivelyNotably, these banks achieved their highest stock prices of the day at 7.14 yuan, 8.92 yuan, 5.58 yuan, and 5.33 yuan.

The recent strong performance of bank stocks has also attracted the attention of insurance capitalFor instance, on January 24, New China Life Insurance invested 4.3 billion yuan to acquire shares in Hangzhou Bank

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Additionally, since late last year, Ping An Group has been actively increasing its stake in various banks, including ICBC and Agricultural Bank, through its subsidiariesAccording to earlier reports, eight insurance companies were involved in buying stakes in 18 banks throughout 2024, highlighting a clear preference for financial institutions among investors.

Chen Xingwen, the Chief Strategic Officer at Heikaze Capital, pointed out that the resurgence of A-share bank stocks is driven by multiple positive factorsFrom a policy standpoint, banks are receiving equal policy treatment as public fund entities, lending power to the growth in asset valuations.

Market dynamics, particularly the ongoing influx of long-term investments from institutional investors like insurance capital, are crucial drivers behind the upward trajectory of bank stocksThese investments not only provide capital injections but also bolster market confidence in the banking sector.

Chen believes that the high dividend yield of bank stocks is gaining more importance in a low-interest-rate environmentWith a downward trend in deposit rates, there has been a steady flow of insurance funds and passive index funds into high-yielding assetsThe robust fundamentals of the banking sector further support rising stock pricesAdditionally, preliminary reports from banks indicate a stable increase in profits, driven primarily by an uptick in non-interest income and the recovery in quality regional loan demand.

However, despite the optimistic outlook, there are short-term risks of correctionAs of February 18, 42 A-share listed banks had disclosed 16 preliminary performance reports for 2024. These reports suggest that most banks achieved positive growth in net profits attributable to shareholders, along with an overall increase in total assets and a stable improvement in asset quality.

Looking forward, it is anticipated that the banking sector will maintain steady growth in asset size, with a continued emphasis on optimizing the asset structure focusing on bond investments and consumer loans

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Although net interest margins face pressures, the declines are expected to narrowPolicy support may alleviate risks in key areas such as real estate, leading to overall improvements in asset quality, where the non-performing loan rate is likely to remain low.

According to Ba Jinang, a fund manager and senior researcher at Rongzhi Investment, the current valuations of bank stocks are still relatively low historicallyWith the alleviation of local debt risks and improvements in economic expectations, there is room for valuation recovery for bank shares.

Research reports from Citic Bank reveal that the revealed performance results for 2024 show stability in the overall operations of listed banksFinancial data from January indicated a positive start for bank credit, with most banks employing early investment strategiesCombined with slower than anticipated interest rate adjustments, the outlook for the banks is expected to be favorableSince last week, the banking sector has begun to stabilize and recover, reflecting a shift back to fundamentals in the investment logic underpinning bank stocks.

The question remains, should investors buy into the rising bank stocks? Although there are still appealing valuations, recent stock price increases have led to some declining dividend yieldsTherefore, investors are advised against excessively chasing these banking stocks, particularly in an environment where prices have risen significantlyBa Jinang stressed the importance of being cautious.

Chen Xingwen echoed this sentiment by underscoring the need for caution in the face of potential corrections in the near termA considerable rise in bank stocks through 2024 may see some investors cashing in on profits and shifting their focus to other sectors, leading to short-term pressure on pricesFurthermore, broader macroeconomic challenges must also be considered, with the GDP growth rate potentially slowing to 4.5% in 2025, which could weaken corporate loan demand and reduce the repayment capabilities of consumers, potentially pushing non-performing loan rates higher, especially for banks with significant exposure to real estate.

From a risk perspective, aside from potential short-term corrections and macroeconomic pressures, some banks will need to meet Total Loss Absorption Capacity (TLAC) requirements, possibly issuing perpetual bonds or convertible bonds to boost their capital

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