The Zhitong Finance App learned that Citibank released a research report saying that the operating profit of the 21 banks in China covered by it increased 9.9% year-on-year before provision in the first half of the year, which was stronger than expected, benefiting from strong transaction earnings, resilient loan growth, and stabilizing net interest spreads.
Although profit growth in the first half of the year was slow, with only a 3.2% year-on-year increase due to conservative provisions, rising credit costs and higher actual tax rates, the year-on-year increase in earnings for the second quarter accelerated from 3% in the first quarter to 3.3%. Bank of Ningbo (002142.SZ) recorded the strongest pre-provision operating profit and profit growth in the second quarter, with year-on-year increases of 18% and 14%, respectively, while Everbright Bank (06818) was the weakest, falling 4.7% and 40% year-on-year, respectively. Overall, Bank of China (03988), China Construction Bank (00939), Postbank (01658), and Bank of Ningbo surpassed expectations in the first half of the year, while Everbright Bank, Minsheng Bank (01988), and Industrial Bank (601166.SH) were disappointing. Major banks and Bank of Ningbo have exceeded expectations in terms of increasing dividend payout ratios in the interim. Bank of China and China Construction Bank are preferred bank stocks within H shares.
According to Citibank, China's top six banks raised their dividend payout ratio by 1 percentage point from 30% in fiscal year 2025 to 31% in the first half of 2026, which was a positive surprise for the market. The above adjustments include the Ministry of Finance's increased capital requirements for dividend payments from large banks; China's regulatory direction encouraging A-share listed companies to increase shareholder returns through repurchases/dividends; and the key factors that have constrained the Bank of China from increasing dividend payout ratios in the past were to ensure sufficient cushioning to cope with potential credit cycles. However, systemic asset quality risks have gradually ceased to be a major concern, and the Bank of China has reserved sufficient buffers for the credit cycle.
According to the bank, based on a sustainable return on equity of about 8% and a sustainable loan growth of about 5%, China's largest banks will gradually increase their dividend payout rate to about 40%. As the Bank of China's dividend payout rate catches up to around 40% of the global interbank industry, H-share Bank of China should be worth reevaluating. Considering that the current H-share Bank of China transaction has an expected net market ratio of 0.6 times in 2026 and a dividend yield of about 5%, this can be converted into a total return on capital of about 25%.
Furthermore, the bank expects Bank of China's stock price to continue to receive capital inflow support. The reasons include declining 10-year treasury bond yields, widening the spread between Bank of China dividend yields and 10-year treasury bond yields, making Bank of China stocks more attractive to investors seeking income from the south; the promulgation of new asset liability management regulations for insurance companies should encourage onshore insurance companies to increase the allocation of income assets such as the Bank of China in the future; given that Bank of China is one of the few industries that are strongly linked to the AI technology sector's stock price, China and emerging market funds will continue to accumulate Bank of China stocks to hedge technology- Downside risk once the AI sector is adjusted.