The Banking Sector Poised for Valuation Reassessment

Long-term undervalued listed banks are now attracting capital attention. Recently, Minsheng Bank was targeted for stock purchases by the "New Hope Group". Since the beginning of this year, more than 20 banks, including Nanjing Bank, Everbright Bank, Beijing Bank, Suzhou Bank, and Lanzhou Bank, have seen their shareholders or senior executives increase their holdings. Industry experts indicate that the increased holdings reflect shareholders' optimistic expectations for the future development of the banks, sending positive signals to the market. With the recent introduction of market capitalization management policies, the banking sector is likely to undergo a valuation restructuring.

New Hope Group Plans to Invest in Minsheng Bank

Recently, Minsheng Bank announced that its board of directors had approved a proposal for New Hope Chemical Investment Co., Ltd. (referred to as "New Hope Chemical") to invest in the bank, and it will submit an application for approval to the National Financial Regulatory Administration concerning shareholders holding more than 5% of shares.

The announcement stated that New Hope Group Ltd. is optimistic about the long-term development of Minsheng Bank, and its subsidiary, New Hope Chemical, plans to increase its holdings of Minsheng Bank shares through the secondary market, employing both centralized bidding and block trades. As of the announcement date, Southern Hope Industry Co., Ltd. and New Hope Liuhe Investment Co., Ltd., controlled by New Hope Group Ltd., collectively held 4.96% of Minsheng Bank's total shares, and after the increase, New Hope Chemical and the aforementioned parties will together hold more than 5% of the total shares. This investment will be implemented following approval.

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Industry insiders analyze that companies generally increase their holdings with a long-term investment perspective; the "New Hope Group's" action may be due to the current valuation level of the banking sector aligning with long-term investment requirements. They hope to achieve relatively stable investment returns through increasing their holdings in bank stocks.

According to the third quarterly report, in the first three quarters of 2024, Minsheng Bank achieved an operating income of 101.66 billion yuan, a year-on-year decrease of 4.644 billion yuan, a decline of 4.37%, which is a narrowing of 1.80 percentage points compared to the first half of the year. The net profit attributable to the bank's shareholders was 30.486 billion yuan, down year-on-year by 3.091 billion yuan, a decrease of 9.21%. As of the end of September this year, Minsheng Bank's core tier one capital adequacy ratio, tier one capital adequacy ratio, and total capital adequacy ratio were 9.30%, 10.76%, and 12.66%, respective increases of 0.02 percentage points, a decrease of 0.19 percentage points, and a decrease of 0.48 percentage points compared to the end of the previous year.

"The increase in holdings by certain bank shareholders reflects an optimistic expectation for the future development of the banks, sending a positive signal to the market," said Zhou Maohua, a macro research analyst at Everbright Bank's financial market department. In recent years, some small and medium-sized banks have faced increased operational pressure due to macroeconomic fluctuations, interest rate marketization reforms, intensified market competition, and ongoing efforts to benefit the real economy, which have led to insufficient internal capital supplementation. Some small and medium-sized banks are actively expanding external capital supplementation channels to solidify their capital strength and enhance their risk resistance, stable operational foundation, and business expansion capabilities.

Over 20 Banks See Shareholder Increases This Year

It is noted that it is not just Minsheng Bank; several banks have recently seen increases in shareholder holdings.

On November 8, Nanjing Bank announced that based on confidence in the company's future development, BNP Paribas (QFII) increased its holdings by acquiring a total of 17.9 million shares through the Shanghai Stock Exchange's centralized bidding system between March 14, 2024, and November 7, 2024. After this increase, the combined shareholding ratio of the largest shareholder, BNP Paribas, and BNP Paribas (QFII) rose from 17.04% to 18.04%, an increase of 1%. This marks the second announcement this year regarding increased holdings by BNP Paribas (QFII), following a previous acquisition of 7.98685 million shares from February 26 to March 13.

On November 13, Citic Financial Assets announced a proposal to further advance investment allocations, mentioning that to maximize shareholder interests, the company will increase its investment including acquiring no more than 26 billion yuan in shares of Bank of China and no more than 4 billion yuan in shares of Everbright Bank. The announcement indicated that Citic Financial Assets currently holds 3.57% of Bank of China’s shares and 7.08% of Everbright Bank’s shares.

According to data from Wind, this year, beyond the aforementioned banks, over 20 banks including Suzhou Bank and Lanzhou Bank have received increases from shareholders or senior management, with the reasons predominantly reflecting a belief in the banks’ long-term value and confidence in future development.

"With the overall condition of bank stocks being undervalued and their low valuation appealing to certain long-term investors, institutional investors and major shareholders often prioritize stability and dividend yields, which makes the defensive characteristics of bank stocks align with their investment preferences," remarked a researcher from the Bank of China Research Institute. In an interview, he noted that increases in holdings by major shareholders or executives are often viewed as confidence signals for the company's future development, helping to stabilize market expectations and prevent excessive stock price volatility, making them an important strategy for market capitalization management.

Du Yang also stated that increases by major shareholders or management release a positive signal indicating steady growth in the industry; however, several aspects need to be monitored: first, while overall asset quality in the banking sector has improved, the risks of some small and regional banks still need attention. Second, the recovery of the real economy requires robust support from the banking sector; financing costs may further decrease, while pressure from narrowing interest margins remains, which could somewhat impact profitability. Third, some banks, especially small and medium-sized ones, have relatively low capital adequacy ratios; methods like increasing capital and issuing new shares can effectively alleviate this issue in the short term, but a long-term, market-oriented capital supplementation approach is still needed. Fourth, although regional banks are rooted in local markets, they face competitive pressure from nationally established banks regarding resources like funds and talents, requiring continuous enhancement of their differentiated service capabilities.

Bank Sector Valuation Expected to Reconstruct

On November 15, there were clear definitions of the responsibilities of the board of directors, directors, and senior management of listed companies, along with specific requirements for market capitalization management systems for major index constituent companies and for disclosing valuation enhancement plans for companies that have long been undervalued.

The banking sector is notably a concentration of long-standing undervalued entities. Data shows that out of 42 listed banks in A-shares, 39 have long been in an undervalued state. On the first trading day following the announcement (November 18), banking stocks surged, with stocks like Zhengzhou Bank and Zijin Bank reaching their daily limit.

Multiple interviewed experts believe that the current price-to-book ratio level of bank stocks remains low, which provides room for valuation improvement. At the same time, the increases in holdings have bolstered market confidence in bank stocks, helping to stabilize stock prices. Although there is pressure on net interest margins, the overall profitability of banks continues to grow, supported by policies and expectations of economic recovery that provide momentum for future credit demand and interest income growth.

"The banking sector is a cyclical industry; as the macro economy steadily improves, listed banks are expected to achieve high-quality development, with the valuation adjustments in the banking sector being well-supported by solid economic fundamentals. Furthermore, the recent policies point the way for valuation adjustments in the banking sector, indicating that market capitalization management will be conducted through more diversified methods. A series of policies supporting local debt resolution risks and the issuance of special government bonds to supplement core tier one capital for state-owned large commercial banks are expected to provide substantial benefits to the banking sector," Du Yang analyzed.

"With positive factors facing the operating environment of banks, they possess high allocation value for the future," Zhou Maohua also stated, emphasizing that domestic incremental counter-cyclical adjustment policies exceeded expectations. As existing and incremental policies take effect, the economy is likely to stabilize and recover, benefiting bank profitability and asset quality. On the other hand, banks are standardizing manual interest compensation practices, re-pricing deposit products, continuously optimizing asset-liability structures, and increasing efforts to resolve non-performing assets, with results gradually becoming apparent.

However, some securities analysts believe that the banking sector is currently encountering a backdrop of "strong policy expectations and weak fundamental realities," and that substantial recovery has not yet been realized. Current macroeconomic indicators are still gradually recovering, and further economic revival driven by monetary and fiscal policies is necessary for the banking fundamentals to see meaningful improvement.