The three major indices of China's A-share market fell collectively in early trading. As of the midday break, the Shanghai Composite Index dropped 1% to 3,877.2 points, the Shenzhen Component Index fell 1.99%, and the ChiNext Index declined 2.37%, while the Beijing Stock Exchange 50 Index slipped 1.81%. The combined turnover of the Shanghai, Shenzhen, and Beijing markets reached RMB 1.189 trillion in the morning session, a decrease of RMB 34 billion compared to the previous session. Over 4,100 stocks across the entire market ended lower.
In terms of sector performance, banking stocks bucked the trend and rose. Agricultural Bank of China extended its winning streak to eight sessions, hitting a new all-time high, while Qingdao Bank and Xiamen Bank both gained over 2%.
Several banking ETFs including the E Fund Bank ETF, Bank ETF, Bank ETF Index, Bank ETF Fund, Bank ETF Index Fund, Tianhong Bank ETF, Southern Bank ETF, and Leading Bank ETF as well as the Bank AH Preferred ETF all saw gains, with increases exceeding 5% over the past five trading days.
Market sentiment may be shifting, with capital showing significantly heightened interest in the banking sector. In October, investor funds aggressively flowed into banking ETFs, with more than RMB 7.5 billion net inflows into banking ETFs over the past five trading days.
Among these, Huabao Bank ETF attracted RMB 4.772 billion, while the Bank ETF took in RMB 892 million, and the E Fund Bank ETF saw net inflows exceeding RMB 730 million.
Dongxing Securities noted that since July, the banking sector has been undergoing continued adjustments primarily due to anti-internal competition measures and the rise of AI technology trends, which have driven up market risk appetite and triggered shifts in investment style. However, the underlying strength of the banking sector's fundamentals remains unchanged.
Looking ahead, with interim dividend payouts gradually rolling out and the attractiveness of bank dividends increasing after sufficient adjustment, long-term capital deployment is expected to provide support for liquidity. Meanwhile, with interest margins stabilizing and non-interest income continuing to improve, the fundamental resilience of the banking sector remains strong. We are optimistic about a valuation recovery for the banking sector amid a rebalancing of market styles in the fourth quarter.
Fundamentals: Short-term operational resilience remains strong, with expectations for mid-term economic recovery to drive fundamental improvements. It is projected that listed banks' revenue in the third-quarter reports will experience slight fluctuations due to bond market adjustments, but asset quality will remain stable, ensuring steady net profit growth.
Among the factors: 1) Net interest income is expected to improve. In terms of interest margin, with the decline in asset-side yields slowing down and liability costs stabilizing or slightly decreasing, the net interest margin for the third quarter is expected to stabilize temporarily. Regarding scale, the year-on-year growth rate of RMB loans in July and August gradually slowed down month by month; as of the end of August, it was up 6.8% year-on-year, a decrease of 0.3 percentage points compared to the end of June. The credit structure continued to show the characteristic of 'strong corporate demand but weak retail demand.'
Considering the current weak real investment demand and household leverage demand, coupled with the rise in bill discount rates at the end of September, it is expected that credit conditions in September will improve on a month-to-month basis but still see a year-on-year decline. In August, against the backdrop of high base effects from the previous year, the contribution of government bonds to aggregate financing began to weaken, and the growth rate of aggregate financing may have peaked. Considering the front-loaded issuance of government bonds this year, which will gradually slow down, along with the high base effects from the same period last year, it is expected that the growth rate of aggregate financing will continue its downward trend.
It is expected that the growth rates of bank loans and total assets in the third quarter will slightly decline on a month-to-month basis. However, with the narrowing of interest margin declines, net interest income is expected to enter a stabilization phase.
2) In terms of non-interest income, it is expected that fee-based income will continue to recover; adjustments in the bond market in the third quarter may weigh on other non-interest income performance. However, from the perspective of year-on-year growth rates, the impact is expected to be less than in the first quarter.
3) Asset quality is expected to remain stable, and provisions will not drag on profits.
A Galaxy Securities report noted that tariff impacts may re-emerge, but the overall effect on banks' operations will remain controllable, while demand for defensive allocation is expected to rise.
If the new round of tariff increases is implemented, on one hand, the overall impact on banks will remain controllable. However, the associated risks for regional banks in areas with higher proportions of export-oriented economies require further observation. Taking five major state-owned banks with relatively advanced global layouts as an example, as of the end of June 2025, their overseas revenue accounted for an average of about 10.5%. Regionally speaking, areas such as the Yangtze River Delta and the Pearl River Delta have relatively high export-to-GDP ratios and may be significantly affected by tariff uncertainties. Export-related industrial chain companies facing reduced external demand could suppress their financing needs, affecting local employment and household incomes, thereby exerting pressure on corporate and retail lending as well as asset quality for local banks.
On the other hand, tariff uncertainties are intensifying volatility in global asset prices, fostering demand for defensive allocations and creating opportunities for bank investments. The banking sector's stable dividend payouts, combined with improved dividend yield attractiveness following a period of price corrections, are likely to attract risk-averse capital inflows due to its value proposition.
