Bank stocks "support" the asset side of insurance

Under the ongoing backdrop of "asset scarcity," the enthusiasm of insurance funds for bank stocks has risen significantly.

According to Wind data, the bank index (886052.WI) rose by 43.53% in 2024, ranking first in the entire industry; among the 42 A-share bank stocks, only one declined, with Shanghai Bank leading the increase by over 68%.

In contrast to the strong gains, the fundamentals are not particularly impressive:

The National Financial Regulatory Administration disclosed that as of the end of the third quarter, the overall net interest margin of state-owned large banks, city commercial banks, and private banks is still in a downward trend; the performance of listed banks is mediocre, with overall revenue declining by 1.05% year-on-year and net profit attributable to shareholders growing by 1.43%.

Several analysts pointed out that the significant rise in the banking sector in 2024 is partly due to the influx of ETF funds and partly due to the incremental investments from insurance companies.

As of the end of the third quarter, the balance of funds available for investment and operation by insurance funds was 32.15 trillion yuan, a year-on-year increase of 14.06%.

The absolute growth in scale brings better liquidity to the market, coupled with the new accounting standards prompting insurance companies to allocate high-dividend equity assets that can be included in FVOCI to smooth earnings, making bank stocks highly favored.

Xinfeng noted that in 2024, insurance companies such as Xinhua, Ping An, Great Wall Life, and Xintai Life have chosen to increase their holdings in bank stocks; as of the end of the third quarter, more than half of the top 20 heavily held stocks by insurance funds were bank stocks.

With long-term interest rates declining and defensive sentiment in the equity market rising, bank stocks seem to remain a "safe haven" for insurance funds.

Since 2025, Ping An and its asset management company have continuously increased their holdings in bank stocks, raising the shareholding ratios of Agricultural Bank of China, Postal Savings Bank, and China Merchants Bank's H-shares to over 6%;

In just two months, the funds used by Ping An to increase its holdings in bank stocks have exceeded 400 million Hong Kong dollars.

Preference for Dividend Eggs

Looking at a longer time frame, although low valuation and high dividend bank stocks are not favored by public funds, they have been a "favorite" of insurance funds over the years.

Historically, some insurance companies have focused on the stable cash flow and relatively stable profit expectations of bank licenses, increasing their holdings in the secondary market to compete for voice.

For example, in 2015, during Anbang's involvement in the "Baowan Battle," it increased its holdings in China Minsheng Bank 12 times, becoming the largest single shareholder in October of that year;

As of the end of the third quarter of 2024, Dajia Insurance, which acquired Anbang's business, assets, and liabilities, still holds a 20.73% stake in the bank.

At that time, some insurance funds also clearly stated that they were interested in the potential space brought by bank channels.

Also in 2015, PICC acquired a 19.99% stake in Huaxia Bank held by Deutsche Bank, stating that "after completing the equity change, we will promote strategic comprehensive business cooperation with Huaxia Bank."

In such cases, insurance funds primarily engage in strategic investments with distinct offensive characteristics.

Another more common investment trend in recent years is the increase in defensive-oriented dividend assets.

In the "shareholding wave" of insurance funds in 2020, out of 28 instances of shareholding increases, 6 were directed towards banks, involving targets including Agricultural Bank of China, Industrial and Commercial Bank of China, and Zhejiang Merchants' H-shares, showing a clear preference for dividend yields.

Especially in recent years, with long-term interest rates declining and equity market volatility, insurance funds, which have high safety requirements and demand for guaranteed returns, are facing a severe "asset scarcity" dilemma Despite the fact that since 2023, regulators have repeatedly lowered the upper limit of the preset interest rates for personal insurance products and have "reduced the burden" on the liability side through measures such as "reporting and operating as one" and establishing a dynamic interest rate adjustment mechanism, emphasizing the matching of insurance fund assets and liabilities;

Currently, under the backdrop of an intensifying "asset shortage," insurance companies still face pressure on interest spreads.

An insurance asset management professional stated, "Last year's interest rate bonds rose too much, leaving little room for upward or downward movement. In the new year, we expect to increase allocations to equity assets and credit bonds after debt reduction."

Additionally, innovative products such as REITs are relatively small in scale, with insufficient liquidity and limited exit channels;

In the future, insurance funds may be more inclined to increase the proportion of undervalued, high-certainty, and high-dividend equity investments, with bank stocks that have fair credit endorsements being one of the optimal solutions for risk aversion.

The market research team of the Construction Bank Research Institute pointed out that the valuation of bank stocks in China has long been low:

Although the dividend yield of the banking sector has generally risen since 2010, the price-to-book (PB) ratio is still in a downward trend;

Horizontally, the average PB ratio of the global banking industry at the end of 2024 is 1.37 times, while the A-shares and H-shares are 0.62 times and 0.40 times, respectively, which is less than half of the global market.

With the switch in accounting standards, insurance companies also need to smooth their performance with dividend assets.

Under the old standards, financial assets were divided into four categories: FVTPL (financial assets measured at fair value with changes recognized in profit or loss), L&R (loans and receivables), HTM (held-to-maturity investments), and AFS (available-for-sale financial assets).

The new standards classify them into three categories based on measurement methods: AC (financial assets measured at amortized cost), FVTPL (financial assets measured at fair value with changes recognized in profit or loss), and FVOCI (financial assets measured at fair value with changes recognized in other comprehensive income).

In the new classification, changes in the market value of OCI may not be included in profit or loss for the current period, but only financial assets that are more long-term and allocation-oriented are expected to be included in OCI.

Within a limited scope, the dividend assets represented by bank stocks align with the "long-term holding" logic.

After 2020, China Life and Ping An, which entered the transition period of the new standards early, have begun to layout dividends, acquiring shares in Agricultural Bank of China H-shares and Industrial and Commercial Bank of China H-shares;

In 2024, when insurance companies collectively enter the transition period, Great Wall Life and Xintai Life have also increased their holdings in Wuxi Bank and Beijing Bank.

A Preference for Major Markets

If the dividend attribute is considered the only driving force behind the "counter-trend rise" of bank stocks, the positions of insurance funds in individual bank stocks should be highly correlated with the dividend yield.

However, in reality, there is still a significant discrepancy between the specific data and this assumption.

According to Wind data, on February 18, 2025, the top five dividend yields of A-share listed banks (not excluding the impact of secondary dividends, the same below) were Minsheng, Jiangsu Bank, Ping An, Xiamen Bank, and Chongqing Rural Commercial Bank; the top five H-shares were Chongqing Rural Commercial Bank, Minsheng, Chongqing Bank, CITIC, and Construction Bank.

According to the list of the top ten circulating shareholders of A-share listed banks at the end of the third quarter of 2024 (including product holdings), the most popular are still the major state-owned banks.

For example, Zhejiang Merchants has three insurance shareholders: Xintai Life, Minsheng Life, and Taiping Life; both Industrial Bank and Postal Savings Bank have two insurance shareholders each.

The banks with the highest proportion of insurance holdings, excluding Ping An Bank, are Minsheng, Pudong Development, Huaxia, Zhejiang Merchants, and Industrial Bank.

After the third quarter, the increase in insurance capital in bank stocks is still dominated by state-owned banks.

For example, by the end of 2024, Ping An has increased its holdings in the H-shares of China Construction Bank and Industrial and Commercial Bank, with shareholding ratios exceeding 5% and 15%, respectively; among them, the H-share proportion of Industrial and Commercial Bank has been increased to 17% before the Spring Festival.

On February 6, Ping An continued to increase its holdings in the H-shares of Agricultural Bank, Postal Savings Bank, and China Merchants Bank through its subsidiaries, with the proportion of H-shares in all three banks exceeding 6%.

According to media statistics, from the end of 2024 to the present, China Ping An has continuously increased its holdings in the H-shares of Industrial and Commercial Bank, Agricultural Bank, China Construction Bank, Postal Savings Bank, and China Merchants Bank through its subsidiaries, with a total expenditure approaching HKD 10 billion.

It seems that despite some city and rural commercial banks showing outstanding dividend yields, insurance capital still shows a clear preference for large banks in decision-making.

Under the guidance of policies for medium- and long-term capital entering the market, there is still room for insurance capital to increase its positions in bank stocks.

Zhang Yiwei, an analyst at Galaxy Securities, estimates that based on the market value proportion of banks held by insurance capital as of the end of the third quarter of 2024, the "new premium of 30%" mentioned by the decision-making level before the year is expected to bring an incremental capital of CNY 162.727 billion to the A-share banking sector each year.

After the start of the year, the banking sector has continued to show strong performance, with individual stocks of state-owned banks performing well.

On February 18, A-shares experienced the first significant correction after the Spring Festival of the Year of the Snake; however, the banking sector rose against the trend, with the stock prices of the four major state-owned banks reaching historical highs during the session.

As of the close of that day, the stock price increases for Bank of China, Agricultural Bank, Industrial and Commercial Bank, and China Construction Bank were 2.21%, 0.95%, 1.87%, and 0.80%, respectively; among them, Agricultural Bank has seen a continuous increase for six trading days, with a cumulative increase of 5.38%.

Risk Awareness

The preference for large banks indirectly reflects the cautious attitude of insurance capital towards the asset quality and recovery ability of small and medium-sized banks, showing a defensive posture in stock selection.

An insurance asset management person stated to Xinfeng that the investment in bank stocks by insurance capital is mainly related to three factors: profitability, dividends, and financial treatment (accounting standards).

He mentioned that in specific investments, "the macro view considers industry characteristics and regional development, while the micro view looks at asset distribution and profitability, with decision-making focusing on valuation, thus leaning towards Hong Kong stocks."

This person also reminded that when investing in bank stocks, one must be wary of risks from local government hidden debts and real estate prices.

Currently, small and medium-sized banks generally face greater downward pressure on assets.

In particular, many city and rural commercial banks are affected by local resource endowments and economic structures, experiencing difficulties in fund turnover for manufacturing, construction, and real estate clients during real estate downturns, while the depreciation of real estate collateral continues to increase bad debt risks Although the loan classification of various banks generally follows the guidelines set by the central bank, there are still differences in specific implementations. Many small and medium-sized banks have unclear asset quality, and their risk resistance during economic cycles is significantly lower than that of large banks, leading to a lower expectation of sustainable dividends.

For this reason, although some city and rural commercial banks have outstanding dividend yields, insurance funds still tend to increase their holdings in large banks.

Firstly, large banks have a leading scale, and a significant influx of insurance funds will not cause substantial fluctuations in fundamental prices; secondly, they have better asset quality and lower risk of defaults, which aligns with the safety needs of insurance funds.

Especially after the third quarter of 2024, expectations for state-owned large banks to receive capital injections have been continuously enhanced by positive statements from decision-makers.

Currently, the Ministry of Finance is waiting for each bank to submit specific plans for capital replenishment. This tool has been reactivated following the issuance of special national bonds by the Ministry of Finance in 1998, which injected 270 billion yuan into the four major state-owned banks.

Market voices predict that the scale of this round of capital injection may be around one trillion yuan, which means that the core Tier 1 capital buffer of state-owned large banks will be further strengthened.

Under the accumulation of various factors, the expectation of sustainable dividend capacity from large banks is generally higher among insurance funds.

In 2024, there are also reports of Great Wall Life increasing its stake in Wuxi Bank and NCI acquiring shares in Hangzhou Bank; however, compared to the increase in holdings in large banks, the proportion remains limited